Most think Holloway is a district in north London, best known for its eponymous women’s prison. But for the protection market, it is a niche income replacement that rewards long-term policyholders with a cash sum on retirement.
Named after reforming MP George Holloway, who laid out the product’s principles of providing sick pay, plus an eventual lump sum and a modest pension for working men in an essay written 135 years ago, it could take a new relevance as self-employment increases and sick pay provision decreases, especially for those without gold-plated contracts. And that relevance could be increased for some advisers following an FSA (Financial Services Authority) ruling that Holloway products with their investment element, are generally exempt from the RDR (Retail Distribution Review).
But in an example of unjoined-up thinking, FSA regulations still prevent protection specialists from selling the classic Holloway plan. There are around eight friendly societies currently marketing Holloway policies. Four of the biggest, the Original Holloway (now usually known as Holloway Friendly), Cirencester Friendly, Exeter Family Friendly and Wiltshire Friendly are still based in the west of England – George Holloway was the member for Stroud in Gloucester. British Friendly is in Bedford.
Attitudes to underwriting – both medical and whether an occupation is acceptable or not – as well as details such as premiums, deferment periods and whether, or for how long, own occupation pre-dominates, vary. But the basics are the same.
The investment element
All classic Holloway products come with a variety of features (see box) but it is one of those – an investment element to provide a cash lump sum, usually on retirement – that should have netted the product into the RDR. But providers argued that the investment element was small and almost coincidental to the main protection purpose of the plan. Holloway Friendly, for example, quotes a non-guaranteed investment gain for a 25 year old planning to retire at 65 taking out a £1,000 a month protection element of £2,456 if investments grow at 3% a year, £2,986 at 4.5% and £3,666 at 6% – all in 40 years’ time. There is nothing if the plan stops in the first 20 years.
The monthly payment into the investment fund remains static despite the annual (occasionally five-yearly) increases in the protection premium. These illustrated gains are far from substantial and often little more than the cost to the policyholder of the investment element. So there should be no danger of another endowment mortgage mis-selling scandal. The investment is conservative.
“It’s mostly gilts, cash and near-cash – ours is managed by Royal London cash managers,” says Matt Manser, sales and marketing director at Holloway Friendly. “Technically, it is a share in the profits of the society.”
“The FSA recognises that the main purpose is protection so there is an exemption for the product as long as the eventual investment gain is not more than 20% of the total premiums paid in,” Manser adds.
According to Cirencester, “before RDR advisers designated CF30, holding the CeFA qualification (or an equivalent ), who work within a firm holding Part IV Authority from the FSA to give investment advice, and were authorised to provide advice on the product under the COB (Conduct of Business) rules.”
However, since RDR, intermediaries now need the higher QCF4 qualifications to advise on investments. They are also banned from accepting commission. The RDR exemption applies to those who have not – for whatever reason – achieved level 3 although not attained level 4 but remain part of a firm which holds the FSA investment advice authority.
“Because our Income Assured Plus policy has an investment element, even if holders can opt in and out of it, it counts under COB rather than ICOB [Insurance Conduct of Business],” says John Bridge, director of sales and marketing at Cirencester. “Now as long as the investment bonus does not exceed 20% of total premiums, those with CF30 can sell it and earn commission on new business.”
The complicating feature for some is that they must still be part of a firm with an authority to give investment advice, Bridge adds.
“Some IFAs have now left the umbrella of firms with that authority,” he says. “We have lost some sales outlets but while this is a concern, it is not a big number.”
The new rules leave Cirencester’s Income Assured Plus – and similar products from other providers – with two problems. First, there is adviser confusion over the new rules.
“Many firms do not know that non-qualified IFAs can advise here and earn commission,” says Bridge.
Bridge adds: “A solution for firms with advisers who have not achieved their level 4 qualifications is to retain their CF30 status to enable them to sell only Holloway exempt along with pure protection contracts/general insurance and give basic advice on investments.
“There are firms which may have cancelled the CF30 designation. They should reinstate the affected advisers to allow them to sell the full range of products available to their authority.”
But the RDR exemption still leaves most protection specialists out in the cold. The only advisers who can sell traditional Holloway products with their end of policy bonus are those with an investment authority and an investment qualification as the plans are controlled under COB rules rather than ICOB regulations. A number of pure protection advisers told Health Insurance that they did not want to discuss a product they could not sell although some did put their heads above the parapet.
“I can’t consider them even if they are RDR exempt,” says Andrew Jenkinson, a director of Wimbledon and Brighton-based Drewberry Insurance. “I am only regulated for protection. So as with many others that rules out the traditional product.”
Providers agree that the exemption will not greatly increase sales.
“Our only benefit from the RDR ruling,” says Manser, “is the freedom from the adviser charging rules. The FSA accepts the main purpose is protection so intermediaries can accept commission as the nature of the plan is unlikely to spur any degree of product bias. We did argue, of course, that the main purpose was protection and the bonus was a side benefit and that we would rather a wider exemption but we now have what we have.”
Holloway products retain their ability to pay both initial and trail commission to advisers who are not qualified to sell pure investment products. A typical commission is 140% of first year premium on a three year indemnity basis or 140% of the monthly premium for three years on a non-indemnity basis.
Manser accepts that level 4 qualified investment advisers are not going to sell Holloway products.
“It is not mainstream for them, it is outside their scope and strategy,” he says. “Wealth advisers are simply not interested in a £30 a month product for which they might have to charge £500 in fees.”
Holloway providers generally aim at incomes no greater than around £60,000 a year with a maximum £3,000 a month income protection but some will offer more.
Unlike some rivals, Holloway did come up with a pure product – income protection without investment gains – that could be sold under ICOB.
“It is not technically Holloway but it works,” Manser adds.
A question of opinion
Jenkinson, though, is not impressed.
“It’s not on our product panel,” he says. “I only recommend income protection which will pay out over the long-term. Holloway’s pure product – which I could sell – only has ‘own occupation’ for two years then it reverts to the very woolly ‘suited occupation’.
“You have to be really aware of this. I don’t want to be the one to tell someone who is long-term ill that they have to look for another line of work. Some providers argue that a suited occupation is unlikely to be any different. If that is so, why bother with such a term? I can certainly do much better for the lower risk and/or the higher paid person.”
Simon Dunn at Julian Harris Mortgages in Leeds is more of a fan.
“I can only advise on pure protection,” Dunn says. “I use friendly society products on a regular basis, especially for the self employed such as tradesmen. I like Shepherds Friendly for its underwriting flexibility. Exeter Family Friendly is good for claims, and also for white collar staff who are often penalised as societies tend to price for manual workers. These firms will often quote for risks such as offshore oil rig operatives which mainstream income protection providers won’t touch. I can generally get up to a £5,000 a month benefit. I can’t sell those with investments but really what is the point of them? Someone on a £2,000 a month policy is talking about £25 or so extra each month for an investment which is inflexible, and very long term. I am not an investment person but perhaps they could do better in an ISA.”
But Holloway product providers believe they will continue to have a market for their investment/protection hybrid. They hope that the mix of protection and savings will appeal to the increasing number who are self employed or on contracts short enough that they have little chance of an employer sickness pay scheme.
As one put it: “It’s a lot cheaper than a payday loan or a visit to the pawnshop. And besides offering long-term cover, there is the sweetener of something at the end.”
In that, the providers remain true to George Holloway’s vision in 1878.
Holloway products – typical features
– regular and published premium increases as policyholders age – planholders generally see costs rise on a set date each year
– a set income during periods of incapacity – £1,000 a month is typical
– a choice of deferment periods, generally from one day to one year – some plans offer immediate payments for an accident whatever the deferment period, a big advantage for manual workers
– no occupational loading if a category is acceptable – unacceptable jobs vary substantially between providers
– no gender loading (now ruled out by law anyway) but purchasers are predominantly male
– no loading for smoking (some new plans do load but not nearly as much as conventional protection products) – the target audience tends to smoke more than average
– an investment element to provide a cash lump sum, usually on retirement
Please note, products do vary from provider to provider – this table is for illustrative purposes only