1. DOES PROTECTION NEED TO CHANGE?
The consultation paper’s assertion that “it is not unreasonable to consider that there may be similar market problems to those addressed by the RDR in the general insurance and mortgage markets” divided respondents. “We have seen no evidence that the protection market shares many of the issues seen in the investment market,” said Alex Roy, assistant director, distribution reform at the Association of British Insurers (ABI).
Others, however, regard the RDR as a timely opportunity to address longstanding problems in the protection market. “The RDR is not just about adviser charging but on a broader scale is about outcomes, transparency and consumer understanding of the service they are getting,” said Ian Brown, protection marketing manager at Skandia.
2. WILL ADVISERS SHIFT SALES TO PROTECTION, RESULTING IN CONSUMER DETRIMENT?
The key concern expressed by the FSA is that the RDR’s changes to remuneration and requirements for higher professionalism could see adviser firms shift their sales to focus on pure protection to maintain commission income and avoid investing in professional development. The paper states concern that such a shift could result in market distortions and consumer detriment although it does acknowledge that an increase in the number of advisers offering pure protection “is not a concern in itself”.
While some provider spokesmen, including those from Aviva, Zurich, Unum and Pioneer agree that the proposals could result in a shift towards protection sales, others question the FSA’s prediction. Steve Casey, product manager for Bupa Individual Protection, pointed out that intermediaries tend to be specialists in their areas who refer clients to protection specialists if they do not provide that advice. Alan Ferguson, director of marketing and channel development for protection at Legal & General, said that given the significant costs associated with maintaining permissions for delivering investment advice, few would focus on protection unless the associated income is a significant part of their business. He also said that the number of customers required to replicate investment advice income would be “disproportionate” for many firms.
“It seems somewhat unjust of the FSA to tar all of the IFA market with the same brush by suggesting there will be an exodus to selling protection products in preference to retail investments simply to get around the RDR proposals,” added Paul Hudson, CEO of Cirencester Friendly.
Regardless of views on the likelihood of that occurring, the overwhelming majority of respondents believed that there is very little risk to consumers from such a scenario. Most cited the size of the protection gap and the value of attracting more advisers to the market. Martin Werth, managing director of Fortis Life, pointed out that advisers should disclose their charging structure prior to giving any advice, at which point they will not know whether a protection sale is likely. He also stressed that protection could not displace investments within rounded financial advice.
“I am not convinced that clients are going to be persuaded to divert significant sums earmarked for investing towards buying insurance,” added Richard Verdin, protection director at Aviva. “If one consequence of the RDR, however, is that more customers consider protection as part of their overall ‘money strategy’ then that would be a step forward from where we are today.”
However, some intermediaries expressed concerns.
“Many commission-based advisers will struggle to adapt to a more professional environment following the implementation of the RDR rules,” said Andrew Fisher, chief executive of Towry Law. “If they have the option to carry on selling products to earn commission, this may be an easier alternative for them than giving professional fee-based advice. We, therefore, share the FSA’s concerns.”
Keith Richards, group distribution and development director at national IFA Tenet Group Ltd, largely agreed with the majority stance but said the FSA’s concerns might be justified “if proposals drive a greater wedge between qualified and non qualified distribution”. He pointed to the growth of remote and non-advised operations, coupled with an “obvious lack of client needs assessment and suitability of product”.
3. CAN TWO REGULATORY REGIMES CO-EXIST FOR INVESTMENTS AND PROTECTION?
Respondents were split on this question. Many, including the ABI, felt that the two regimes could happily co-exist. Spokesmen for Aviva, AXA, Fortis, Friends Provident, Zurich and PruProtect all agreed with this stance. Kevin Carr, director of protection development at PruProtect, pointed out that, due to the nature of underwriting, a fee-only approach could have unintended consequences, with those requiring greater attention and time (such as those with health issues) being charged higher fees.
Likewise, L&G’s Ferguson felt that getting customers to understand and appreciate the different models of payment “might be difficult”.
“Given that commission is only earned when a sale takes place then it would perhaps seem inconsistent to customers if the fee for investment advice were not the same,” he said. “This might effectively limit some holistic advisers to only charging contingent fees, which might actually have the reverse effect of pushing some advisers out of the protection advice market.” He suggested that holistic advice firms set advice charges across all their business and use commission earned from protection sales to offset against it.
But Andrew Fisher of Towry Law opposed the co-existence of two regimes. “The removal of commission payments to advisers will provide consumers with far greater transparency and increased protection against receiving inappropriate advice,” he said. “It is completely illogical that these aims can be promoted by running different sets of rules for different types of products. This will cause confusion and perpetuate the risk that consumers will be mis-sold products.”
Linton Penman, head of retail sales & marketing at Unum, foresaw challenges for intermediaries.
“This may be the nub of the issue – if advisers are challenged by the sheer enormity of the task of running different business models concurrently, at the same time as trying to explain why the model is different to the customer,” he said. “This could become a real inhibitor to the success of the RDR and doesn’t fit well with the Treating Customers Fairly initiative.”
Reinsurers were also cautious. David Heeney, chief marketing officer of Pacific Life Re, warned that the move to fee-based remuneration “is seen by the FSA as an essential step in removing any suspicion of bias”. He added: “Over time, I think it will be increasingly difficult for protection advisers with apparently lower formal qualifications and who are remunerated by commission to be perceived as equivalently ‘expert’ or ‘independent’.” Mick James, business development manager at reinsurer RGA, agreed that there was a risk of protection specialists being seen as the “poor cousins” of investment advisers while Ron Wheatcroft, technical manager at Swiss Re, agreed that there was a potential for customer confusion.
Paul Hudson of Cirencester highlighted the challenges facing providers offering hybrid products such as income protection combined with the opportunity to build up a capital sum payable at the maturity of the contract.
4. DOES THE CURRENT MODEL OF REMUNERATION NEED TO CHANGE?
Many respondents gave detailed evidence in favour of retaining the commission based model, supporting the ABI’s assertion that “there is no evidence to suggest that the current model is broken”.
“Advisers’ sales and marketing costs are borne up-front; it is therefore understandable why they want their remuneration to be paid up-front,” said Aviva’s Verdin.
Several respondents agreed with Peter Hamilton, protection management director at Zurich, that changing the model could widen the protection gap, given the public’s unwillingness to pay fees for protection advice, a stance supported by research from Swiss Re.
“Pure protection is different to savings and investments in that there is no investment element for commission to ‘eat’ into and no product bias driven by commission as the commission calculation for products such as life cover and critical illness etc is the same,” added PruProtect’s Carr.
However, there was plenty of recognition within the industry that the commission model had imperfections. Spokesmen from AXA, Fortis, Friends Provident and Zurich all agreed that the industry should consider moving from indemnity commission to level commission. “In the shorter term, the industry needs to address the indebtedness indemnity creates in advisers by over paying commission at the point of sale and then clawing this back on lapses,” said Fortis’ Werth. However, Graham Harvey, managing director of protection at AXA, recognised that a move away from indemnity commission could see many advisers go out of business.
“A removal of initial commission would accelerate a fall in adviser numbers which is already as marked as the rise in the protection gap,” agreed Zurich’s Hamilton. “We need to ask where the next generation of advisers is coming from.”
However, Towry Law’s Fisher said the current model was not sustainable. “The industry is moving toward a professional fee-based approach and the payment of commission based on the value of the premiums paid by the client for a protection product, and not a fee for the work done, is as unacceptable as paying commission based on the value of an investment, which, of course, the FSA is banning,” he said.
Both Matt Morris of adviser firm LifeSearch and Keith Richards of Tenet agreed with Peter Le Beau, co-chairman of the Income Protection Task Force, that changes to the model could mean genuine advice “will only be an option for the rich”.
“The cycle of bad advice which we saw with endowments and payment protection insurance will be perpetuated once again,” warned Morris. “The more we have tried to separate and explain charges, the more we have confused the consumer,” said Tenet’s Richards.