Background & Regulatory Focus
Pure Protection (PP) products have been out of the regulatory spotlight for some time, so it may not come as a surprise that the Financial Conduct Authority (FCA) is sharpening its focus on consumer outcomes in the PP insurance sector. The FCA announced its intention to launch a market study into how PP products are sold following concerns that competition is not working well in the market. The FCA cited three factors that are driving this concern:
- The design of commission arrangements may not always support the delivery of fair value
- Some pure protection products may not provide fair value to customers.
- Competitive pressures in the market may be weakening due to the recent exit of several insurers providing pure protection products
The recent publication of a Terms of Reference (ToR) into the distribution of PP products to retail customers, follows the thematic review of general insurance (GI) and PP product oversight and governance arrangements. This thematic review highlighted examples of good and poor practices, which has been explored by Square 4 here. The poor practice published by the FCA in the review is behaviour that it considers unlikely to meet the standards in PRIN 2A.9 (monitoring of consumer outcomes) and PROD 4 (product governance rules).
The market study intends to explore the distribution of PP products to assess whether they are providing fair value to consumers. For example, whether the total premiums paid over a lifetime of a product far exceed the maximum conceivable payout.
The FCA will focus primarily on the sale of 4 specific types of products – term assurance, critical illness cover, income protection insurance and whole of life insurance. The study will be launched in late 2024 / 2025 and will be explored through four broad themes:
- Consumer needs, engagement and understanding
This theme explores how PP products meet consumer needs and provide fair value. It will also include; whether the nature and complexity of products are presented in a way that is understandable to consumers, the consumer decision-making processes, the value of services provided by intermediaries, the transparency of intermediary remuneration, the level of consumer engagement with PP products, and cross-selling.
- Competitive constraints on insurers and intermediaries
This theme explores the role of intermediaries as a distribution channel and their significance to insurers. This will also include bargaining power between intermediaries and insurers, distribution channel competition, the broader economic environment’s influence on competition, and the nature of competition between insurers and intermediaries.
- Commission incentive and potential conflicts of interest
This theme will examine the size and structure of commissions within the pure protection market, the incentives these create, and the extent to which the FCA’s rules and features of commission schemes, such as clawback, mitigate potential conflicts of interest.
- Firms’ Behaviour and Practices
This theme explores how incentives impact conduct in relation to products, the market and the treatment of consumers.
These themes are intended to structure the FCA’s investigation; however, they are not exhaustive, and conclusions will be based on the evidence gathered. Outcomes observed will be considered in alignment with those expected under the Consumer Duty.
What Firms Can Do Now
The proposed market study signals the FCA’s continued focus on consumer outcomes in the insurance industry. This clearly signals that more work may need to be done by insurers to ensure fair outcomes for all customers. While the market study is aimed at the PP market, all firms should note the content of the proposed ToR as there is potential read across to other products and sectors.
As the FCA has not yet formally launched the market study, it is welcoming feedback on the intended scope and the issues it intends to explore via PureProtectionMS@fca.org.uk by Friday 11 October 2024.
If the FCA finds that the market is not working as it expects it intends to address any issues through a variety of measures including rule changes, publishing general guidance, proposing better self-regulation for the industry, introducing firm-specific remedies, and where harms to consumers are found, it will take supervisory and enforcement action.
In light of this, firms should be proactively conducting reviews on PP products to ensure that Senior Management is confident, and can evidence, that products and commission arrangements deliver good outcomes for customers.
Questions for firms to consider include:
- Do PP products provide fair value to customers and can this be evidenced?
- Is product information presented to customers in a clear and understandable way?
- Are intermediary renumeration arrangements well designed, transparent and free from conflict?
- Are commission structures effective in mitigating incentives and conflicts of interest?
- Are the costs and benefits of cross-sold products clearly explained to customers?
Pro-actively conducting these reviews can help firms not only demonstrate compliance with the Consumer Duty but also mitigate potential conflicts of interest and ensure that consumer interests remain at the heart of their business practices. Regular monitoring and adjustments to products and commission frameworks may also be necessary to respond to evolving market conditions and regulatory expectations.
How Square 4 Can Help
At Square 4 we specialise in regulatory compliance across the FCA agenda throughout the Wealth, Retail Lending and Insurance sectors. Our specialist consultants have been supporting our clients comply with product governance and distribution regulations by successfully developing and implementing Fair Value Assessments, MI, governance and control frameworks, Outcomes Monitoring Frameworks, and other aspects of the FCA’s Consumer Duty and conduct agenda.
Please get in touch with us at hello@square4.com, or the team below, should you wish to discuss how we might be able to support your firm further.
Contacts:
Sean Kulan, Client Relationships Director – skulan@square4.com
Elliot Cooper, Client Partner – ecooper@square4.com