"Consumer Duty should not be something firms turn to only when the regulator asks difficult questions."
- Mike Allison - Paradigm Protect
Almost a month has passed since the FCA published its much-anticipated final report into the distribution of pure protection products, and I suspect a number of insurers and distributors will have been reasonably pleased with what they read.
Certainly, if you concentrated on the opening paragraphs of the executive summary, you could be forgiven for thinking the industry had received something approaching a B+ on its school report, with the regulator broadly satisfied that the market is working reasonably well.
However, there is considerably more to this report than those opening paragraphs, and anyone who believes the FCA has given the industry a clean bill of health should look a little more closely.
Closing the protection gap
The report makes clear that closing the protection gap remains a priority, with the FCA setting out a programme of collaboration with industry bodies and other organisations over the next 12 to 18 months to improve consumer awareness and engagement.
When 58% of consumers do not hold any protection products, there is clearly a significant amount of work to be done, and given advisers account for around 80% of protection distribution, much of the responsibility for improving that position will inevitably fall on our sector.
Some of those consumers will already be sitting within mortgage and IFAs’ existing client banks, potentially without having had a meaningful discussion about the protection products available to them.
We are also approaching the publication of this year's AMI Viewpoint research, which has previously highlighted a considerable disconnect between the number of advisers who say they regularly discuss protection and the proportion of consumers who actually remember those conversations.
If more than 90% of advisers believe they are having those discussions, yet a significant proportion of consumers cannot recall them, then we need to reconsider whether the way we communicate protection risks is actually working.
Consumer Duty remains central
One of the most important elements of the FCA's report is its reminder that, under Consumer Duty, firms must ensure customers receive the information they need to make effective, timely and properly informed decisions.
For mortgage advisers, that includes ensuring clients understand the risks associated with their borrowing, including the consequences of failing to maintain repayments and the options available to mitigate those risks.
The FCA has also made clear that it will monitor progress and consider further intervention if consumer outcomes do not improve or industry-led initiatives fail to deliver sufficient results.
Given the information available to the regulator through firms' reporting, including mortgage and protection business volumes, it is not difficult to see how greater attention could be directed towards firms where protection engagement appears particularly limited.
That should give advisers and distributors plenty to think about, particularly as the FCA has established a relatively short period in which it expects to see meaningful progress.
Loaded premiums and restricted panels
Of course, improving consumer engagement is only one part of the picture, because when the market study was first announced, there was considerable speculation about whether the FCA might intervene on commission structures, loaded premiums or restricted distribution arrangements.
It has chosen not to introduce market-wide restrictions in these areas, but I would strongly challenge the suggestion this means loaded premiums or multi-tie arrangements, for example, are now beyond regulatory scrutiny.
The FCA has been clear that firms should consider how commission arrangements affect the overall price and value of products, rather than simply concentrating on the structure or description of the remuneration involved.
Consumer Duty, and particularly its price and value requirements, therefore remains central to the decisions firms make about their protection propositions.
For those who believe the absence of new rules provides a green light to continue with loaded premiums without further consideration, I think that would be a serious misreading of the report.
The same applies to multi-tie arrangements, where the commercial benefits for insurers and distributors need to be considered alongside the potential consequences of limiting consumer choice.
We are talking about arrangements which may generate relatively modest additional remuneration per case, particularly when compared with the overall commission already available, and firms should be questioning whether those commercial benefits justify restricting access to potentially more suitable or better-value products.
Putting the consumer first
One recent development which illustrates why product choice matters is the arrival of Beagle Street in the life and critical illness market, bringing some genuinely interesting product features and a different approach to premium ratings.
Its ability to apply premium loadings in increments of 1%, rather than the larger bands traditionally used by some providers, could make a meaningful difference to certain customers, particularly those with medical conditions who might otherwise face substantial increases in their premiums.
However, consumers whose advisers operate restricted panels may never have access to that proposition, even where it could potentially provide a better outcome for their individual circumstances.
That is precisely why I believe the debate around whole-of-market access, loaded premiums and restricted panels should ultimately come back to one question: whose interests are being served by the arrangement?
Recently, National Friendly won the Individual Protection Provider of the Year award in a category that included AVIVA, Guardian, LV=, Royal London, Vitality and Zurich - again, via an intermediary operating under a multi-tie. So, again, consumers cannot get access to providers like this who are putting a large footprint into the market with innovative products.
Passing the 'Mum' test
There is a simple test I have always liked when considering these sorts of decisions, which is whether you would be comfortable recommending the same arrangement to your own mother.
It might sound simplistic, but I think it gets to the heart of what Consumer Duty should mean in practice, because firms should not need a regulator or their compliance function constantly reminding them to put the customer's interests first.
The Paradigm position remains that access to a broad range of providers, transparent pricing and avoiding unnecessary premium loadings offer a stronger foundation for delivering good customer outcomes.
The FCA may have decided further market-wide intervention is not currently warranted, but that does not remove the responsibility on individual firms to examine their own practices, challenge arrangements which may compromise customer value and demonstrate their recommendations are genuinely in the client's interests.
Ultimately, Consumer Duty should not be something firms turn to only when the regulator asks difficult questions, but a principle which informs the commercial decisions they make every day.
