"We have seen indications that this may not be the case across the pure protection market, and we will act if we find that the market is not working well."
- Sheldon Mills, Executive Director of Consumers & Competition at the FCA
The Financial Conduct Authority (FCA) has said pure protection products are designed to help individuals & their families financially should the policyholder die or become unable to meet their financial commitments due to ill-health or injury. These products are predominately sold through intermediaries such as independent financial advisers or mortgage brokers.
The industry watchdog is concerned that the design of commission arrangements may not allow firms to deliver good outcomes to policyholders. The FCA is also concerned that some products may be providing poor value, for example if the total premiums paid over a lifetime far exceed the maximum conceivable payout.
In order to understand how the market is working, the FCA will explore consumers’ engagement with an understanding of the products they’re buying, the competitive constraints on insurers and intermediaries, and potential conflicts of interest in the structure of commission.
This market study – which will be launched later in 2024/25 – will focus primarily on the sales of four specific types of products: Term Assurance, Critical Illness (CI), Income Protection (IP), and Whole of Life (WOL) Insurance, including policies for over-50s that offer guaranteed acceptance.
“Pure protection can offer peace of mind & financial security, often when people are at their most valuable. Consumers should be able to buy products which meet their needs and provide fair value,” explained Sheldon Mills, Executive Director of Consumers & Competition at the FCA.
The FCA is keen to hear any feedback on its Terms of Reference and will engage with firms, industry groups, and others to gather views on the market before launching the study.
Reacting to this announcement, Cara Spinks, Head of Life & Health at Broadstone, said “The FCA is delivering a firm message to the Financial Services Industry with yet another probe into whether a segment of the market is delivering good outcomes to members. This investigation into the distribution of protection products is focused on commission arrangements, fair value for consumers, and competition in the market.”
“These products provide vital cover for policyholders in the case of death, serious illness or injury, delivering protection at a vulnerable or stressful period in people’s lives. Ensuring the market is providing a fair and competitive service to policyholders is central to the regulator’s Consumer Duty objectives,” she added.
Ruth Gilbert, Partner at Insuring Change, also shared her concerns about some of the “egregious commission out-turns at the extremes. Ditto GWOL without premium caps and guaranteed ‘paid up’ sums assured for those who can’t keep paying.” However, Ruth believes “indications have been shown that the UK protection market is possibly the most competitive in the world, despite recent further shrinkage in numbers of providers.”
“Great if the FCA review can achieve genuine improvements. But not great if it upends the market again as it did with RDR (and obliquely, with MMR – the mortgage market review, not the vaccine!) Fewer people getting covered by product products, which are achieving massive good overall, is the last thing society needs when financial resilience is under such pressure,” she said.
Tim Hogg, Director at Fairer Finance, said “There are important issues for this market study to investigate – this is long overdue. Market failures in pure protection are leading to harm for existing customers, while under-insurance means that far too many people are not protected at all.” Tim believes some over-50s products offer “notoriously low value to customers, who can end up paying significantly more in premiums that their family will ever receive in payouts.”
“The nature of competition in this market has led to intermediaries sometimes receiving what appear to be high commissions, resulting in lower value products for consumers. There are also concerns about competition weakening due to firms exiting the market – and lower competition is likely to lead to worse outcomes for consumers in the long run,” he added.
“The detailed review into the UK protection market initiated by the FCA is unprecedented and highly welcomed. This review is long overdue, as there has not been such an in-depth examination since the introduction of the 1986 Financial Services Act. The protection market has evolved significantly, and while it operated more efficiently in many areas, there are still crucial areas that need regulatory attention,” highlighted Ian McKenna, Founder & CEO of Protection Guru.
“The FCA’s work on Consumer Duty has largely focused on wealth advisers, leaving protection advisers with less clarity on expectations. The recent thematic review emphasised that advisers basing recommendations solely on price are not meeting the new standards.
“This review presents an opportunity for the FCA to provide more guidance on what is required from protection advisers. Many advice firms are already working towards significant changes, and it is hoped that the FCA will recognise these efforts and target actions at those who are not yet adapting,” he concluded.
