FSA Consultation Paper 09/18

A submission from LifeSearch

SHOULD RDR READ THROUGH TO PROTECTION?

Answering Question 19 of the CP.

"What consumer detriment, if any, would arise if we implemented the RDR proposals for the sale of retail investment products and took no action on regulating the sale of pure protection products under ICOBS by retail investment firms.

August 2009

Introduction

(Please see the short glossary at the base of the document which explains acronyms)

The 2 current key causes of consumer detriment

"The percentage of the UK population that holds life insurance has decreased significantly from 61% in 1996 to 39% in 2006...furthermore...21% of people do not know how they would cope if the main breadwinner suffered a long tem illness"*

Far too few consumers have adequate protection in place and, when disability or death strike those without adequate protection in place, they and their families thus suffer avoidable financial hardship and become unnecessarily dependent on the state.

The timing of the huge decline described above has accelerated of late and policy makers should thus seek urgently to remedy it by accelerating across to the protection market those strands of RDR aimed at improving consumer knowledge and increasing and simplifying consumer access to protection advice. Logically that must include increasing the availability of protection advice to consumers.

The first point of our submission must thus be:

No change resulting from this consultation, or the wider RDR should reduce the number of advisers available to those seeking protection advice. Indeed if that number might be increased as an effect of changes then that is broadly to be celebrated, not feared.

The second key current cause of consumer detriment in the protection market is the underestimated and strongly rising dominance of non-advised or execution only sales. Consumers are encouraged to focus only on price by aggregators and price comparison sites and telephone sellers (those who purport not to advise). This, combined with the very high levels of consumer ignorance of protection products other than term life insurance*** has the effect of cementing in the protection gap, as those consumers alert to their needs are sold only basic life insurance at low cost, rather than being advised as to the proper range of products they should consider.

Furthermore, the majority of those who have bought protection this way have made a mistake in doing so. "7 out of 10 LifeSearch customers who had bought protection without advice, confirmed that our subsequent advice caused them to change their decision in a way they considered important."**

Our second point is thus:

As consumers are best served by advice, not execution only sales, no change resulting from this consultation, or the wider RDR should encourage non-advised sales at the expense of advice. As this is most easily done by applying further change, cost or process burden on advisers, that must be avoided in the wider consumer interest.

Focusing on the possible effects of RDR

Notwithstanding the key current consumer detriment above, it is clear that the FSA's focus in this consultation 09/18**** is "...whether possible changes in behaviour of firms brought about by implementing RDR proposals in the retail investment market could contribute to...an increase in unsuitable sales of these products."

In conversation with FSA officials it is clear that the factor causing this concern is that commission will currently remain available on Protection products post RDR and is likely to be an influence on the sales behaviour of those regulated advisers able to sell protection but currently not doing so. If that is the case then the immediate concern is whether that influence will cause consumer detriment similar to that found to in the Investment and Pensions markets, which originally helped trigger the RDR.

Providers report to us that IFAs are already making more of an effort to sell protection, but not yet as a result of any RDR based factor, but rather as a sensible business diversification in the light of reduced and credit-crunched revenues from traditional Investment and Pensions business streams. At this time it is not the method of remuneration that is important, but rather the fact that it is possible to advise effectively and profitably in the protection market, which for many is a hitherto unconsidered field.

It follows that should RDR make alternative business streams less profitable, but allow advice to remain profitable in the protection area, any wise IFA business leader will consider investing in increasing the latter business stream. They will however find that without serious investment, profitability is limited in the medium term.

The business mechanics of protection advice and arrangement need to be understood before the likely long term behaviours of practitioners can be assessed.

The salient points are as follows:

1. The arrangement of protection has a preliminary point of sale when cover from an insurer is applied for. This is never a binding application, so the point of commitment is when the chosen insurer's offer of cover is accepted by the customer. The gap between the two is shortening, but routinely runs from around 1 day to 6 weeks and quite often runs past 6 months.
2. The gap is caused by the gathering of specific medical evidence, either by assessment of a paper form, or the completion of an insurer's electronic form on-line with the customer supplying answers to their adviser or his agent, often over the phone. Further medical evidence is then gathered from GP's; specialists and supplementary questionnaires. At present this process is universally carried out at no cost to the consumer, even where no purchase results. The attrition rate between the two stages runs currently at around 12-20% across the market and is increasing as insurers cut rates and therefore tighten up underwriting procedures to reduce claims.
3. ALL ICOB regulated products have no investment element and no consumer detriment is necessarily caused by stopping and starting them.
4. Though called long term insurance because they are normally set up with a fixed premium for a fixed period, without many options for flexibility, there is no automatic cost to cancellation and restart and some 15-30% of policies are lapsed within the first few years.
5. We have investigated the reasons for lapses on many occasions and most recently in March 2009 found the reasons for lapses to be as follows:
   5% - Adviser revised recommendation due to market changes
   28% - Customer found cheaper or better cover elsewhere
   22% - Circumstances changed and a different structure of cover was needed.
   10% - Could no longer afford premiums due to loss of income/increase in costs.
   15% - Bank or Direct Debiting error was not corrected.
   19% - Other, including, no longer needing cover, divorce, rental arrangements changing and negative press comment on insurance
6. As premiums are trending lower, changing protection policies within their original term is often sensible and causes no consumer detriment except in 2 specific areas.

• In critical illness cover where some newer policies are cheaper but have inferior covers. Non-advising sellers in particular cause this detriment as they do not comment beyond price.
• When a customer's health has deteriorated and cover is no longer available at the standard price, or perhaps not at all. It is normal business practice to advise that an existing policy is retained until the replacement offer of cover is accepted.

In summary then, the establishment costs of a protection policy are borne by the adviser and the insurer alone. Bearing in mind that these can take anything from a few minutes to several months this is a real consumer benefit.

The time spent processing applications through to completion, but not including the initial time spent on advising is as follows.

• Young lives – applying for life cover only - 0.5 hours.
• 35-50 year olds – life cover only – 1.25 hours
• Older lives – life cover only – 1.75 hours
• All lives applying for Critical Illness Cover or Income Protection – 2.25 hours
• All lives with relevant medical history or dangerous occupations – 2.5 hours

These timings are achieved by specialists dealing in volume and must be considered the most efficient achieved. Advisers in more general practice will take 2 to 3 times as long to process a case in the last 3 categories above. ****

The effects of commission based remuneration.

A clear current consumer benefit arising from commission based sales is noted above – the cost of underwriting and changes of mind are borne by sellers not buyers. Caveat Vendor!

Accepting that fact, the following potential consumer detriments arising from commission need to be considered.

1. Advisers might enter the market without training merely to earn commissions.
2. Advisers might ignore the question of suitability so as to earn commissions.
3. Varying rates of commission might cause product bias.
4. Varying rates of commission might cause provider bias.

Advisers might enter the market without training merely to earn commissions.

This is not to be feared, as the standard of knowledge needed to improve clients protection position is already part of the core training needed to practice as an adviser. The product set and consumer need is not complicated and is easily acquired.

Advisers might ignore the question of suitability so as to earn commissions. Protection is recognised by marketing experts as a 'distress purchase', one which consumers make reluctantly, because they feel they have to, not because they want to. It is thus very difficult to sell protection where it is needed, let alone where it is not. The costs and benefits of each product type are totally transparent and no consumer pays the premiums without some reluctance. The dynamics of advised sales in this market are thus radically different to those where the prospect of exciting returns can be held out. Misselling dreams is easy, misselling nightmares is practically impossible.

It is thus not viable to talk a consumer into buying insurance they do not think they need and certainly not possible to make them keep paying the premiums.

Consumers, when they address the question, show a very clear understanding of their needs and very consistently UNDER estimate them. While it is possible to imagine an unscrupulous adviser over selling the amount of cover needed by a consumer, the fact that it is clearly very hard indeed to get consumers to buy cover up to the amount they actually do need, must make the imaginary scenario of over-selling very far-fetched.

Varying rates of commission might cause product bias
There are just 3 broad areas of product, Life Cover, Critical Illness Cover and Income Protection and whole-of-market-adviser commission rates are broadly similar across all of them.

Overall, the key things that cause product bias are the simplicity of the life insurance sale versus the other two and the consumers' familiarity with the concept of life insurance. It is true that in the PPI market the product's profitability caused non advising sellers to sell it inappropriately, but advisers did not, and the dynamics of an advised sale make that unlikely, in that the three core products produce better solutions and more commission, albeit for a more complex sales process.

Varying rates of commission might cause provider bias.
There is a key factor that renders this very unlikely. The cost of protection is totally transparent and easily compared by consumers and advisers. A product which pays more commission must either offer inferior cover or be more expensive or be offered by a more efficient provider.
The covers offered by all providers across the advised market (not so the non advised sector if you consider say Direct Line's CIC) are very similar and subject to regular small upgrades and price reductions.
There is a relatively small gap between the top and bottom of the commission scales. While theoretically some bias is possible, in practice other factors are far more important in provider selection. Premium as noted above, but the provider's process speed to completion and their stance on medical underwriting issues are two other issues more influential than slightly differing commission rates.
Advisers seeking higher commissions simply tie or multi-tie to providers so as to achieve their aim without increasing the price to the consumer.
Price is the dominant factor in consumer decision making in this market. This makes the selling of more expensive like for like covers business suicide.
Some providers offer lower premiums and higher commissions due to scale or process efficiencies. There is no consumer detriment in this and real consumer advantage.

Conclusions

• In a market without investment elements price is totally transparent. This makes adviser bias very clear to any consumer. With the easy availability of online comparison sites, advisers fail if they do not remain very sensitive to price.
• So the single biggest cause of provider and product bias in adviser selection is lower price.
• The differences in commission rates between products and providers are small and cause no bias.
• More advisers entering the protection market will not change any of the above except possibly to increase the sale of more comprehensive policies at higher premiums. This is a desirable consumer benefit.
• Consumers' reluctance to purchase protection products makes mis-selling impractical.
• Most of the costs of advice and sale are incurred at or directly after the point of sale. Commission reflects this fact effectively, and can be clawed back if the policy lapses without substantive consumer detriment arising.
• It is the adviser who suffers the greater loss if a customer changes their mind. A key disincentive to mis-selling! A typical example might be that a monthly premium of £25 causes costs of sale and underwriting of £325.
• The consumer detriment in buying the wrong cover can be corrected at any time. The universal monthly payment structure means that consumers have every opportunity to correct errors or reflect changed circumstances without incurring severe detriment.
• It is certain that charging fees for protection advice will reduce the sale of protection policies as they will greatly increase the initial cost. This would be genuine consumer detriment caused by the RDR and this risk should outweigh all others.

And lastly, a request from a responsible retailer...

Please end the chronic uncertainty caused by Question 19. It has absolutely stopped this protection specialist from attracting capital investment needed to grow our business. There is no gain to the consumer or the FSA in prolonging this uncertainty and an early statement making clear that RDR will not read across to protection unless proven detriment is found to be occurring after implementation is critically needed if the current 'planning blight' is to be ended and consumers are to have access to more good protection advice.

About LifeSearch

With more than 200,000 customers, more than £13bn of cover arranged and over 40 awards and nominations LifeSearch is the UK's leading independent life insurance and protection specialist offering advice to consumers on life insurance, critical illness, income protection and family income benefit.

Established in 1997 by Tom Baigrie and Arthur Davies of London based Independent Financial Adviser Baigrie Davies, LifeSearch has offices in London, Milton Keynes and Leeds. The company currently employs over 150 people, of which approximately 60 are qualified advisers.

LifeSearch prides itself on the quality of advice and high levels of service it provides - always offering the most competitive quote possible based on a client's personal circumstances.

LifeSearch is the only IFA to offer a dedicated claims desk, which is independent of any insurer, to help customers fight for their claims when necessary.

Through LifeSearchCare, LifeSearch is also the only intermediary to provide its clients with free support and counselling provided by RED ARC.

Recognition of the service the company provides is reflected in the number of positive customer feedback forms LifeSearch receives. Since launch, this figure is in excess of 10,000.

LifeSearch Limited is an Appointed Representative of Baigrie Davies and Company Limited, who are authorised and regulated by the Financial Services Authority

GLOSSARY

RDR – Retail Distribution Review. The review of the way financial products are sold in the UK has recommended widespread changes to the way investments and savings are regulated. The RDR is now looking at the Protection market.

ICOBS – Insurance Conduct Of Business. These are the FSA rules which all insurance sellers have to abide by.

FSA – Financial Services Authority. The governing body for the whole of UK financial services.

IFA – Independent Financial Adviser. An expert in the field of managing individual's finances who can give an independent opinion on which policies and companies would best serve their client. They are either paid for their work by the client in the form of a fee, or they receive commission from the company with whom they place their client.

* Vision for the Insurance Industry in 2020. A report from the Insurance Industry Working Group.
** LifeSearch Research April 2009. 150 randomly selected customers from those known to have bought a non advised protection product before speaking to a LifeSearch adviser were asked, "Did our advice lead you to change anything important about your recent non advised protection purchase?"
*** Consumer-Protection Insurance Engagement Campaign (CPIEC) research which revealed that just 1% of the population properly understood Income Protection and just 12% Critical illness Cover. See PDF sent simultaneously.
**** All data from informal LifeSearch research conversations amongst peers and providers conducted for this submission.