FCA market study into protection product commissions

The Financial Conduct Authority (FCA) has announced a market study into the commission structure associated with protection products. It aims to assess whether the commissions paid to advisors for recommending such products deliver value for money and ensure positive outcomes for consumers. The study will be launched later this year.

The market study will focus on the sale of four specific types of products: term assurance, critical illness cover, income protection insurance and whole of life insurance (including policies for over-50s that offer guaranteed acceptance).

The study will look at a number of key areas, including:

• Value for money:  Are consumers receiving protection products that are commensurate with the commissions paid to advisors?
• Consumer outcomes:  Are the recommended protection products meeting the specific needs and circumstances of individual consumers?
• Adviser incentives:  Are advisors being incentivised to recommend products with higher premiums to maximise their commission earnings, potentially leading to below par outcomes for consumers?

The connection to the Consumer Duty

The market study aligns closely with the new Consumer Duty, which came into force in July 2023.  The Consumer Duty sets out higher standards of consumer protection and requires firms to act fairly, honestly, and transparently.  Key aspects of the Consumer Duty that are relevant to this probe include:

• Fair treatment:  Firms must ensure that consumers are treated fairly and that their best interests are considered.
• Transparency:  Firms must provide consumers with clear and accessible information about the products and services they offer.
• Good outcomes:  Firms must take steps to deliver positive outcomes for consumers.

By investigating the commission structure associated with protection products, the FCA is seeking to ensure that these products comply with the principles of the Consumer Duty and that consumers are not being exploited.

The study could have wide ranging implications for business that either provide or sell this type of cover.  Key potential implications include:

• Rule changes:  If the FCA finds evidence of harmful practices, it could introduce new rules to curb excessive commissions or mandate transparency in commission structures.
• Reputational damage:  Businesses implicated in unethical commission practices could face reputational damage.
• Increased costs:  Compliance with new regulations could lead to increased operational costs for businesses.

The FCA also hopes that there will be positive implications of customers, including:

• Improved outcomes:  The FCA's hope is that this could lead to a more transparent and fair commission structure, resulting in consumers receiving protection products that better align with their needs.
• Reduced costs:  If excessive commissions are curbed, the FCA hopes that consumers may benefit from lower premiums.
• Increased trust:  The FCA's view is that a crackdown on unethical practices could restore consumer confidence in the financial services industry.

The FCA's press release is keen to stress that they are looking to explore how this market is working, and they note the peace of mind that such cover can provide consumers.  However, the FCA has been keen to highlight circumstances where it believes fair value is not being offered since the advent of the Consumer Duty and we fully expect them to take action here if they do decide that these products are not meeting consumers needs (and at a fair value).