Protection: Can we second guess the FSA?

Clive Waller, director at CWC Research, takes a closer look at what CP 09/31 could mean for protection IFAs...

Now you probably think I am especially sad for wanting to revisit CP09/32 and you are right. Nonetheless, this paper is important to all of you IFAs as it will help shape the future of your business AND it gives you the opportunity to let FSA have your views one more time.

A most noteworthy section is that on pure protection (section 4). This section tells us what the regulator is currently thinking with regard to the threatened read across.

I use the word ‘threatened' because I judge the removal of the ability to pay commission to advisers on protection covers as having two important and detrimental outcomes:

• Loss of revenue to advisers at a time they can least afford a drop in income
• An increase in the protection gap - meaning less people will enjoy the safeguard provided by income protection and life cover

All for no benefit to anybody but the fee-based fundamentalist extremists!

I cannot see any customer detriment arising from the status quo. Nor do the vast majority of the respondents to the FSA. Post RDR, advisers who have been through the hoops to stay in business will not risk it all to become mass mis-sellers of dodgy protection insurance.

So what are FSA saying?

Firstly, they see no reason why an IFA should not continue to receive commission under ICOB, albeit with some form of disclosure. However, they suggest that if the adviser chooses to adopt a single regime for investment and protection, COB, then adviser charging would apply. This concerns many IFAs.

I confess that it seems to me that FSA is employing a quasi-philosophical argument here. They see an inconsistency in the adviser being fee-based for investment but in receipt of commission for pure protection a single regime. This seems to imply that the customer is aware of the detail of the regulatory process. I hope this is not the case, as this will dilute the sales message. Perhaps I am missing something, but I can't see that it matters.

What is fascinating is the FSA's concern in two areas:

• They are concerned that advisers are not ensuring that customers understand the exclusions under critical illness insurance. Indeed, they recognise that it may be lack of knowledge on the part of advisers. Research that Peter Le Beau and I conducted entitled "Understanding Income Protection" in 2005 certainly led us to this conclusion.

• They are further concerned that only around 40% of advisers sell all three protection products. They suggest that advisers not considering the full protection product range might have to limit their advice as ‘restricted'

This is the most positive position the FSA has taken on protection advice since inception.

This could be immensely positive, particularly for income protection sales. Whilst critical illness is a wonderful product that meets the need for a lump sum following the diagnoses of awful diseases such as cancer, heart attack and stroke, it doesn't mitigate comprehensively against long-term capacity for two reasons:

• The cover is unlikely to be adequate. An income of £25,000 per annum would require cover in the region of half a million
• Critical illness doesn't cover the commonest causes of long-term disability - nervous/mental illnesses and musculoskeletal disease - stress and bad backs in short (these account for around 50% of incapacity benefit claims). In addition, the total permanent disability ‘safety net' fails in around 50% of claims.

If you have not read CP 09/31 - do so! If you have strong views, answer the FSA's questions. If you are not giving all protection covers due prominence, think again.