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Consumer Discretionary
The Financial Conduct Authority (FCA) has been conducting a comprehensive review of the pure protection market, focusing on key areas such as commission agreements, competition, and consumer outcomes. This study, launched in August 2024, aims to examine the distribution of pure protection products like term assurance, critical illness cover, income protection, and whole of life insurance[2][3]. With concerns about commission structures potentially harming consumer value and market competition, the possibility of banning commissions altogether has emerged as an extreme but plausible outcome[3][4].
Commissions play a significant role in the insurance industry as they incentivize intermediaries to sell protection products. However, these commissions can sometimes lead to negative outcomes for consumers, including unnecessary policy switching and limited choice due to restricted panels of insurers[4]. The issue is complex, as commissions also compensate intermediaries for their time and effort in providing valuable advice to customers[4].
Several key concerns have been highlighted by the FCA in its market study:
High Commission Rates: Commissions can be substantial, potentially leading to consumers receiving less value for their money. For example, indemnity commissions might amount to multiples of the annual premium[4].
Competition Issues: The market structure, including commission agreements, can impact competition among insurers. Smaller insurers might struggle to compete due to high commission rates[4].
Consumer Outcomes: The FCA is concerned about consumer outcomes, particularly the potential for commissions to skew product sales and limit consumer choice[2][3].
A full ban on commissions in the protection sector is considered an extreme outcome but not entirely off the table. Nadege Genetay, a partner at Sicsic Advisory, suggests that the FCA might intervene if the industry fails to address commission structures properly[1]. However, industry voices caution against such drastic measures, highlighting the importance of balance to avoid exacerbating the protection gap or unfairly impacting consumers with complex needs[1].
Past regulatory actions, such as the Retail Distribution Review (RDR), provide valuable lessons for the current market study. The RDR led to significant changes in how financial products were sold, shifting focus towards fee-based models. However, the protection industry has traditionally relied more heavily on commission-based sales, which were exempt from the RDR's main provisions[1].
Internationally, regulatory actions in markets like Australia, where similar changes have been implemented, serve as cautionary tales. The FCA is likely to consider these examples when deciding whether to ban commissions, weighing the potential benefits against the risks of unintended consequences[1].
The FCA's review is not just about commissions; it also explores broader issues like the protection gap and barriers to innovation. The study acknowledges the role of reinsurers, portals, product comparison platforms, and lead generators in influencing product design and distribution[5]. Emerging trends suggest a push towards greater transparency and fairness in consumer outcomes.
Industry players emphasize the need for balanced regulation that does not stifle innovation but encourages it[1]. Alan Waddington, from Cirencester Friendly Society, notes the importance of regulation in maintaining trust while fostering creativity[1].
As the FCA concludes its market study, the prospect of a commission ban remains a potential, albeit extreme, outcome. The regulator must navigate complex issues, ensuring any changes enhance consumer value without undermining the distribution of vital protection products. With an interim report expected by the end of 2025, stakeholders are eagerly awaiting the findings that will shape the future of the pure protection market[4].
