Under Financial Services Authority regulation, the demands and needs statement can prove a useful sales tool. Nick Kirwan explains
In the new regulated world, every pure protection sale will need to be completed using a Statement of Demands & Needs (SoDN). However, the Financial Services Authority (FSA) has given relatively little guidance and produced no template for this important document, only high level requirements for the information it must contain.
The SoDN is like a slimmed-down version of an investment-style Fact Find and Reasons Why letter rolled into one. Clearly, together with the Initial Disclosure Document (IDD), it is the cornerstone of the new regulated protection sales process. To understand how to unlock the sales potential of the SoDN, and to ensure that the compliance job gets done properly from the start, it is important to explore how professional protection advisers can make best use of the SoDN by considering some of the regulatory requirements.
Lack of clarity
The SoDN must set out a client's demands and needs. Since the regulation rules were published, there has been a good deal of industry discussion as to what the client's 'demands' and 'needs' actually means. This is the primary requirement of the SoDN, yet the FSA has given relatively little guidance. There is a danger that a lack of clarity today might become tomorrow's mis-selling scandal. To prevent this, the industry needs to err on the side of understanding by documenting clients' demands and needs thoroughly. The good news is that doing so will highlight more sales opportunities. Done well, the SoDN can provide clients with a very valuable summary of all their personal insurance in a single document.
In understanding the client's protection needs, an adviser must take into account any existing insurance cover. In practice, an adviser should always know the current status of existing policies arranged for the client and build this into the advice process. If the adviser is aware of other existing policies that are likely to affect the recommendation, the rules require that these details are obtained before proceeding to make it clear that the recommendations may not be appropriate, depending on what existing cover the client has.
The FSA has confirmed that the completed SoDN must be given to the client before the sale is concluded unless an exemption applies (e.g. for telephone sales). There has been quite a bit of industry debate around what 'concluded' means. For protection sales, it means the point at which the contract is legally made. This requires an 'offer', an 'acceptance' and a 'consideration', but not in Scotland where only the first two are required. For a protection policy, this is normally when the client takes up the acceptance terms that the insurer has offered by instructing the insurer to collect the premium - the 'consideration'. However, with online systems and instant cover, this could be at the point of sale.
The SoDN must be presented on what the FSA calls a 'durable medium', i.e. a piece of paper. However, it could also be in a format that can be stored on the client's computer. Both the adviser and the client will want to keep a copy of the SoDN, so it makes good sense to use a computer system to create and save it. A copy of the SoDN must be kept for at least three years from when the recommendations were made. It is important that advisers tell their clients to keep a copy in a safe place or save it on a computer.
The SoDN must state whether or not the adviser gave advice. A tick box can be used to do this. However, there are some extra things that an adviser also needs to do.
The advice given must be 'adequate' and it is crucial that the reasons for the recommendations are documented. The FSA has given some guidance on what this means: "In our view 'adequate' advice amounts to the same thing legally as 'suitable' advice."
The rules state that only insurance solutions need to be considered. It is the adviser's job to assess whether the level of cover is enough, consider the cost of the cover (with comparisons to other products) and take account of any significant limitations or exclusions. However, in CP187, the FSA had previously given an insight into what it considers to be the three main factors an adviser should always consider when recommending a 'suitable' policy. These are:
• Value for money - Quite clearly, this is wider than simply price and should include other factors such as what cover is provided. It is important to document the reasons why the adviser believes the policy offers good value for money.
• Creditworthiness of the insurer - Some advisers may feel that when companies close to new business, their approach to paying claims becomes rather more legalistic. Naturally, all the clients will want to depend on a well-known, financially strong insurer that will still be in business when the worst happens. Realistically however, all they can do is recommend a product from a reputable insurer and document the insurer's credit rating.
• The insurer's claims handling record - Advisers should recommend an insurer with a good reputation for paying claims promptly and without fuss. The word 'record' implies that past performance is important and a published claims history may be helpful.
Given the nature of general insurance and pure protection, it is not surprising that the FSA focused on the cover provided and the issues potentially affecting claims. However, a word of caution: the FSA also said that this list of requirements is not exhaustive. So it is crucial to ensure you take into account any other factors that may be relevant to the client. For example, another area that protection advice should cover is the use of trusts. Writing a life policy in trust can ensure that the death benefit is paid promptly, goes straight to the intended person, and is not liable to Inheritance Tax under current tax rules. These three benefits can be very important.
Valuable source
There are also other aspects that might help an adviser avoid an unwelcome brush with the Financial Ombudsman Service (FOS), as well as being of value to clients. Every adviser knows the importance of filling in the application form properly so that, if the worst happens, the client can rely on the policy to pay out as expected.
After a declined claim for non-disclosure, a client could potentially complain, justified or otherwise, that they were advised that they didn't need to disclose the missing information. If upheld by the FOS, this could mean being faced with having to compensate the client by up to £100,000.
Therefore, ensure the client gets a copy of the completed application form and ask them to sign a declaration that they understand the importance of answering all the questions in the application form honestly, and to the best of their knowledge and belief. This will help ensure the client gets a pay out when they need it. It may also protect the adviser from a potentially expensive complaint - it is better to be safe than sorry.
Good protection advisers will always want to consider the client's wider protection needs. For example, when arranging protection for a loan, the client's need for family protection should also be considered. If the client decides to only protect the loan, a record should be made of the family protection as a gap in their needs. When asking clients to sign the SoDN, it may also be useful to confirm that they understand their unmet demands and needs are just that, unmet. Not only can this encourage the client to re-think; it can also head off potential complaints that they didn't understand what wasn't covered.
The client might also find it useful to have a list of the kind of events that might trigger a change in their need for protection. For example, moving home, changing mortgage, pay rise, job change, changes in health etc. This could prove to be a valuable source of extra new business. It may also protect the adviser from a potential complaint that the client wasn't told about the lack of cover in these situations.
Done well, the SoDN can be a very powerful sales tool. In particular, it could be used to give the client a very useful insurance summary with an outline of all the policies they already have, the new ones being arranged for them and any remaining gaps in their financial plan. What's more, if the adviser captures the gaps in the client's current financial plans, it makes a great place to start every time the client's circumstances are reviewed.
Nick Kirwan is marketing director for protection at Scottish Widows
COVER notes
• Under FSA regulation, pure protection sales will need to be completed using a Statement of Demands and Needs (SoDN).
• Documenting a client's demands and needs should highlight further sales opportunities for advisers.
• When asking clients to sign the SoDN, it may also be useful to confirm that they understand their unmet demands and needs are just that, unmet.
