For the first time, advice given on protection and health insurance will come under scrutiny by the FSA. Nick Kirwan explains the small print every adviser needs to know
The new regulatory environment for IFAs selling protection and health insurance heralds a new dawn of transparency and openness that could bring substantial financial and reputational benefits to those IFAs prepared to take that first step.
Reputation
If we have learned anything from the past 20 years, it is that there's no such thing as a fast and easy route to being a successful adviser. Without exception, the intermediaries that have successful businesses are the ones that have worked hard to build a reputation based on relationships developed over time, and who are open and honest, dealing fairly with customers and recognising the contribution they can make to help clients create a strong financial net.
It seems the Financial Services Authority (FSA) has recognised this too and has taken the essence of that existing, widespread good practice and used it as a basis for much of what we will see under the regulated system.
In a significant move by the FSA, the final rules governing the sale of protection and general insurance policies extends the remit of the Financial Ombudsman Service (FOS) to rule on complaints relating to advice. This means, for example, that when the FOS considers a complaint about a disputed claim, the advice given by the intermediary may, for the first time, be taken into account.
Given this extended authority, intermediaries need to be entirely clear on what is meant by 'advice' and ensure that the advice they give is unlikely to be the cause of a dispute - especially a disputed claim. The definition the FSA has given is:
• Discussing the merits of buying or selling a particular insurance product.
Independent advice is described by the FSA as:
• Advice based on a 'fair assessment' of the market.
Misunderstandings
To ensure there are no misunderstandings on whether or not advice is given, the FSA has set out a sales process framework to allow advisers and clients alike to clearly see and understand the advice and how it is given.
Advisers will have to make specific disclosures to the client including:
• Status - including who you are and/or who you work for, set out in an initial disclosure document (IDD).
• Any fees you charge (full details must be given before the client incurs any fees). This does not apply to commission unless the client asks.
• Provision of a policy summary or 'opted-up' key features document.
• The cost of the policy.
• Provision of a copy of the policy or a specimen policy document.
• Details of the claims process.
In addition to these disclosures, intermediaries will have to prepare a statement for each client that sets out their individual demands and needs. This is the client's record of the sales process which must be provided on a durable medium - for example, paper or a computer disk - and the client must get it before they are committed to proceed with taking out the policy. This can be, for example, before the client takes up acceptance terms.
In addition to setting out the demands and needs of the client, some other requirements of these statements are:
• Advice - state if you have given advice.
• Suitability - explain why the policy recommended is suitable.
• Unmet demands and needs - make a record of any of the customer's demands and needs that the policy you arrange does not meet.
There is also the non-advised sales process, where intermediaries would use a set of scripted questions to arrive at the client's demands and needs. These are often referred to as decision trees and, in the case of general insurance and other simple products, some people are calling them 'decisions saplings'. The same set of disclosures needs to be made in the non-advised process, but here the demands and needs statement can be simpler because no advice has been given.
The FSA has set out three criteria it expects intermediaries to take into account when determining whether a protection product is suitable for their client. These are:
• Value for money.
• Financial strength.
• Claims history.
Although the FSA makes the point that these are not the only factors that advisers should consider, it's worth ensuring these three criteria are covered every time. In assessing value for money, the price of the product is the most obvious consideration, but there's more to value than simply price.
Disputes
Other factors which make up value include the level of guarantees the product offers, the scope of the cover (including, for example, free cover and child cover) and not forgetting the flexibility of the product to adapt and change in the future. With a trend of rising premiums and tightening cover, flexibility could save a client a small fortune if their circumstances change.
With regard to financial strength, a look at the company's credit rating should be straightforward enough. This will help intermediaries and their clients feel confident that the company will still be there if the client needs to make a claim in 10, 15 or 20 years. When it comes to claims history, intermediaries should check out the company's track record, where possible, so they can be confident that the client's claim will be handled fairly.
The FOS will act to defend the rights of the consumer. The FOS will take into account not just the law, but also the wider aspects of what is 'fair and reasonable' in all circumstances. Most disputes concerning insurance products fall into one of two categories - and protection is no exception. The first, and by far the most common, is when a claim is turned down or only partially paid. The second relates to disputes over premiums.
All areas that are advice-driven have the potential for dispute. But these two categories are by far the biggest areas where advisers need to be sure that their advice is watertight - especially when you consider that the Ombudsman can award the person making the complaint up to £100,000 compensation. And of course, if it's a disputed claim, very often the financial loss will be more than that amount, with the possible loss of future business.
So what areas should advisers look out for? Examples of advice that the FOS might take into account when examining a complaint or disputed claim:
• The scope of the cover. For example, was the need for child cover taken into account when recommending critical illness cover to a couple with a family, or to a couple who might have a family in the future? If not, and the client's child suffers a critical illness, it's conceivable that the Ombudsman might rule that the policy wasn't suitable.
• Disclosure. Responsibility lies heavily with intermediaries to encourage clients to disclose all relevant information to the insurer. If a claim is disputed due to non-disclosure and the client was advised there was no need to include the information on the application form, then the FOS might hold the intermediary responsible.
• Reviewable premiums. Was the nature of the review process explained to the client? If not then, again, the Ombudsman may find a case against the intermediary.
Giving advice falls into a privileged circle of occupations from which the public expects the highest levels of professionalism and integrity. Intermediaries who offer financial advice on protection are an essential part of this elite group. To remain so, will mean not just complying with the new regulatory processes, but embracing the changes. Those who rise to this challenge and put the needs of their clients at the heart of their sales processes can look forward to working in a thriving market and a rewarding future - in every sense.
Nick Kirwan is head of protection, proposition development & marketing at Abbey for Intermediaries
COVER notes
• The FSA's definition of giving advice is 'discussing the merits of buying or selling a particular insurance product.'
• Independent advice is described as 'advice based on a fair assessment of the market.'
• The FSA has set out three criteria it expects intermediaries to take into account when determining whether a protection product is suitable for their client: value for money, financial strength and claims history.
