When the FSA announced it was to consult on over-70s regulation last month, much of the industry felt such a move was long overdue. Johanna Gornitzki reports
A loud cheer could be heard across the industry last month when the Financial Services Authority (FSA) finally announced its decision to consult on the rule surrounding over-70s regulation. To say that industry experts were delighted with the regulator's decision is a mild understatement.
Over-70s regulation has always been met with a lot of criticism. Just like the previous rules surrounding pension term assurance, over-70s legislation forbids protection-only advisers from selling some types of protection policies due to them being classified as investment products. Looking at the present rule, a product is defined as an investment product if it is capable of paying out on death over the age of 70 unless the term is less than 10 years. Therefore, Conduct of Business (COB) rules currently apply to long-term insurance contracts, which are defined as investments, while Insurance Conduct of Business (ICOB) rules apply to the sale of shorter term protection contracts. This has effectively left all whole of life and term assurance policies with an end date beyond age 70 excluded, as pure protection contracts and cannot be sold under ICOB rules.
Definitions
The rule is a leftover from the Financial Services Act 1986, which set out the definitions of what should be seen as an insurance product and what should be seen as an investment product. Back then, it was decided that term assurance of more than 10 years should be regulated as an investment product if it provided for a term that took the average person beyond the age of 70, since such policies were similar to whole of life policies, which are regulated as investments.
The current rule means that if a 25-year term assurance policy is sold to a 45-year old customer the sale is subject to ICOB, whereas if the policy is sold to a 46-year old customer the sale is subject to COB.
Alan Lakey, partner at Highclere Financial Services, thinks the rule is bizarre. "There is nothing to suggest that above a certain age you should be treated as an investment," he argues.
Problems
Instead, he believes the rule has caused numerous problems. For instance, he argues the current legislation is directly opposing the FSA's Treating Customers Fairly initiative. "Is it treating customers fairly if they are allowed to deal with an adviser who cannot offer them the whole range of products?" he questions.
Agreeing with Lakey, Andy Couchman, managing director of Bank House Communications, says: "There is a risk when a customer goes along to a protection-only broker that they may end up with something worse than they initially wanted, as the broker may sell them a less appropriate policy in the fear they may otherwise lose the commission."
Another dilemma is that while the majority of protection IFAs would tell their clients if they needed to see a COB adviser, it is hard to know that until the end of the advice process. Nick Kirwan, chairman of the Association of British Insurers Protection Committee, says: "You don't know what expiry date you will need until the end of the process.
"Ultimately, a customer may have to go and see a different adviser and then they may not bother," he warns, saying the legislation has meant the volumes of policies sold that end after the age of 70 has been limited, increasing the costs for consumers.
He adds that if it was to be based on age, it should be based on age at time of purchase rather than at the end of the policy. "At least that could have some validation as older people tend to be more vulnerable," Kirwan says.
The FSA thinks there are four main reasons that justify changing the definition of a pure protection contract.
Firstly, socio-economic factors, including people working for longer, taking out mortgages and having children later in life, has increased the demand for protection policies expiring after the age of 70. Secondly, actuarial evidence also suggests that as a result in improvements in mortality among the insured population, age 70 in 1986 now represents the equivalent of at least 75 today. Thirdly, the rules have hindered many providers from creating term assurance policies that cover people over the age of 70, and some firms have even hinted that they would rather keep the sale in the ICOB regime, by offering a shorter term product than losing out on the business. Finally, the FSA also admitted that there is an increased regulatory cost associated with term assurance sales extending beyond the age of 70 - a cost that ultimately has to be shouldered by the consumer.
However, Roger Edwards, products director at Bright Grey, disagrees with the regulator's reasons for amending the rule. He says: "The reasons for changing the rule isn't because people are getting older and are taking out mortgages later - though these are good reasons in themselves - it is because applying the rule to term assurance doesn't make any sense."
He thinks the only explanation for it still existing is because no one has been bothered to get rid of it. "Anecdotally, it appears that it was always an oversight, but that successive governments have preferred to find ways of justifying why the rule applied to pure term assurance products rather than admitting that it was stupid and amending it," he says.
So what is now being proposed? The regulator is considering two options for changing the definition of a pure protection contract. The first one is to increase the age condition to 80 years, while the second option is to remove the age condition and the 10-year term condition altogether.
The protection industry is overjoyed by the regulator's decision to amend the rule. Mark Anders, head of sales at Liverpool Victoria, says: "The relaxation of the rules should simplify the sales process for life assurance contracts and the associated compliance costs. It should also improve access to appropriate products for a larger proportion of the population."
Agreeing with Anders, Couchman says: "Change is long overdue and should have happened ages ago, there are no downsides as far as consumers are concerned."
Scrapping the rule
But while experts applaud the FSA's announcement, they all seem to agree that the first option will only postpone the problem.
"The rule needs to be scrapped because if the age is only increased it is like a bandage on a wound. The current rule is like a gangrene leg and should be cut off," argues Lakey.
Contemplating the reasons why the FSA has decided to finally consult on this matter, Kirwan thinks the regulator's decision comes as a part of a tidying-up exercise after regulation, suggesting a regulatory regime with lighter touch is on the cards.
He says: "I think the attitudes are changing and that the FSA is focusing on principle-based regulation rather than rules based. This spells great news for the industry because why should protection-only advisers not be able to sell the product of their expertise? If it is an investment, regulate it as an investment, but regulate insurance products as insurance. That's all - and it has nothing to do with age."
Looking ahead, Kirwan urges everyone to make their voices heard and not ignore the consultation. He says: "It is, after all, up to us if the FSA is going to change the rule they way we want it, so we should all make sure to mark 6 September in our diaries."
