The Government has failed to close the protection gap, leaving it to the industry to take action, argues Tom Baigrie
To be truly effective, the excellent cause that is Promoting Protection must include the political process of getting those forming policy in financial services to properly address one primary wrong -- that too few people in the UK buy financial responsibility, and too few sell it.
The Treasury, down to the Financial Services Authority (FSA), banks, insurers and the myriad of distributors, have all failed to fulfil a primary economic function - encouraging financial responsibility in the public. The savings, pensions and protection gaps are clear evidence of that failure. A nation in debt, with no savings and with families ruined when breadwinners retire or lose jobs, health or their lives, will not be stable or safe.
Solution
There is a successful business model that can change all this, and that is advised selling. Whether face-to-face, over the phone or on the internet, it can overcome the disadvantages of a dated protection product range and an almost total lack of proper marketing. Currently, most consumers are either simply innocent (or just ignorant) until they talk to an adviser when it comes to understanding their protection needs and the available solutions. They are starved of this knowledge by the State's refusal to publicly acknowledge that it is no longer able to properly look after those forced to rely upon it. The consequent lack of any public policy attempt to explain what consumers' needs are, the dated focus on life assurance, and insurers' inability to communicate how several solutions fit those needs, mean consumers have been left to their own devices.
Insurers hardly ever advertise their products and when they do, the focus is on direct offerings that provide lowest-price life cover, rather than investing in explaining to the public why they need to consider their protection needs urgently. It seems, therefore, that it must fall to advisers to take on the challenge. The industry needs to develop new products and new distribution methods and it must market them effectively.
Policymakers also need to be held to public account for the growth in the protection gap and the industry should demand that they accept the clear evidence that only advice can close that gap.
A key step in this would be to make sure that the growing number of consumers buying the wrong thing, or not nearly enough of the right thing, are guided towards the advice they need. Policymakers must be made to see that buying without advice just cements in the protection gap and that the key hindrance to the growth of advice into the mass market is non-advisers' current inability to explain why they do not give advice. It is because it excuses them from responsibility for the purchase being suitable. And the fact they can purport that their service is the same as one that takes on that responsibility constantly undermines the latter. Why pay more, after all, when it seems there is no difference?
The undermining of advice is a central marketing strategy of the institutions that lead the way in non-advised sales, and support from the big insurers cannot always be relied upon. They are heavily and wrongly committed to the non-advised approach. They feel their websites and brands can corner markets if advice can be marginalised. Such companies would thrive in a non-advised market shorn of their independent competitors, which is why advisers need to accept responsibility for this part of the battle.
Government policymakers need to be dissuaded from their insistence on perfecting the way consumers pay for their financial advice, and get them to accept the harder and more important job of righting the primary wrong. The factory-gate pricing model that the FSA seems rather keen on is simply a Trojan horse for the providers to rev up direct sales as independents reject them - and it will be fatal to the survival of independent advice in the mass market.
The policymakers' insistence on tackling such problems has made debt the only real boom market in retail financial services. All now agree that something urgent needs to be done to promote savings and protection and educate people about the dangers of debt. There is talk of schemes to educate, perhaps with classes in schools, and the Thoresen Review team has started work on generic advice guiding the innocent towards financially responsible solutions.
These are all good provided they guide the populace to independent, Ombudsman-backed advice. The industry should, however, demand that these solutions be compared to the far more flexible effect of a vibrant profitable independent sector. If the regulator allowed the industry the margin to do so, it could run financial responsibility courses at local schools and colleges.
Righting the wrong
The key to righting the primary wrong is the same key that promotes protection sales. It is an army of responsible and profitable marketers and sellers of financial responsibility whose mission it is to turn around the fact that all too few consumers ensure they are protected against the financial effects of both disaster and longevity.
For 20 years now, advisers have focused internally and left policymakers to define the market. They were persuaded by the industry's silence and past failings that low prices were the solution. They therefore regulated non-advice as lightly as possible to give stakeholder pensions and supermarket life assurance the best chance of success. That route has failed them and there is now an opportunity to point out that the industry can do what they could not. It can highlight need, explain and construct solutions and convince consumers. It can take responsibility for the closing of gaps. It is time for the protection industry to stand up and shape the future of the market.
It is not just consumers and many advisers who are ignorant. If you ask around in Parliament, The Treasury and the FSA, you will find very few policymakers who know anything about the pure protection area. There is little up-to-date protection industry knowledge or opinion in those institutions and it is clear that the great and the good are genuinely bemused by the complexities protection advisers daily explain to clients.
The FSA's new website is a valiant attempt to inform, and it is spending lots of our money promoting it, but it is clear that it is aimed at informing consumers of how to avoid the confusion that website information always causes. Surely, its job should be one of informing consumers of how desperately they need cover and then where to find the advice they need to buy it properly.
In truth, making that latter case is the job of advisers, not the job of the FSA, but many in the industry cannot help wondering why the current retail distribution review seems, yet again, aimed chiefly at trying to perfect the advice value chain, or remove the need for it, rather than helping advisers grow to a scale that can close the protection gap. Why would that latter route not work for the FSA?
There is a sign that the market is beginning to lead the policymakers. Recently, Asda started to introduce its customers to protection advice, as opposed to direct non-advice, and others will eventually follow.
Further hope comes from the fact that the payment protection insurance saga, along with trade publication protection campaigns, such as Promoting Protection, are making policymakers aware that protection is simply not like other markets. That, uniquely, mistakes in protection can ruin families and individuals totally, not cost them some unnecessary fees and that people's protection needs are best resolved by advice.
The non-advice route has been tried, almost, to death; it profits no one in the long run, least of all the consumer and the economy. It has failed because it cannot explain things well enough and personally enough to get its customers to make the right decisions. Customers are uncertain and, therefore, they buy little and cancel a lot. And the protection and other gaps widen.
It is therefore vital that the Promoting Protection campaign persuades policymakers to back protection advice instead of undermining it with constant change and subtle support for those who cause no complaints.
In protection, policymakers must now change direction and take as their key task the need to make the responsible retail distribution of financial responsibility profitable. And that means backing advice. Only that way will they close the protection gap.
Tom Baigrie is managing director of LifeSearch
