Meeting the direct sales challenge

How is the rise of non-advised sales affecting the market? Peter Madigan reports on the latest COVER Think Tank.

Richard Verdin: Clearly the answer is yes, because customers are transacting with advisers and with non-advisers. There are plenty of businesses that are profitably trading in these circumstances so there is room in the market for both.

Steve Casey: From our view it is the consumer understanding what exactly they are receiving, whether it is true advice or not, that is our primary concern. The consumer has the right to choose but they should have an informed choice and it is the information provided both pre-sale and post-sale that is of paramount importance.

Roger Edwards: I think we should ask what we perceive advice to be because people could go on the internet, find out a lot of information and think that information is advice. I could go online and read about a critical illness policy. Now is that advice or just information?

Kevin Carr: The ombudsman's definition of advice is anything that influences a customer's decision to buy or not to buy. An awful lot of websites confuse advice and information. Every day the ombudsman receives complaints from consumers who thought they were advised - but who weren't.

Martin Werth: Everything you read influences you unless you are unable to understand it. We have to improve the quality of advice otherwise we will simply see people buying cheaper products without understanding what they are buying. We have to get across the message that the products are complicated and to get it right you need quality advice.

Roger Edwards: It is the availability of the right product in the non-advised market, like it is in the advised market, that is key. A client could go to an adviser, get all the advice they need and then not give the adviser any commission but simply go on the internet and find the best deal themselves. But they won't be able to find the right combination because no provider actually does it. So how do they decide which bits to keep and which bits not to?

Richard Verdin: Let's look at the facts; accident, sickness and unemployment insurance outsells income protection by five to one. The statistics on single life policies written in trust are between 3-8% and if you go up to £200,000 sum assured it goes as high as 18%. Of the vast majority of policies sold with advice, single life policies have not been put in trust, and people are not advised to take out income protection policies, so I think it is not an issue of advice versus non-advice; it is an issue of good advice versus bad advice.

Martin Werth: If the quality of advice is so good it differentiates from non-advice the question is, is there room in the market for both? Market forces will leave both in the market but you have to ask whether people really understand what they are getting. I am okay with both routes existing as long as people know what they are getting. The person who decides they understand the product and can go and find it cheaper elsewhere is probably the person who does not need advice because they are smart enough. Most people find our products far too complicated and they may think they are more protected than they actually are.

Alex Broad: What steps have been taken to ensure consumers understand whether they are receiving advice or not?

Richard Verdin: The FSA's solution was to decide that all customers should be issued with a key facts and an initial disclosure document. There are two options for a business to show what they are offering the customer. They can either tick the box that says, 'We will advise and make a recommendation for you' or, 'You will not receive advice or a recommendation from us'. Then people make their own choice about how to proceed and I think that is pretty clear. Can you make it clearer if you are getting advice or not getting advice?

Kevin Carr: Of course you can, because those documents do not go into detail on what that means to the consumer. What it does not say is that if you do not receive advice you lose the right to redress from the ombudsman if you buy an unsuitable product. That means something to the public; the initial disclosure document does not.

Martin Werth: What the FSA keeps coming back to is whether people have the understanding of information. If people don't understand, and our products are complex, then the FSA may say that I am treating customers fairly since I have sold a complex product when a person did not have the capability to really understand what was going on. The FSA also says people must be responsible for their decisions as long as they have the understanding and information.

Scott Taylor: Isn't it strange that as an industry we are producing things that consumers do not even understand. That is a bit of an odd position to be in. Then we spend an awful lot of money on advice and regulation to make sure that these products do not end up in the hands of the wrong people.

Martin Werth: There is a history to this situation. It is a salesman's role to sell and if the sale was complicated it supposedly created a better trust between the salesman and the consumer. Our products are overly complex but there are a range of products that are overlapping gaps, so consumers do not know what they are really buying or what they really need.

Scott Taylor: You can easily make the argument that people are quite canny, quite capable of buying and making important life decisions with very little advice. If we are introducing products that are too complex for people then the industry should be rethinking its goals. What the financial services industry does not do is produce products that people are asking for. What it does is produce products which it thinks have a good commission structure and that it can sell in sufficient volumes to make money.

Roger Edwards: Absolutely. Critical illness is an example of a product which ended up developing to meet the needs of those selling it rather than those buying it. We created a product that was so full of the complex definitions that the industry needs, that customers need medical experts to help them understand what it is. I'm not sure we could ever get a product that was so simple that people would not need advice.

Scott Taylor: Regulating the industry is one of the reasons that some of these products are quite complex. I would say almost all our products need some form of advice - whether it is basic life products being written in trust or two single lives over a joint life policy and especially income protection, which probably has the highest need for advice of all products.

Martin Werth: I don't think we should measure success by sales because that is successful strictly to the insurer. We need to design our products in a way that recognises that people do not know the event that will lead them to make a claim and the product must therefore be safe enough to do something for the most common causes of claim. Unfortunately we got it the other way around and asked, 'What's exciting to market? What can we sell via broker consultants?' We never asked, 'What are the causes of claim?' Now let's make sure that there are simple products that meet those common causes of claim.

Kevin Carr: Protection advisers sell five to six times more income protection than mortgage payment protection insurance. Banks and building societies do not sell income protection and if most people get the majority of their financial information from either the company they bank with or the company they borrow money from then they will never have heard of income protection. They think mortgage payment protection is their income protection plan. If you get it wrong at the start then the consequences at claims stage can be immense.

Scott Taylor: Why can't people be allowed to make mistakes? Why are we so concerned that people are buying unadvised products? I don't understand. Maybe it is because non-advised sales present a tremendous threat. I would not be surprised if the vast majority of insurance is bought direct in future.

Kevin Carr: It will be. The way the market is going the vast majority will buy direct. But isn't it interesting that the more places they are given to buy, the more sales fall? I agree with the concept that supermarkets reach out to a target consumer but my objection is not just because being an IFA is my business. On a far larger level, people's lives are been destroyed and homes are being lost.

Scott Taylor: That all sounds very nice but we are all in the industry for business reasons. If you are saying that the work we do here has a social aspect then the Government should be doing it. They should be taxing us to provide that if it is a social issue. To suggest that we should have people out there shifting life policies otherwise there will be all these orphans and widows in distress is completely detached from reality.

Alex Broad: Is it possible that the FSA may step in to stipulate that advice must be given when buying protection products?

Martin Werth: I agree that people must be responsible for their own decisions but we are selling complex products and we have to be aware that they may not be able to understand them. The FSA is focusing on whether people have the understanding to make an informed decision.

Scott Taylor: Presumably the regulator does not agree, otherwise they would not allow the non-advised sale of certain products. We do it routinely with investments and say that these investments cannot be bought by the general public without advice or unless they are an expert investor.

Steve Casey: If the ombudsman is receiving complaints from the consumer who thought they had advice and in reality they were not given any, then it is only a matter of time until the FSA clamps down on this.

Scott Taylor: I'm not sure whether there is a clear definition of advice in the consumer's mind. What the consumer principally sees under the heading of advice is often nothing more than a sales process and whatever value that approach had has now been discredited. That is why consumers now feel more comfortable buying insurance cheaper at a supermarket or online.

Alex Broad: Do customers recognise the value of advice or do they just see an adviser as a middle man and an unnecessary expense?

Roger Edwards: I think the whole infrastructure of the industry is more orientated towards the price sale rather than the advice sale. We can demonstrate the value of advice through the old adage about paying a little more for two single life policies rather than a joint one and receiving double the benefit. But the industry doesn't highlight that and compliance departments at a lot of IFAs say, "Go to the Exchange, get the printout and then justify to me why you haven't gone for the cheapest premium on the printout."

Richard Verdin: But surely in the absence of a certain product or service feature price must be the determining factor. If the product is ostensibly the same in terms of service then the only difference to the customer is the price, so it is up to the intermediary to demonstrate that they can find a product variation that means that the transaction is better placed with them. Otherwise, in the eyes of the customer, you give them this one and that one and they look exactly the same so they buy the one that is cheaper.

Martin Werth: We have to get across that sometimes the products don't do all we think they can do and that is why people need advice. Are the providers doing enough? We have tried to develop the concept of an essential protection index in which, if you measured our products out of five, most would only score one with maybe a few reaching two. If we can get a simple way of communicating that you are getting less than you realise then they'll understand why they need advice because a lot of these products are very poor.

Alex Broad: What are the merits of an industry-wide advertising campaign to warn consumers about the pitfalls of not seeking advice when buying protection products?

Roger Edwards: One of the problems with such a campaign is that it would perpetuate the myth among consumers that insurance companies are corrupt and constantly trying to screw them out of their money. While I would support an industry-wide advertising campaign we would have to position ourselves very carefully if we wanted to warn about the risks of buying without advice.

Richard Verdin: We could only have a campaign if every-one agreed on the issue but clearly, even just around this table, there is wide disagreement on advice.

Kevin Carr: The danger is that the commoditisation of any market does two things, particularly in protection. It devalues price as, in consumers' minds, it is a price-based decision and if the value of advice is not illustrated then we are going to reach a stage soon when consumers do not want advice at all.

Roger Edwards: This whole commoditisation issue bugs me. Milk is a commodity and everybody buys it. We all talk about term assurance being a commodity product but what we are doing is undercutting each other as advisers and providers and just going after the same people and re-broking existing business. We are just cannibalising the market at ever-decreasing prices.

Steve Casey: That is one of the reasons why the protection gap continues to grow year on year rather than decreasing.

Roger Edwards: If these price spirals carry on then companies that offer added value services will have to seriously think about whether they can continue to offer them.

Martin Werth: I agree that the industry is unlikely to unite about advice and non-advice. If we could try to put together a measure of what a product does against what the customer's needs are we would have a generic approach that deals with the lack of customer information. Rather than advertising I think there are much subtler ways of getting across the message about what are good and bad products.

Scott Taylor: A marketing campaign when the industry is undecided on what it wants and where it is going would be pretty ill-conceived. If the consumer chooses not to put a policy in trust because they do not know about these things, so what? I wouldn't want any of my clients being in that position but I am being paid to give them advice. If people who are not my customers want to go and make mistakes and buy simple products relatively easily, great. We have to make it easier for people to give us their money but the current structure makes it very hard even though today's technology should make it really easy.

Roger Edwards: There are actually a growing number of people who want to give advice on this particular area but since regulation this has become more difficult. Estimates suggest that to sell a life policy an adviser will have to talk the client through 130 pieces of paper. When the mortgage they are covering is just £70,000 or £100,000 advisers rightly ask if it is worth all that paperwork for such a small sum.

Jason King: If mortgage advisers are not recommending any kind of protection to cover what will probably be the biggest commitment a person will take on in their lives, we have to ask whether it is treating customers fairly not to offer protection advice on a huge financial commitment.

Alex Broad: If an advertising campaign is not feasible what alternative methods are there to raise consumer awareness?

Martin Werth: The way to get across to consumers that life assurance is not just death insurance is to establish a measure of quality so people start thinking, why have I only got a one star product when I could have three?

Richard Verdin: We would need an independent body to assess that.

Jason King: But what would they be assessing? A product that covers you and then pays out a lump sum to your benefit when you die would get five stars just like any other product for doing its job. You can give it five stars but it is the model and the way it is delivered that is more important.

Scott Taylor: Why doesn't the industry sell direct? Why not sell through websites? I believe it doesn't want to do that because providers don't want to get so close to consumers that they have to take responsibility.

Steve Casey: What do you mean by responsibility?

Scott Taylor: By responsibility I mean hiding behind the adviser. The insurer can produce a product they think is great and attach a certain amount of commission to it. It is then the adviser's problem if he does not fit that product to the right people. It suits a lot of insurance companies to have that distance between them and consumers as they have some uncomfortable truths to learn if they were trying to draw people directly.

Steve Casey: Coming back to the idea of a protection index I am not convinced that the criteria would underpin a five-star rating. The overall issue is an educational campaign. We are all agreed there should be something, to what depth is debatable.

Martin Werth: You should start with what a customer needs to be covered for. The problem is that there is no certainty on protection. It covers less than 50% of common causes of occupational disability so you may argue over which policy covers an extra condition or two but the biggest problem is that it doesn't cover the most common causes of why people cannot work. Why aren't we getting this message across?

Richard Verdin: Who are the people who determine the shape of a product? It is the reinsurer who is providing 90% of the risk and determining 90% of the premium.

Martin Werth: The reinsurer has to design products that sell and traditionally they were sold through a direct sales force and then through financial advisers. The products were designed in the late 1980s with a sales process that was relevant then.

Richard Verdin: So what are the reinsurers going to do about it?

Roger Edwards: If we knew all we know now about pricing and the issue of guaranteed rates and medical advancements but the product did not exist, we would not go away and develop the product we currently have. We would have developed something that better met the consumer need.

Alex Broad: What are the wider market implications of the growing market share of direct and non-advised sales?

Kevin Carr: The main implication is that we will certainly be receiving more complaints from consumers about the financial services industry. It is about prevention and cure. We can wait 10 or 15 years to try to cure things or we can prevent the problem today.

Scott Taylor: I don't think the main issue is about advice; it's about the quality of the product. I think an increase in non-advised sales could be a good thing for insurers. Of course, I don't think it will do advisers much good.

Richard Verdin: You cannot make an assumption that advice equals good advice because it has been proven in the past that quite often it doesn't.

Jason King: Even if advice is bad, at least there is some recourse there.

Steve Casey: I agree entirely. Consumers have that recourse if they have received advice on a sale and they don't without advice. We promote that; if someone has a claim turned down we encourage them to go to the ombudsman if they feel they have been given bad advice.

Martin Werth: It is wrong to say that if a sale is non-advised you have no recourse to the ombudsman; you do. It is only if the product itself is misleading. We have to be clear that advice must be of the right quality but without advice does not mean that you get no protection, just much more cut down protection.

Kevin Carr: It is very easy to believe that consumers understand anything you give them when the truth is that in the recent consumer intelligence report all 125 consumers failed to spot the difference between advised and non-advised sales.

Scott Taylor: It is interesting that barely any critical illness cover is bought without advice. It offers a nice premium and a nice commission and perhaps it is the commission that is driving the market. Insurers are essentially in an arms race with other providers, constantly improving their products and enhancing their propositions to keep them competitive.

Richard Verdin: I think we do need a benchmark index system to make it easier for consumers to measure and give them some form of confidence in a product rating scheme. But at the same time work needs to be done on benchmarking advice and what qualifies as reasonable advice for customers. I don't think that anyone has attempted that yet. There is a lot of work to be done.