The Government must consider applying CAT standards to protection products, savings and loans that w...
The Government must consider applying CAT standards to protection products, savings and loans that will be sold through 'voluntary benefits' schemes alongside stakeholder pensions from next April if it wants to avoidwidespread mis-selling of non-regulatedproducts. This is the warning being sounded by many in the employee benefits arena, in light of the fact that voluntary benefits such as critical illness and income protection fall outside the regulatory framework.
Martin Thompson, commercial manager at Sedgwick Independent Financial Consultants, says: "When stakeholder pension schemes launch in April, providers will have an excellent opportunity to cross-sell their other insurance and investment products to members of these schemes. Just because the stakeholder scheme is low cost and must offer fair terms, employees should not assume other products will offer equally good value."
The voluntary benefits scheme represents a sales process that cuts through regulatory consumer safeguards and is not recognised or regulated by any of the existing authorities. Providers have a huge opportunity to make good the losses they make on their stakeholder schemes by cross-selling unregulated products on uncompetitive terms. At the same time, employers can receive substantial commissions from these sales yet avoid regulatory control, as they are not a recognised introducer of business.
A blueprint is included for good practice in voluntary scheme management based on The Benefits Alliance, a group of major companies that have joined forces to achieve competitive rates and terms for their employees. The Alliance members, which include Asda, the BBC, BT and Towers Perrin, together command a total active workforce of 500,000. The companies' pensioners also have access to these benefits.
The Benefits Alliance does not make any money from the deals it negotiates. Alliance member Towers Perrin selects providers and negotiates premiums for the group. TP consultant Martin Phillips, says: "We request that any commission the providers would usually pay is redirected into the deal to enhance the terms for the employees, otherwise it would reduce the value offered."
Careful screening of providers and products is essential, not just from the cost point of view. "Naturally the cost of the benefit is important," Phillips says. "But while we look for a competitive premium or price, we will not necessarily choose the cheapest. Equally important is the standard of service. Before we select a provider, we investigate their administration and service track record and may visit their call centre. Some of the providers we use offer a dedicated help line for each member company in The Benefits Alliance."
The voluntary approach
Voluntary benefits, as demonstrated below, are not subsidised by the employer but are nevertheless considered as much an employee benefit as the guaranteed core items and products available through flexible benefits schemes. While there is no employer contribution to a voluntary benefit, it can be attractive where companies use their bulk negotiating power to achieve wholesale terms for individual employees. Virtually anything can be sold in this way from insurance products, loans and saving schemes to electrical goods and cheap holidays.
There is nothing wrong with the concept of voluntary benefits. As with personal pensions, the potential for misleading employees lies in the sales methods employed. Arguably, the role of the professional fee-based adviser, who is remunerated by the employer, is crucial if a mis-selling scandal is to be avoided.
"Stakeholder pensions will become the biggest voluntary benefit when they are launched in April," Thompson says, "but they will not be the first." Cut-price financial services and products are already available through a growing number of employer-approved voluntary benefit schemes. Where a fee-based professional adviser is used to select and monitor the voluntary benefit providers, these schemes can be a win-win situation. Employers gain increased employee loyalty, while the employees gain access to products and services at wholesale rates - that is, 25-30% cheaper than they can purchase in the open market.
But the problem with 'worksite marketing', as it is called in the US, is the role of the employer, which represents a wild card in the regulatory system. Providers are regulated or at least governed by a code of conduct and answerable to the Department of Trade and Industry (DTI). However, employers endorse these products and receive sales commission, yet are not regulated or governed by any such code. Admittedly the employee, who takes out an individual contract with the provider, has access to the Insurance Ombudsman (which now forms part of the Financial Ombudsman Service) but relying on the Ombudsmen to regulate is rather like slamming the stable door after the horse has bolted.
Product providers understandably are eager to sell in the workplace because they have the implicit backing of their products from the employer and they gain access to a potentially huge market, particularly where these benefits are arranged on a multi-employer basis.
Employees, for their part, could be forgiven if they fail to recognise that products sold via the stakeholder website are not governed by the same tough rules that ensure the stakeholder scheme itself is low cost and offers fair terms. Employees will not be aware of the complete dearth of rules and will assume employers screen the companies they welcome into the workplace or permit to advertise on company notice boards, the back of pay packets and on the company's intranet.
Regulatory loophole
Who then, will warn employees that caveat emptor still applies to anything their employer promotes?
Not the Financial Services Authority (FSA). Andy Fleming, a spokesman for the FSA, says: "It is possible that employers may offer additional voluntary benefits at the same time as stakeholder pensions. We would hope that both employers and product providers would take a responsible attitude but it is for employees to decide whether a particular product is suitable for them." The FSA adds that concerns about insurance products can be referred to the Insurance Ombudsman.
But David Cresswell, a spokesman for the Ombudsman, pointed out that as the contracts would be between the employee and the provider, the Ombudsman has no jurisdiction over the employer.
Nor will employers be required to comply with the General Insurance Standards Council (GISC), which formed in July 2000 after the Insurance Broker Registration Council (IBRC) was disbanded. The GISC is a quasi-regulatory body and membership is voluntary. Moreover, its remit only extends to the actual sale of products and the employer is not involved in this process even where it expedites sales by setting up a payroll deduction facility. Such facilities, which will link payroll deductions directly to the providers, will become much more widespread following the introduction of stakeholder.
Catherine Nicoll, head of communications at the GISC, says this is a marketing situation in the distribution channel that is not covered by any regulator at present. "This falls outside of normal models. We have not identified this situation and formulated a view on it although this is the sort of commercial operation we are seeking to embrace."
John Gorham, policy manager at the GISC, adds: "The GISC is looking at the role of the employer as introducer. Where the employer is promoting insurance products like private medical insurance (PMI) as their own scheme or where they are co-branded with the provider, this does fall within the GISC's rulebook."
He says it is the trust of the employee that is at stake. "We believe that the employee who buys through a voluntary scheme, or any other type of affinity group marketing, should have the same protection in terms of product knowledge as the consumer who buys direct. We want to see a mechanism in place where the employee is automatically given all the necessary information. For example, a low cost monthly PMI plan negotiated by the employer might look very attractive but the employee must be made aware if there is, for example, a high excess payment per claim."
To make matters worse, while the GISC's remit would enable them to regulate the sale of PMI products, it does not encompass income protection and critical illness. "The reality is that these products represent a gap in the floorboards," Nicoll says.
Goreham adds: "At present, these products are not regulated by the FSA and they are not regulated by the GISC. It is a statement of fact that these are not regulated products.
"The GISC's remit is defined by Schedule 2 of the 1982 Insurance Companies Act. This covers PMI, for example, but it does not include income protection or critical illness. The regulators are aware of this issue and clearly it needs to be addressed, but by whom and how quickly I cannot say."
