Time to dive in

At long last, full regulation of long term care insurance (LTCI) products will be a reality. This commitment confirms the Government's acknowledgement that insurance has an important role to play in helping the elderly pay for care costs. This ensures best advice for a potentially vulnerable market, ends the anomaly of IFAs who have to advise a client on regulated investment business and unregulated LTCI, and will facilitate industry growth.

The LTCI industry has been lobbying for the introduction of regulation for the past four years. The industry recognises that LTCI sometimes involves both large sums of money and complex investment advice. For these reasons, customers deserve the protection of fully regulated products and advice from regulated individuals.

Political progress

Without going into every detail it is worth reminding ourselves of the key political steps surrounding long term care (LTC) before a decision on regulating the market was finalised:

• March 1999: Royal Commission on LTC. From a number of its recommendations the report advised that the Treasury and Financial Services Authority (FSA) began work to bring all LTCI under full conduct of business regulation. The Treasury Committee and the Joint Scrutiny Committee on the Financial Services and Markets Bill both recommended regulation.

• December 2000: Treasury consultation document on LTCI CAT Standards and regulation. 39 responses were received and over half agreed with the Government's preferred option that the FSA should be given the power to regulate the selling and marketing of LTCI.

• April 2001: Capital means test limit changed.

• April 2001: Intermediate care arrangements came into effect.

• May 2001: Health and Social Care Act.

• October 2001: Free nursing care implemented in England.

• October 2001: Treasury decides to regulate the LTCI market through the FSA.

Building confidence

It is unlikely any further political debates or deliberations will take place. Such certainty provides the industry with an opportunity to develop existing products and build customer confidence in LTCI as a solution to elderly care costs.

Interest in this market already exists and recent research among IFAs confirms this, as 73% of IFAs said they were interested in selling LTCI and of those interested, 35% have already sold the product and the other 65% want to increase their knowledge. Regulation should build on this interest as it brings LTCI in line with other product areas. Like the investment market, there will now be certain expectations on IFAs due to their important advisory role. IFAs will have to now consider and advise on the risk of long term care as part of their general consultancy practice.

James Swanson, from IFA firm Chandler King UK, thinks regulation is the right step forward as financial advice for long term care needs to be regulated like any other financial product.

He says: 'I have been selling LTCI for some time and I am aware of the complex issues which can be involved in providing advice on long term care. I already treat this market as if it is regulated. Through my own experience and through the learning curve I had to go through myself, I know how important training and education is for IFAs who are new to this marketplace.'

The potential for this market has always been there, but for the past few years the issue of paying for elderly care has been beset by uncertainty. This has often caused both advisers and potential clients to adopt a 'wait and see' attitude.

However, the Government has made clear the level of support it is willing to provide and, as a result, clients are now more likely to want to discuss LTC funding options. Full regulation will further increase demand as clients will have more confidence in the products they are being advised on, and will be reassured by the transparency that surrounds regulation. Regulation should certainly make LTCI easier to sell.

However, regulation may bring some teething problems. IFA firms, particularly smaller independent firms, may experience resourcing and financing problems as tighter compliance insists on Training and Competency (T&C) schemes. Some firms might want to make it a requirement their IFAs sit the Advanced Financial Planning Certificate (AFPC) G80 exam before being allowed to advise clients. Larger IFA networks may have an advantage over smaller independents as they will have T&C schemes in place, but others will have to set up schemes themselves.

However, tighter compliance procedures should not pose too much of a problem for IFAs. Most IFAs when advising clients on LTCI address and make a record of a client's potential need for long term care via a fact find. If IFAs have not been doing this already, it is now essential. If LTCI is rejected as a potential solution this will have to be documented in the 'reasons why' letter which is sent to clients after a consultation. In order to properly do this an IFA must have enough knowledge on LTCI to outline the reasons for or against recommending LTCI.

Retirement solutions

Getting to grips with how LTCI dovetails with other areas of financial planning may initially be time consuming, but the advantages for the client and potential for creating more sales opportunities for IFAs is huge.

Advising on LTCI will overlap with other areas of financial planning from critical illness, pension planning, estate preservation and inheritance tax (IHT) mitigation. For example, when discussing IHT planning it is crucial to incorporate long term care planning solutions into the recommendation.

This addresses the anomaly of losing 40% of an estate over £242,000 when a client dies or losing 100% while they are still alive. In Swanson's experience advising on LTC predominantly links with income generation and IHT discussions.

He says: 'Many of my clients have come to me for advice on income generation, investment advice, IHT or all three. I discuss the question of LTC and the costs involved right at the start and many clients are not even aware that they face a potential financial problem.

'I firmly believe that for clients who are over 50, LTC is a vital part of the bigger picture of protecting their assets, and not just helping them achieve what they want from their money but also helping them ensure their money will last.' IFAs should be eager to get up to speed on LTCI, its product options and how it links into other areas of financial planning.

Unlike other product areas in the 1% world, the LTCI industry can recognise the time commitment involved in advising on LTCI and the amount of work involved in the many visits often required before a LTCI sale is made. Again, Swanson thinks that tighter compliance might encourage advisers to become specialists in LTCI.

He says: 'Better commission levels on these products reflects the amount of time and effort invested by IFAs and this may turn out to be more than can be achieved on core investment business. There is a lot of potential for LTC to become a large specialist area, this in turn could help the industry achieve a lot of growth.'

With regulation in place, the future LTCI market looks promising. Full regulation promises to change and open the minds of solicitors and accountants and encourage them to consider the important role insurance can play in safeguarding the needs of older clients. In turn, this openness can lead to cross-selling opportunities across the board.

From speculation to regulation the LTCI industry is being empowered. It is an important marketplace that deserves the respect and regulatory treatment it has achieved. The scale of attention that the Government has attached to regulating it reflects the potential growth expected and shift from State dependency to private provision. Regulation makes sense ' the LTCI market can now take a giant positive step forward from which everyone stands to gain.