There has been considerable speculation of late over whether the Government will regulate the long t...
There has been considerable speculation of late over whether the Government will regulate the long term care insurance market through the Financial Services Authority (FSA).
But ahead of any decision on regulation, it is expected that the Treasury will soon announce the introduction of basic standards covering the sale of long term care insurance products. These may take the form of CAT standards, similar to those already introduced in other areas of financial services.
One question we might ask is, would such CAT standards be a stepping stone to full regulation, or would they be an adequate self-regulatory solution for consumer protection?
Government ministers and senior officials at the Treasury may already have reached their decision, but we can only guess what that might be.
Some long term care bonds are already regulated by the FSA as they are investment vehicles, but straightforward long term care insurance (LTCI) products fall outside its remit.
It is the sensitive nature of care for the elderly which pushes LTCI up the FSA's agenda, as well as the size of the premiums, which in themselves are similar to the sums involved in investment products. There have been enough signs from the Government to give us a steer on the importance they attach to the issue of consumer protection in the long term care insurance market, and this is worth exploring.
The question of regulation has been bubbling for some time as part of the Government's analysis into funding long term care. The Royal Commission looked at social as well as financial issues of funding care and one of the commissioners, Lord David Lipsey, has been a vocal proponent of regulation.
As a dissenting commissioner, he put his name to a minority report which conceded that the State was unlikely to pay for all care, and that elderly people with assets should continue to cover a significant part of the overall cost of their care. This minority report identified the role of insurance in providing asset protection for the elderly, which is why David Lipsey has been so vocal on the subject of regulation. He tabled an amendment to the Financial Services and Markets Bill to put long term care under the control of the FSA.
Government discussions
A Treasury working party met in March this year to start the process of exploring product and sales standards in LTCI and, with the benefit of hindsight we can see how this anticipated July's NHS Plan.
The NHS Plan, which was part of the Government's Comprehensive Spending Review, said the State would, from October 2001, pay for nursing care in a nursing home. The precise rules on how this will work are, as yet, not available. Although this benefit will reduce the cost of nursing home care for some, the average reduction will be relatively modest and a large proportion of nursing home residents could still be facing costs of £20,000 per year.
Other announcements within the NHS Plan simply confirmed that the majority of people would have to pay for their long term care. New rules on the delivery and funding of care in a person's own home could involve a new means test for this type of care. These rules are expected early next year and will bring local authorities into line. The current means test arrangements which state that people with assets over £16,000 (increasing to just over £18,000 from next April) have to pick up their long-term care costs if they move into residential care, were retained.
In the NHS Plan, the Government touched on the role of long-term care insurance in protecting people's assets and they had already set the wheels in motion to ensure that there would be some form of consumer protection in place.
Any debate on regulation inevitably looks at mistakes that have been made by the insurance industry, as well as the damage done by unscrupulous individuals. Selling to the elderly immediately rings alarm bells, because there are so many images of elderly people being duped out of their savings or valuable antiques because they were too trusting, or no longer able to make sensible financial decisions.
Buying long term care
In reality, most people that take out LTCI plans are in their late 60s. But product providers are trying to bring this age down. The most logical time to act is on the point of retirement, as LTCI should be considered as part of retirement and inheritance planning process.
Immediate needs policies, which provide a funding option for people already needing long term care, are sold to people in their mid 80s and even late 90s, but the discussions over needs are usually held with relatives, solicitors, or accountants representing the person in care.
The Treasury working party's recommendations are expected to be announced shortly. The Treasury has consulted with insurance providers as well as with other interested parties. Their terms of reference have been to 'define financial services products that offer reliable, efficient and effective means of saving to pay for long term care costs. The products may be any kind of retail financial services vehicle including immediate needs facilities'.
The committee has looked at product areas such as cost, reliability and ease of understanding, as well as the claims process. It has also looked at product marketing and disclosure.
Any announcement from the Treasury cannot be pre-empted, but there has been considerable media speculation on encompassing these recommendations in a set of CAT or beacon standards, providing a form of self-regulation for the industry and a yardstick for the public and IFAs.
CAT standards
But are CAT standards enough? The Treasury is expected to issue a consultation paper on the regulation of LTCI products before the end of this year. The various options will be set out but, based on the opposition David Lipsey faced in the House of Lords, the Treasury may not be in support of regulation through the FSA.
The aim of regulation or CAT standards is two-fold: one is to set standards and make sure they are adhered to, and in so doing, the second is to reassure the public and give them confidence in the products they are being sold. Regulation makes sense in a market with such significant growth potential. Without the confidence of the consumer how can insurers and IFAs hope to develop this market? The attention of the Treasury, and potentially the FSA, is a clear sign that the Government expects this market to grow considerably.
If self-regulation in the form of CAT standards or standards by some other name are introduced as a result of the Treasury's recommendations, it would be seen as a positive step forward. Providers will be quick to ensure that they fall into line with any areas they do not already comply with.
From the IFAs' viewpoint, any move that boosts consumer confidence must be a benefit. Research carried out earlier this year showed that people believe there is a one in two chance they will need professional care in old age. Four out of five people in the AB social group believe they will have to contribute towards the costs of such care, and of these, two out of five will expect to consult an IFA about covering themselves against the cost of care.
It is the potential size of this market that justifies regulation at some stage in the future. In the short term, common standards must boost consumer confidence and help IFAs who respond to the opportunity created by the Government, to go out and talk to clients about this form of protection.
Jacque Langford is head of retired markets development at PPP lifetime care
