Depolarisation: Exclusion of protection products may cause consumer confusion
The Financial Services Authority's (FSA) decision to exclude protection products from the menu under its depolarisation rules could indirectly lead to another mis-selling scandal, according to Nick Kirwan, marketing director for protection at Scottish Widows.
As part of the rules, which came into effect on 1 December 2004, advisers have to disclose a menu about the fees or commission they charge.
This helps to relate the cost of receiving advice to a clear statement of what services are being provided. However, this will not apply to protection products.
The FSA said the decision was made because the menu is mainly for investment products, with protection products having its own layer of regulation. Incorporating them into the menu could place general insurance firms at a competitive advantage, as it would demand different disclosure requirements from different companies selling the same products.
Arguing that the exclusion could effectively lead people to believe that price is the only differential between protection products, Kirwan said the FSA's decision could have catastrophic consequences.
"There is an underlying fear that people will assume that protection products are only commodities. While to some extent, that is the case for life cover, it cannot be said about other products such as critical illness and income protection," he said.
Kirwan added that this thinking could cause some serious problems further down the line, with consumers opting for cover purely on price, believing all the same products within the same genre offer the same benefits.
"In five years' time this could lead to a mis-selling scandal," he warned. Emphasising his concern, Kirwan added that as this is very likely to happen, he believes the FSA is likely to change its mind within the next two years.
Commenting on the decision, Ruth Excell, spokesperson for the FSA, said while depolarisation rules only apply to investment products, the decision is unlikely to cause any future problems.
"As far as protection products are concerned, intermediaries still have to provide key facts about their services," she said.
Apart from having to provide a menu, the new regime allows advisers to offer advice on products from the whole of the market, a single provider or from a limited number of providers. Firms will have a six-month transitional period before they have to comply with the new rules.
