In what way could retrospective legislation affect advisers working in the protection market after Financial Services Authority (FSA) regulation is brought in? What steps should advisers be taking to ensure they are prepared?
Market views
Jason King, Life Policies Direct
The threat of retrospective legislation is significant to all protection advisers and not just those working under the Association of British Insurers' (ABI) code of conduct.
There are many FSA-regulated advisers who have been conducting 'non-regulated' protection assurance business through their regulated practice, but have not necessarily been overly concerned with the sales process or record keeping, 'safe' in the knowledge that the product is not regulated.
While it is fair to say that the basic term assurance contract payable only on death is relatively non-contentious, it is where the various options have been included and more importantly excluded that possible litigation could arise.
As all advisers know, it is not necessarily the advice that is at dispute, but whether the adviser documented advice correctly in the first instance.
Issues that will come to light include: the client's understanding of reviewable premium contracts; waiver of premium exclusion; was a clear distinction made between the relative merits of rival critical illness definitions, in particular own/any occupation total permanent disability (TPD); and was Inheritance Tax mitigation advice given?
The prudent adviser is already treating protection sales as regulated by issuing post sale letters, confirming the available options, those that have been selected and reasons for that selection. Do not wait for regulation in January 2005 to begin protecting yourselves.
Short of this, there is little the adviser can do except ensure their professional indemnity cover is paid to date and cross their fingers. The FSA has already indicated that the principle of caveat emptor does not apply to regulated products.
Roger Edwards, Bright Grey
I do not believe that the FSA can make the new protection regulation rules retrospective, but it could be unwise to assume that the rules will not influence the Ombudsman's approach to disputed cases thereafter.
The key to avoiding any problems in the future is to operate as if the rules had already been introduced, and couple this with good record-keeping.
It would also be worth advisers reading the relevant FSA consultation papers to find out exactly what the requirements are and to start meeting those now if they are not already.
Many companies already treat protection products as if they were regulated, and produce full key features and other disclosure documents. The various ABI Statements of Best Practice also set out a minimum standard of information that we have to communicate to our clients.
Most protection providers and advisers want to improve the poor perception consumers have of our industry. Reducing the number of disputes the Ombudsman has to deal with will help. Clearly explaining what critical illness and income protection products cover should reduce the number of disputed claims, and helping clients to fill out application forms accurately will also help to reduce the number of non-disclosures.
Doing a thorough job now should mean that we do not have to worry about any retrospective thinking that might arise when regulation comes into force.
Sue Rice, Investment and Life Assurance Group
Some concerns have been voiced about the possibility of retrospective regulation when the FSA comes to power. However, it is not permissable for the FSA to 'backdate' its rules and guidance unless the Treasury allows it to do so, and retrospective regulation has never been proposed.
Potential problems with regulation activity are far more likely to arise from customer complaints where intermediaries' past actions may be compared with the requirements of the new rules and guidance.
Intermediaries have always owed a general duty of care to customers and the new FSA regime will not change this. This duty, however, is encompassed by the FSA's new rules and guidance, which generally reflect existing sound business practice.
Among the proposed regulations, for example, intermediaries must provide policyholders with information about significant exclusions applying to the contract. Regardless of whether or not such a requirement is a regulatory obligation, this is sound business practice and arguably forms part of today's duty of care.
Intermediaries cannot be expected to undo the past. They should, however, look to the future and become familiar with the proposed regulations; make sure their procedures are compliant, especially in the area of systems and controls; and begin planning an implementation programme.
Jason Hurley, RGA Re
The problem with retrospective legislation is its unpredictability. I have great sympathy for advisers who are told by the FSA and the Financial Ombudsmen Service that they should have done something a different way, particularly if the IFA was following the rules set out at the time. The FSA should set out in advance how they expect IFAs to operate and only punish those who break the rules.
Yet, I can see three potential problem areas. The first is that of policyholders who buy critical illness policies believing that they are covered if they are too sick to work. Is this another expensive mis-selling issue?
The second concerns advisers who recommend cheap reviewable premium policies where the risk of premium increases is not made clear to the policyholder. Will the IFA fund the increase?
Another problem is that of advisers who ignore the problems involved with claims not being paid due to non-disclosure. This could lead to potential claims against the adviser if the claim is refused.
IFAs can protect themselves with thorough documentation and clear warnings.
