Tony Müdd: The law of unintended consequences

"You cannot argue that the introduction of Consumer Duty isn’t the right direction of travel."

clock • 4 min read
Tony Müdd: The law of unintended consequences

SJP's protection expert, Tony Müdd, writes that the introduction of the Consumer Duty could, and should, spell the end of loaded premiums in protection, even if not by design.

A great deal of column inches have already been devoted to the FCA paper on Consumer Duty, and we haven't even had the final regulations.

In practise I don't think we've seen anything yet and while my thoughts here are adding to the column inches, I make no apology - after all you can always stop reading.

Now normally when a consultation paper is issued the industry undertakes a collective intake of breath, looks at all the issues and responds without any real belief they will be listened too, before complaining that they cannot meet the anticipated timelines to an audience that won't believe them.

Putting aside this corporate regulatory dance and assuming every part of the industry takes this seriously, which it must, once you get under the bonnet, the direction of travel is both unsurprising and should result in a number of positive outcomes for customers.

The specific outcome I wish to address here, however, is the end of loaded premiums.

Many of you will know my feelings on this practice, plus I spoke about it in Protection X6 and my views, if anything, have actually hardened.

However, recently I have started to think about the business that has already been written on these terms and what it may mean for the market: the customers, the advisers and the providers.

An opportunity

If we start with customers, they have been paying higher premiums for cover than they should have been and what was available in the market at the time the policy was executed.

Cynically, if this practice is either banned or melts into the ether, as the excuses for the practice run out, it will give intermediaries the opportunity to rebroke the business. They would be able to revisit each and every customer and potentially offer the same cover at a lower premium.

Given the current economic climate, why wouldn't this be appealing? The intermediary could be seen as a knight in shining armour helping the client protect their family but at a reduced premium. Galling, I know.

 Even more cynically, if this was undertaken outside of the commission earnings period, then it would be at no detriment to the intermediary. Sure, it may be argued that recently introduced products may have greater flexibility (especially in the light of Covid) or include a myriad of additional benefits, such as digital GP services. But let us not kid ourselves as to the reality of what would drive this practice.

Let's not forget too, conventional wisdom suggests that it is far easier to sell to an existing customer than a new one. It could be a rich revenue stream for the intermediary and although they could waive their commission and discount premiums lower still. I think that's unlikely!

Furthermore, it's all well and good for those customers who still enjoy their good health, but what about those that have had a health scare or have changed occupations to a more manual one?  They are effectively locked into paying the higher premium if they want to retain the same level of cover.

And I think that I can state categorically that they were unaware that the intermediary they used obtained their quotes from a loaded premium panel. This cannot be right, but it is a perfect example of the client detriment Consumer Duty is trying to address.

Winners and losers

Now normally with significant changes, such as this, there are winners and losers. However, the only winners here are those advisers who overcharged their own clients.

The providers and reinsurers really are stuck between a rock and hard place. They are powerless to do anything other than to increase lapse assumptions in their pricing and taking this through to its natural conclusion would mean prices increasing across the board - impacting new clients and doing nothing to help address the protection gap.

Life companies bleat about the importance of distribution management, lapse and NPW rates, and the need to weed out the bad apples, but the reality is they all have allowed this practice to go on too long.

They understand all too well the implications for their own book but at the same time have new business targets to hit in their fight to have internal capital allocated to their business, retain their jobs and earn those bonuses.

This could also have another unintended consequence or apparent contradiction of making the annual new business figures look more positive, whilst the protection gap actually increases. This is because what is not measured and reported are both the lapse rates and what percentage of new business cases are replacement policies.

You can argue about timing, failure to address the issue of non-advised sales or the lack of clarity around the definition of ‘fair value' to name a few, but you cannot argue that the introduction of Consumer Duty isn't the right direction of travel.

The cultural shift the FCA are expecting to see starts with the consumer and ends with the consumer and while changes will be difficult and painful, they will happen; they have to happen. Perhaps the interesting question is who will blink first.

Tony Müdd is divisional director, development & technical consultancy for St. James's Place Wealth Management

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