ILAG Investment & Life Assurance Group
The Practitioner Voice
Fiona Syer
Retail Policy Division
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
6 September 2006
Dear Fiona
CP 06/13: Quarterly Consultation no 9
Chapter 2 Proposed amendments to the Glossary definition of a pure
protection contract
Overview
After our involvement in discussions with the FSA on options to change the
definition of a pure protection contract we are pleased to comment on your
proposals set out in Chapter 2 of Consultation Paper 06/13.
We believe strongly that the proposals, if adopted, will increase the availability
of protection products to consumers, will be of benefit to firms and will provide
a contribution to the reduction of the Life Assurance Protection Gap in the UK,
currently estimated to be at least £2.3trillion sum assured.1
Under the present regime intermediaries have to identify whether a potential
sale or even interview is likely to fall under COB or ICOB rules, and firms need
to have appropriate monitoring systems in place to ensure compliance with
the relevant rules. For these reasons some provider firms have taken the
decision not to offer protection policies beyond age 70. This has limited the
availability of such products to the older consumer at a time when the need for
protection cover ceasing at older ages is rising, due to increased longevity,
people having children later in life and working beyond what used to be
regarded as the ‘normal’ retirement ages.
The impact can also be seen in employer sponsored group life schemes. At
present most schemes terminate at age 60 or 65. New regulations covering
age discrimination in employment, which become effective in October 2006.
These will increase pressure on employers to provide competitive employee
benefit packages and are likely to create additional demand from employers
1
Swiss Re Life & Health Limited
PO Box 73 Princes Risborough HP27 OYJ
Telephone: 01844 273630
Fax: 01844 273631
Mobile: 07950 327513
lynda.maynard@ilag.org.uk
ILAG Investment & Life Assurance Group
The Practitioner Voice
for death in service cover for older employees within employer sponsored
arrangements.
Without the proposed change many firms providing advice on group life
business would have to vary their permissions to enable them to advise on
cover extending beyond age 70. In practice, most firms would see this as
disproportionate and, as a result, employers may find it difficult to arrange
such cover, leaving them to self insure the risk on older lives if they wish to
continue to offer cover. Faced with this choice, some may simply withdraw
group life cover.
Our answers to the specific questions raised are attached and we shall be
pleased to discuss these with you in more detail.
Yours sincerely
Lynda Maynard
Administration Team
PO Box 73 Princes Risborough HP27 OYJ
Telephone: 01844 273630
Fax: 01844 273631
Mobile: 07950 327513
lynda.maynard@ilag.org.uk
ILAG Investment & Life Assurance Group
The Practitioner Voice
Question 1: Which proposal do you support:
(a) Option 1 – increase the age condition to 80 in the definition of a pure
protection contract? or
(b) Option 2 – remove the age and ten-year condition in the definition of
a pure protection contract?
We believe strongly that the better option is the removal of all references to
age and term in the definition of pure protection business. We therefore
support Option 2.
Although Option 1 would result in there no longer being an age-related
distinction for pension term assurances or for cover beyond age 70 written
under registered pension schemes, firms would still need to have systems and
controls in place for other protection policies to check whether the COB or
ICOB rules were applicable. Intermediaries would still need to consider the
likely term of the cover early in the advice process if they were not authorised
to conduct both COB and ICOB regulated business.
As mortality improves it would be necessary for the age limit of 80 to be
reviewed. The removal of an age limit would also obviate the need for a future
time consuming and costly exercise.
Both options should result in making pure protection contracts more widely
available. However, in our view Option 2 would have the greater effect as it
should encourage ICOB advisers to widen the range of products they advise
on to include whole life products which pay a capital sum on death only, to
meet the need for funeral costs cover or cover to meet inheritance tax liability.
As stated in the Overview section above, improving access to such products
should have a positive effect on the Life Assurance Protection Gap.
Similarly option 2 puts all of the protection family of products into ICOB so
there is a clear savings discipline and a protection specialism. We accept that
a holistic planner needs to be able to span both, as they do now.
Question 2: If your firm’s business is affected by these proposals,
please provide estimates of the compliance and other cost savings if
these proposals were implemented. Please provide estimates for
Options 1 and 2 separately.
Our member firms may respond on an individual basis to this question.
PO Box 73 Princes Risborough HP27 OYJ
Telephone: 01844 273630
Fax: 01844 273631
Mobile: 07950 327513
lynda.maynard@ilag.org.uk
ILAG Investment & Life Assurance Group
The Practitioner Voice
Question 3: Do you agree that increasing the age condition to 80 would
reduce the number of situations where term assurance sales straddle
COB and ICOB? If not, is there a more appropriate age condition and
why?
Yes, we do agree that the number of situations where term assurance sales
straddle COB and ICOB would be reduced. However, it is important to
emphasise that a simple increase in the age condition would mean that firms
would still need systems to check that the appropriate sales procedure was
used for a sale or, for those with COB or ICOB authorisation only, that the
sale was within their scope of permissions
Question 4: Do you think that whole of life policies without surrender
value could be sold under ICOB without risk to the consumer? Do you
think that additional rules are needed to mitigate the risks identified and,
if so, what?
From our reviews we believe that there are no specific additional risks
involved in making whole of life policies without surrender values available
under ICOB. From information provided by one of our members we
understand that the majority of new whole life sales are where the policy has
no surrender value on early termination. They have estimated that at least
175,000 out of the 205,532 new sales in 2005 were policies with no cash
value on early surrender and that most whole life policies are taken out to
cover funeral costs, with average new sums assured for these policies of
between £3,000 and £3,500.
The Consultation Paper mentions the absence of projections and that there
would be no need for commission disclosure. We feel that there is no need for
a projection of benefits as the product is designed to meet a need for
protection cover.
With regard to commission disclosure, although this would not be a regulatory
requirement, some firms may, as now, continue to disclose commissions in
order to present a consistent approach with investment sales and their
general duty to the consumer.
In keeping with the move towards Principles based regulation we do not
believe that the addition of more rules is either required or appropriate. The
current requirements on firms to pay due regard to the information needs of its
customers and to treat them fairly should provide sufficient safeguards for
consumers, especially when taken in conjunction with the current ICOB
suitability rules and the Unfair Terms in Consumer Contracts Regulations.
PO Box 73 Princes Risborough HP27 OYJ
Telephone: 01844 273630
Fax: 01844 273631
Mobile: 07950 327513
lynda.maynard@ilag.org.uk
ILAG Investment & Life Assurance Group
The Practitioner Voice
Question 5: What are your views on the extent to which each of Options
1 and 2 would restrict a firm’s business because of changes to the
scope of a firm’s permission? Are you aware of any firms whose
business would be restricted?
We feel that the impact would be limited. Many intermediary firms scope of
permissions do include both COB and ICOB business. A firm which did not
have the required permissions would have to submit a variation of permission,
but in view of the small number of new protection sales that meet the
definition of a qualifying contract of insurance, we feel that these would be a
small number only, if any.
Of more importance is the fact that Option 2 would allow ICOB advisers to
widen the scope of their business and thus make protection and whole of life
products more widely available.
Ends
PO Box 73 Princes Risborough HP27 OYJ
Telephone: 01844 273630
Fax: 01844 273631
Mobile: 07950 327513
lynda.maynard@ilag.org.uk