FCA announces review of Pure Protection Plans

The Financial Conduct Authority (FCA) has launched a comprehensive review of the “pure protection” market, which includes products like critical illness cover, term insurance, income protection and life insurance.

In 2023, pure protection policies paid out approximately £4.85 billion in the UK and the FCA is keen to ensure that these products deliver fair value to consumers and offer transparency.

This deeper dive into the market should not come as a surprise. The FCA indicated they intended to carry out the review in August 2024, following concerns that consumers may be underserved or not receiving the full benefit of their premiums. For example, the FCA is concerned that the cumulative premiums eventually exceed the maximum potential payout.

The review will focus on the following key areas:

1. Value for Money/affordability
2. Transparency of products
3. Claims outcomes/customer Service
4. Market structure/competition

The FCA will also examine if the structure of commission arrangements encourages advisers to suggest switching, when it may not be beneficial for consumers. This is likely to be an anticipated area of reform/intervention by the FCA. We  also expect comment on whether the market supports innovation and growth, as this has been a previous point of criticism.

Whilst the initial findings from the review and proposed next steps are not expected until the end of 2025, there may be several implications for insurers and brokers. Depending on the findings, new regulatory requirements may be implemented, such as tighter controls on pricing, increased disclosure obligations, increased measures to ensure competition within the market and even imposing deadline requirements for any claims within the market.

The review follows increasing scrutiny against FCA regulated entities in light of the Consumer Duty, which, as a reminder, came into force in July 2023 for open products and July 2024 for closed products. It is yet more evidence of the FCA ensuring firms are complying with the Consumer Duty. Despite this, it doesn’t appear that the FCA is seeking to ‘catch’ firms out – they have recently announced plans to publish Consumer Duty guides for smaller firms and it’s possible that many of the firms forming part of this review, will benefit from such support.

Comment

In summary, firms will need to ensure that any pure protection products are fair, transparent and provide genuine value to consumers or face potential regulatory intervention. The FCA’s review underscores the importance of delivering fair value and transparent products. Firms may want to start looking at their practices now and ensuring that any recommend policies are supported by detailed consideration of the consumer’s personal circumstances. The FCA’s review should increase consumer protection when they are at their most vulnerable.