RDR brings protection opportunity

Recent months have seen a dramatic shift in attitudes towards the Retail Distribution Review (RDR) from within the protection community. Having been widely condemned as a threat to intermediated protection sales, it is now increasingly being heralded as the potential source of a sales boom.

The turning point occurred last December with the publication of the Financial Services Authority (FSA)'s consultation paper on the RDR. This dispelled fears that advisers selling protection products could be forced to move away from a commission-based approach. Investment advisers, on the other hand, will be required to operate on a fee-paying basis.

This situation should hopefully provide investment advisers with an incentive to take a more holistic approach to client needs in the knowledge that they can earn commission from recommending protection products. It could even encourage the odd independent financial adviser (IFA) who prefers commission to fees as a means of remuneration to cease being involved in investment business altogether and to focus solely on protection – but this is only likely to happen at the margin.

“indemnity commission is a good thing for advisers and customers as well”

Nick Kirwan, assistant director, health and protection, at the Association of British Insurers (ABI), says "I'm very optimistic about the future of the protection market, particularly as the FSA has confirmed that we will still be maintaining indemnity commission for protection. There are substantial numbers of people who do want financial advice but who don't want to pay fees for it. Indeed, every piece of relevant research I've ever seen says customers don't want to pay a fee to be sold an insurance policy.

"I believe that indemnity commission for protection products is a good thing not just for advisers but for customers as well because it aligns the interests of both. Although an indemnity commission is paid up front it is actually earned over a number of years and the customer can cancel the product if they are not satisfied, which isn't in the adviser's interests if it is done within the first few years as it will lead to commission clawback."

"This aspect of indemnity commission for protection is often overlooked", continues Kirwan. "It's not like investment, where an adviser can earn commission up front on a lump sum investment and not do anything else. So we shouldn't be afraid of saying that protection commission works differently and that this method of remuneration is a good thing."

Kirwan believes that the long-term implications of this RDR development could be very significant but feels that they could take time to become apparent, pointing out that we commonly tend to overestimate the effects of these sorts of changes in the short term but underestimate them in the long term. He also stresses that a greater interest in protection from the IFA community should not necessarily result in an increase in mis-selling.

He says, "The industry needs to be alive to the dangers of mis-selling but we should remember that natural swings take place between investment and protection during certain stages of the economic cycle. We have recently seen more interest in protection when investment markets were depressed but there has been no evidence of an increase in mis-selling as a result. The thing that limits the market is that there are not enough advisers to meet the needs of the population.

"We do, however, need to make sure that protection is sold properly and not for the wrong reasons. It should be sold because people need it and not simply because it offers the chance to earn commission. There is so much of a protection gap that there is no need to sell to people who don't need it. Most people of working age do have some sort of protection need."

Swiss Re, in its 2009 Term & Health Watch, reported the Life Assurance Protection Gap to be £2.3 trillion and the Income Protection Gap £190 billion. Advisers who scrupulously focus only on customer needs should therefore certainly never be short of opportunity. Nevertheless, there is clearly a fine line between commission being an incentive for selling protection and being the actual reason for doing so, and it is important that this line is not crossed.