A probe into whether commissions in the pure protection market provide value for consumers has been launched by the Financial Conduct Authority.   

The City watchdog says while this industry attracts “relatively few complaints” it has “concerns that commissions used to sell these products may affect the outcomes consumers receive and the product’s value or design”.  

Protection firms paid out around £4.85bn in claims in 2023, and in the home loans sector is used for building and life insurance as well as critical illness cover and income protection.  

The regulator says its market study will examine whether:   

• The structure of commissions encourages advisers to suggest switching that may not be beneficial for consumers   

• Premiums are being raised by insurers to pay a higher commission to an intermediary 

• Products provide fair value 

• The market supports innovation and growth 

The watchdog’s study will focus on the sale of four products — term assurance, critical illness cover, income protection insurance and whole of life insurance.   

Its initial findings and any proposed next steps will be published by the end of the year. 

Financial Conduct Authority executive director of supervision, policy, competition and international Sarah Pritchard says: “Consumers rely on pure protection to provide an important safety net, often when they are at their most vulnerable be it through bereavement, illness, or injury.  

“We are determined to ensure the market is working well and delivers good outcomes for consumers by testing it or suggesting improvements. 

“In launching the study today, we will be able to take a closer look before considering next steps. We will keep stakeholders regularly updated and welcome the feedback to date that will help us plan the scope of this review.” 

Royal London director of policy Jamie Jenkins argues three key areas should be addressed by the regulator. 

Jenkins says: “First, it’s acknowledged that protection is a commonsense purchase, and one which is typically sold rather than bought.

“Advisers need incentives to help their clients understand their needs and how best to meet them. Any solution should recognise the need for flexibility in commission while ensuring recommendations are unbiased and provide fair value.  

“Secondly, building consumer confidence is an important step towards improving the market.  

“The industry needs to enhance its practices and ensure that consumers can make informed decisions about their finances and trust in the support being offered to them.” 

“Finally, consumers need access to comprehensive and targeted advice to ensure they are able to consider protection while accommodating their diverse needs and budgets.”   

However, Fairer Finance director Tim Hogg points out: “Pure protection markets could be working better for consumers.  

“The design and size of some commission payments appear to be hurting — rather helping consumers.  

“Ultimately, many people aren’t buying life insurance when they would benefit from it. Communications about life insurance remain complex and off-putting.  

“Purchase journeys can be lengthy and contain high levels of friction triggering negative emotional responses with the medical questions.  

“It’s great that the Financial Conduct Authority will look at how to facilitate more innovation in this market — from the design of communications and journeys, to the way that products work.”