21st August 2023
Alan Lakey: What happened when we met the Ombudsman
The perennial battle between price and value often results in consumers ending up worse off despite the benefit of advice.
Recently, Tom Baigrie and myself, on behalf of the PDG, met with the Financial Ombudsman Service to discuss the trade-off between price and value.
This may seem like a rather dry subject however if you delve beneath the surface you find numerous strands which impact on how compliance managers and networks deliver their rules and edicts. A number of these areas were discussed and this article touches on a few of them.
In recent years insurers have dissected their critical illness plans enabling children’s critical illness cover as an optional add-on. This is logical as it ensures those without relevant children do not pay for a benefit they cannot claim on. However, this freedom has created a problem for some advisers. I’ve met with some compliance managers who will not allow optional child cover to be added to a plan if the insured does not yet have any children. They cite this as ‘future insurance’ and proscribe it.
Imagine this scenario - a young couple arrange a life and critical illness plan to protect their new mortgage. The adviser asks if they have any children and is told that they plan to start a family in a few years. His network disallows ‘future insurance’ so he has to rely on the couple telling him that they now have a child so he can add on the valuable child cover. The problem here is that the better plans cover children from birth therefore waiting until the child has been born loses the valuable congenital condition, pregnancy complication and stillbirth cover. Clearly sticking to a rigid ‘no future insurance’ regime creates a disservice and flies in the face of Consumer Duty where the outcome is the ultimate determinant of good advice.
Another important point raised relates to arranging a CIC plan with integral life insurance for somebody without current dependents. Many compliance managers reject such applications which ignores the reality that most young people will eventually have dependents. Waiting until they have dependents runs the risk of them being uninsurable. More to the point, numerous insurers charge no extra for the life insurance with those that do charge doing so for a minimal additional cost.
A third issue raised concerned those advisers that opt to recommend a level term plan to protect a capital and repayment mortgage. Many advisers believe that having such a plan not only ensures excess funds but also looks to the future where an increased loan is probable. Again, many compliance officers take a dim view of this.
Another area where good advice can wither on the altar of compliance is the portfolio approach. No sensible adviser would suggest that a client place all of his investment in a single fund and equally a portfolio approach offers wider cover for clients. Four comprehensive plans each for £100,000 rather than one for £400,000. This can quadruple the child cover and additional payment payouts without necessarily affecting the overall cost.
Ultimately, the reason why compliance officers are so cautious is their fear that the Ombudsman service will find it favour of complainants. The question that Tom and I posed to the Ombudsman was whether they really do focus on cost to the detriment of value.
They assured us that this was not the case. Of course, they do not set precedents and each complaint is viewed on it merits however it seems clear that a well written suitability letter is the answer. Such a letter should explain the rationale for the product selection and confirm that after discussion the client has agreed to what might be a dearer but more beneficial option. It always helps to finish such a letter by asking the client to make immediate contact if there is any aspect that they disagree with or don’t understand.
This article was kindly provided by Alan Lakey, CI Expert and originally published in Money Marketing on 07 August.
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