FCA: insurers are 'undermining' RDR rules

Regulator finds that "more than half" of UK insurers are still offering banned inducements

UK insurers are "undermining" the Retail Distribution Review (RDR), the push by UK regulators this year to change incentive structures in the financial sector in order to prevent mis-selling, according to a Financial Conduct Authority (FCA) report released today.

The FCA said that its thematic review of the life insurance industry "highlighted serious concerns and a poor management culture in some firms whose actions have the effect of undermining the objectives of the RDR".

The regulator identified two specific areas of concern: continuing payments by insurers to advisers in order to encourage the advisers to sell their products (a conflict of interest) and the continued existence of joint ventures between insurance providers and financial advisers. Two insurers have already been referred to the FCA's enforcement division, the regulator said.

Many insurers paid advisory firms for "support services", but in some cases these payments were unjustified – one adviser had an advisory panel consisting only of firms who had paid it, and another received payments too big to be justified by the services it provided. In a third case, a joint venture between an insurer and an adviser was blocked because it included a large upfront payment to the adviser, and a disproportionate share of the profits.

The FCA also highlighted examples of relationships that could give rise to conflicts of interest: long-term agreements between insurers and advisers; agreements which tie payment rates to sales; and a crossover between advisers dealing with customers and those dealing with providers.

However, aggressive enforcement of the conflict of interest rules could harm the market, a lawyer says.

"There have been some arrangements which have gone too far but they have existed in the marketplace for some time and generally they have not caused consumer detriment," says Bruno Geiringer, an insurance partner at Pinsent Masons in London.

"They helped to enable the market to function. Some advisers are clearly going to suffer from not being able to rely on these arrangements any more and maybe that is a good thing. On the other hand, if that adds to the reduction in the availability of advisers, as has been seen in the first stages of the implementation of the RDR, then that is not necessarily a good price to pay from a consumer point of view."

Geiringer also warned that today's news could herald a much more active approach to conflicts of interest across the financial industry. "Adviser firms have always maintained that they are able to disassociate their recommendations and advice from any arrangement with a provider and maintain their integrity. That now will not be an issue with this guidance in place but how far will it go? Will ownership of adviser firms by providers be the next thing to go and what about commercial loans?"

The RDR came into effect in the UK on December 31, 2012, and deals with higher professional standards and restrictions on the payment of commissions to financial advisers. But this is not the first time the FCA has expressed doubt about its implementation: head of supervision Clive Adamson warned in May that the FCA had "concerns" about RDR implementation, and as soon as it came into force there were warnings that advisers had yet to work out RDR-compliant fee structures.

Mis-selling of insurance products – by banks, not insurers – has been behind the biggest mis-selling compensation payouts in recent history. Payment protection insurance (PPI) was mis-sold to huge numbers of bank loan and credit card customers, with total compensation paid out now running over £10 billion. And payouts for mis-sold interest rate hedging products could also reach into the hundreds of millions.