FSA research highlights ways to reduce consumer losses due to early policy lapses

The research examined why consumers lapse their policies early and pointed to four key actions that could reduce the incidence of early lapsing, which can lead to loss:

• advisers could work harder to explore consumers ability to keep up with their payments and to explain the pros and cons of the product and the consequences of lapsing;
• firms could recognise the benefits of encouraging persistency in their products by offering more help to their customers who are considering terminating a policy;
• regardless of whether or not changes in circumstances could be foreseen, firms could offer more products that minimise consumer detriment resulting from early lapse, such as products where charges are spread throughout the lifetime of policy rather than paid at the beginning;
• consumers could help to protect themselves by reading the product information and asking the adviser questions about anything they do not understand before buying.

Around a third of consumers stop paying into regular premium policies within four years of purchase according to an annual survey of firms published by the Personal Investment Authority (PIA) today. Many of these consumers will have got back less than they have paid in and some will have got back nothing at all.

Christine Farnish, FSA, Director of Consumer Relations said:

We are concerned that consumers are losing out because they are not keeping up their payments, which often results in them getting back less than they paid in. Consumers need to understand how long-term investments are structured and the consequences of early termination. Firms could work harder to explain this and advisers could also encourage consumers to understand the information, particularly as we know too few customers do this before buying a financial product.

Reasons for lapsing

Consumers said they stopped making payments for a number of reasons for example:

• 15% cited a change of employment or income;
• 14% said it was because they currently couldnt afford to keep up payments;
• 12% were concerned that the product performance was not as good as expected.

Quality of the sales process

Consumers who had recently taken out a policy found little fault with the sales process. However a significant proportion of those who stopped paying into their policy reported that information was not explained by the adviser. For example:

• over half said that they were not told at the point of sale how much they would get back if they stopped paying into the policy early; and
• 31% said they believed their current circumstances were not discussed thoroughly at the time of purchase and 34% said their future circumstances were not discussed thoroughly.

Of those who had recently bought a policy:

• over half thought that returns on the policy were guaranteed (which is unlikely to be true in most cases);
• one quarter did not realise that their return from the product was linked to stock market performance;
• 18% thought that if they stopped payments in the first two years they would get back all they money that they paid in;
• one in five had no idea of the consequences of stopping payments into the policy; and
• 25% thought that the implications of changes to their income and employment were not thoroughly discussed.

In separate research on product disclosure published last month the FSA found that too few consumers read product information before buying a financial product and, of those who do read it, many have difficulty understanding it and sometimes misunderstand it.

Themed visit work

Alongside the consumer research, supervisory visits were conducted to firms where reported recorded lapses were generally higher than those of their peer firms selling similar products.

The conclusions from these supervisory visits are that there is not a significant link between a firms persistency rate and the quality of its compliance arrangements. These arrangements include monitoring investment staff on an ongoing basis to ensure their conduct complies with PIA rules and guidance, including the requirement to sell suitable products only.

Regulatory Update

The PIA has today published Regulatory Update 81 which promotes best practice in firms and reminds them of their regulatory obligation to provide clear information to consumers at the point of sale. The RU also encourages firms to recognise the benefits of better consumer relationships that could come from reducing the number of policy lapses.

Further Research

Determining the extent to which the reasons for policy lapses could have been foreseen at the time of sale is both difficult and subjective. The research conducted to date is exploratory and the subject will need more in-depth analysis.

Further research will be needed to monitor trends and gain a better understanding of the reasons for lapses so that the FSA can target its regulatory resources and consumer education programme more effectively.

Notes for editors

1. The research was conducted by DVL Smith Ltd and incorporated the key findings of the MORI survey of lapsers and recent arrangers.

2. The survey interviewed consumers who had stopped paying into a policy early and also consumers who had recently taken out a policy such as a mortgage endowment, personal pension, whole life polices or savings endowment in the past 12 months.

3. Persistency is a measure of the length of time over which a consumer continues to make premium payments into a long-term investment contract. Persistency data on life and pension policies have been collected by the PIA from product providers since 1993.

4. PIA's sixth Persistency Report has been released today. The data refers to contracts written between 1995 to 1998. The results show that non-persistency affects a significant proportion of consumers. This year's report has found that some persistency rates have not continued to show the slowly improving overall trend that has been a feature of previous years.

5. FSA is currently seeking views on its Discussion Paper Informing Consumers: a review of product information at the point of sale. Amongst other things this explores options for getting more consumers to look at the crucial information when buying a financial product including the financial consequences of stopping payments early.

6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

7. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.