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Sarah Wilson

As CIC can be complex, firms sometimes have trouble getting customers to understand what they are buying.

FSA/PN/048/2006
30 May 2006

Firms selling critical illness cover (CIC) are making efforts to meet required standards. But they need to do more to show they are treating customers fairly and helping them to have a better understanding of the product.

These are the main findings from an FSA review, which included visits to firms and mystery shopping, into how far firms are complying with the rules on selling CIC and whether they are treating their customers fairly during the sales process. This review is one of several thematic projects looking at the advice and information being given to retail customers when they buy financial products.

Positive findings from the review included:

• Most intermediaries undertook a detailed assessment of the protection needs of the customer before making a recommendation to buy CIC. The discussion of protection needs was often part of a wider review of the customer’s circumstances, during a financial review or when arranging a mortgage, to establish their priorities, such as repaying the mortgage if the customer was unable to work. But where the firm offered more than one CIC product, price was often the only factor used to decide which one to recommend. Others, such as the conditions covered, did not usually influence their advice;
• Controls to reduce mis-selling: Most firms also had reasonable controls to manage the risk of mis-selling. For example, they had good training programmes and risk based compliance monitoring;
• No scare-mongering: Little evidence of pressure selling and no evidence of advisers and sales staff trying to scare consumers into buying CIC;
• Other options reviewed: Other products were considered with evidence that advisers often considered whether there were other protection products that might better meet the customers' needs. Because of the way CIC is sold, customers have time to reflect on their options before they commit themselves, as with prime mortgage payment protection products. This helps to reduce the risk they will make the wrong choices or buy in haste because their attention is on another product they are purchasing.

What firms need to do:

• Make sure customers disclose relevant medical information. Firms did not do enough to make customers understand what they need to disclose and the risks of failing to do so. In some cases, over 25% of CIC claims are rejected – half of those are because of a lack of disclosure;
• Explain CIC better. Consumers find CIC a difficult product to understand and are understandably unhappy when it does not provide the benefits that they had expected. Despite this, the quality of explanations by advisers of CIC as a product – and the illnesses covered – was still poor;
• Make documentation clearer. For example, key features documents often do not clearly set out the benefits and key limitations and exclusions under the policy;
• Justify CIC sales and advice better. Firms used standard wordings in Demands and Needs statements, which in some cases did not say much more than the policy would pay a lump sum if the customer developed a critical illness.

Sarah Wilson, FSA Director Retail Firms, said:

"Many of the findings are positive - and we also recognise that the industry itself has identified these problems with CIC [as a product] and has launched initiatives to deal with them and to assist in the fair treatment of customers, especially to make policy documents and applications forms clearer. It is early days but these seem to be having a positive effect.

"However, our work confirmed some of the compliance concerns we already identified last year in the context of work on the financial promotion of CIC and on general insurance documentation. As CIC can be complex, firms sometimes have trouble getting customers to understand what they are buying. This lack of understanding makes it difficult for customers to make a judgement about whether CIC – rather than a payment or income protection policy – is the right product to meet their protection needs. The high level of claims rejected because of customers failing to fully disclose their personal circumstances show just how important it is for firms to ensure that consumers know what information they have to provide."

The FSA will give feedback to firms that were visited. In the coming months, the FSA will publish the findings from its work on the quality of advice given to customers and the sale of complex products such as PPI and equity release and will explain its findings and future work programme in this area.

Notes for editors

1. The critical illness review and mystery shopping results can be found on the FSA website.
2. CIC usually pays out a lump sum if a person is diagnosed with certain specified conditions. Most sales of CIC are made to customers taking out a mortgage. While CIC can be bought as a stand-alone product, typically it is taken as part of a term assurance policy. Many sales are made on an advised basis following a full assessment of the individual customer’s financial needs. Overall, CIC sales have been in decline – falling by around 30% between 2002 and 2004.
3. The findings are based on supervision visits to 42 firms. These were mainly mortgage and financial advisers, but also included banks, building societies and insurers. A market research company, Research International, was also commissioned to carry out 80 mystery shops across a total of 51 firms to look at what happens in practice.
4. The review of the sales of CIC is one of several thematic projects looking at the advice and information being given to retail customers when they buy financial products. The FSA is also carrying out other work related to protection products. This includes a further review of sales practices of payment protection insurance (PPI), an investigation into the use of unfair contracts in single premium PPI, and later in the year a further review of GI disclosure documents (including CIC).
5. 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; securing the appropriate degree of protection for consumers; and fighting financial crime.
6. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.