The Financial Conduct Authority (FCA), Britain's finance watchdog, has announced plans to launch a market study into the sale of pure protection insurance products, amid concerns over potential poor outcomes for policyholders.

The study, set to commence in 2024/25, will primarily focus on four specific types of products: term assurance, critical illness cover, income protection insurance, and certain whole of life insurance products offering guaranteed acceptance for customers over 50.

Pure protection products are designed to assist individuals and their families in managing finances if policyholders become unable to meet financial commitments, typically due to illness or death. These products are predominantly sold through intermediaries such as independent financial advisers or mortgage brokers.

Sheldon Mills, executive director of consumers and competition at the FCA, stated, "Pure protection can offer peace of mind and financial security, often when people are at their most vulnerable. Consumers should be able to buy products which meet their needs and provide fair value."

The regulator expressed concerns about the design of commission arrangements potentially hindering firms from delivering good outcomes to policyholders. Additionally, there are worries that some products may provide poor value, for instance, if total premiums paid over a lifetime significantly exceed the maximum conceivable payout.

In 2022, approximately £4 billion was paid out in claims against such policies. The FCA aims to explore consumers' understanding of the products they are purchasing, competitive constraints on insurers and intermediaries, and potential conflicts of interest in commission structures.

This study is part of the FCA's ongoing Consumer Duty initiative and may evoke memories of the payment protection insurance (PPI) mis-selling scandal between 1990 and 2010, which resulted in banks paying out around £40 billion in compensation.

Mills added, "We have seen indications that this may not be the case across the pure protection market and we will act if we find that the market is not working well."

The FCA is seeking feedback on its Terms of Reference and plans to engage with firms, industry groups, and other stakeholders to gather views on the market and the issues proposed for examination before launching the full market study.

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