In its Pure Protection Market Study, the Financial Conduct Authority (FCA) said it was aware of instances of advisers becoming employed at a new firm, then cancelling and re-broking policies to earn commission again.
A small section of the FCA report was dedicated to this, and Mark Graves, chief executive of Auxilium, said the issue had not been prioritised because instances of policy churning had “grown exponentially” in the last 12 months, so the number of incidents reported in time for the report would not have sufficed for further action.
He said some firms may also be too “embarrassed” to admit it was happening, adding to an under-reporting of the problem.
When a policy is churned, the adviser’s previous firm is burdened with clawback fees, and often, the policy is placed with a new provider to avoid detection.
Graves said clients trusted advisers, so if one recommended a new, sometimes cheaper, policy, they would be encouraged to cancel. He said the customer detriment was not immediate or always obvious, because many would be unaware of the nuances of the policy change, even though there was a risk that the terms would be less beneficial.
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“What advisers tend to do is knock off a benefit to get a cheaper premium, but the customer doesn’t know that and neither does anyone else,” Graves said. He said it was also a problem when older critical illness policies were cancelled, as newer policies had less favourable benefits for cancer diagnoses.
Helen Martin, chief risk officer at LSL Financial Services, said while most advisers acted in good faith and put their clients first, in a Consumer Duty environment, this practice could lead to poor outcomes.
Martin said: “At its simplest, a replacement policy may appear to offer a customer a lower premium. However, price alone rarely tells the whole story and it is very important that customers are advised of the risk of any compromises in coverage.
“In particular, for customers with pre-existing conditions, the implications can be even more serious if those conditions are excluded under the terms of the new policy. In those cases, a decision made on price alone can create real harm for customers.”
Amanda Wilson, founding shareholder and commercial and strategy director at The Right Mortgage, said the firm was “absolutely aware” of protection advisers moving firms and churning policies.
She added that The Right Mortgage Network has experienced instances “where advisers join with apparently clean references, only for lapse trends or re-broking patterns to emerge later”.
Wilson said: “One of the core problems is timing: lapse data often isn’t visible when references are requested, which limits a firm’s ability to make fully informed decisions at the point of onboarding.”
The cost to businesses
Graves said policy churning had caused some firms to fail, because while advisers kept the majority of the commission earned on each policy, firms were liable for the full clawback fee.
He said firms could protect themselves by making advisers sign a contract holding them responsible for clawback fees. Firms should also set aside a clawback pot to cover themselves, he advised.
In its annual results, LSL said provision had been set aside for commission clawbacks after the termination, suspension or resignation of appointed representatives.
The group said this reflected the management’s best estimate of commissions that would be clawed back, based on historical cancellations, adding that if average lapse rates rose by 1%, the provision would rise by £100,000.
LSL’s Martin said commercial pressures could be a factor behind policy churn, saying the sector remained “exposed” to firms whose model depended on re-broking as a “means to stay ahead of the clawback”.
Martin said this was where “robust oversight becomes essential”, saying replacement business should be scrutinised as “rigorously as any new recommendation”.
She added: “At Primis, we treat a replacement policy as though it were entirely new, requiring a new suitability assessment.
“That ensures that advisers fully assess suitability, consider the customer’s existing cover and document why any change is genuinely in the customer’s best interests. When this goes wrong for customers, this is typically at times of heightened vulnerability through ill health – these cases, though rare, endorse our requirements as the right approach.
“We maintain close relationships with protection providers too. They often monitor policy persistency and flag patterns that could indicate problems. That type of dialogue between manufacturers and distributors is an important part of maintaining high standards.”
Martin assured that most advisers operated with “professionalism and integrity”, so the framework should be strengthened around them, and the quality and suitability of protection advice should be prioritised, not the volume of policies written.
Zachary Bawa, sales director at Rosemount Financial Solutions, said a policy should only be rewritten if there is a clear customer need for it; however, he did agree that “the way the UK industry works with commission on protection cases could be abused”.
He said Rosemount had heard horror stories from other firms where a rogue adviser created “large amounts of commission clawback”.
Bawa added: “Sometimes it was replaced with large amounts of initial commission, with the movement of clawback and commission resembling something of a Ponzi scheme.
“We monitor any amount of commission clawback very closely, to check this doesn’t happen in our network.”
Tackling protection churn head-on
Bawa said problems could be avoided if all providers moved from an indemnity approach to non-indemnity, adding: “That way the commission for the product would arrive in small monthly amounts, over a long period. However, as the industry – or the FCA – looks unlikely to enforce such a change, there will always be the risk of the current system being abused.”
He said the correct balance also needed to be struck, noting that some bad actors took advantage of the system, but most advisers were working diligently with customer interests in mind.
Bawa said banning initial commission risked “throwing the baby out with the bathwater” and could make it hard for protection advisers to make a living, as well as leaving customers inadequately protected.
“We need to keep in mind that protection is normally the highest order need, and on the whole, the UK population does not have enough cover. For those reasons, we would suggest not making it more difficult to recommend protection, despite the current system not being perfect,” he said.
Bawa added: “The product providers themselves have risk departments, which seem to remove the bad actors, and they are aware of these advisers moving from firm to firm. So, there is already this element of risk mitigation taking place, which might not be immediately apparent.”
Graves said providers tended to deal with this at firm level, refusing to work with firms with a high level of lapsed cases, rather than identifying the individual adviser responsible.
He suggested individual adviser registration as a solution, but said the FCA needed pushing and industry support to make this happen.
Graves said: “Providers have got to work together and share the databases. One firm should ask: ‘We’ve had £30,000 worth of business in two months; where has it come from and who’s lost it?’.
“An individual registration won’t solve it overnight, but it will solve it within 12 months when they’ve actually got the data, but they need to deal with it now.”
Wilson agreed with Graves and said greater transparency around adviser performance advice would be a “significant step forward”.
She said: “Providers are best placed to identify patterns of high lapse rates, early churn, and repeated re-broking activity. Supplying networks with structured performance data when an adviser joins would materially improve oversight and reduce the ability for poor practice to go undetected.”
Wilson also supported the concept of a “single, portable agency identifier” that follows an adviser throughout their career.
She added: “That would create continuity of accountability and make it much harder for poor behaviour to reset when moving firms.
“It’s also important to recognise that commission structures effectively operate as a loan against expected policy duration. Advisers must clearly understand that if business lapses early, there are financial and conduct consequences. This needs to be better understood across the market.”
Wilson said responsibility should also be on appointed representative firms that benefit from significant retention by ensuring the business written under their supervision is “suitable, sustainable, and quality-led”. She added: “Preventing lapses is not solely a provider issue; it is a supervisory and cultural one.”
She said a combination approach to enforcement would be most effective, by providers taking immediate practical steps through improved data sharing and monitoring, backed by regulation to standardise reporting and ensure consistency.
“Ultimately, this is about protecting customers, maintaining trust in the protection market, and ensuring advisers who operate with integrity are not disadvantaged by those who do not,” Wilson said.
L&G open to the idea of individual registration
Mortgage Solutions got in touch with some providers for their views on the matter.
James Shattock, managing director of UK protection at L&G, said the company welcomed the FCA’s study and was working closely with the regulator to ensure best practice.
He added: “Our distribution quality management process helps firms to grow and develop in the right way, with a strong focus on achieving good customer outcomes. It monitors distributor trends and, if concerns are flagged, we will intervene. However, customer needs evolve over time, and it is important that advisers review and appropriately update cover to ensure products remain suitable for their clients.
“We will fully assess all proposals which aim to improve professional standards, such as individual registration numbers. We’ll continue to work with the regulator and the wider industry to develop solutions that deliver long-term value and good outcomes for customers.”
