The Financial Conduct Authority said today it will launch a market study of the ‘pure protection’ market including term assurance products and critical illness cover.

The regulator says it is launching the probe into how pure protection insurance products are sold by advisers and others following “concerns” that competition is not working well in the market.

The study will be launched later in 2024 or early in 2025. 

The FCA will focus mainly on the sale of four specific types of products – term assurance, critical illness cover, income protection insurance and whole of life insurance, including policies for over-50s that offer guaranteed acceptance. 

Latest figures show around £4bn was paid out in pure protection claims in 2022, according to the FCA.

The FCA says that the products are mainly sold through intermediaries, such as independent financial advisers or mortgage brokers. 

While commission was banned on investment products by the regulator in 2012 it continues to be paid on protection products, although many Financial Planners rebate the commission to clients.

The watchdog says it has concerns that the design of commission arrangements on pure protection products may not allow firms to deliver “good outcomes” to policyholders.

The FCA is also concerned that some products may be providing “poor value.” This could be case, for example, if the total premiums paid over a lifetime far exceed the maximum conceivable payout.

The FCA will look at consumer engagement with, and understanding of, the products, the “competitive constraints” on insurers and intermediaries and potential conflicts of interest in the “structure of commission.”   

Sheldon Mills, executive director of consumers and competition at the FCA, said: “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. 

“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 keen to hear any feedback on its Terms of Reference and, ahead of launching the market study, will engage with firms, industry groups and others to gather views on the market and the issues we propose to examine.”

Reaction from the industry to news of the review was generally positive.

Cara Spinks, head of life and health at financial services consultancy Broadstone, said: "The FCA is delivering a firm message to the financial services industry with yet another probe into whether a segment of the market is delivering good outcomes to members.

“This investigation into the distribution of protection products is focused on commission arrangements, fair value for consumers and competition in the market. These products provide vital cover for policyholders in the case of death and serious illness or injury, delivering protection at a vulnerable or stressful period in people’s lives.

“Ensuring the market is providing a fair and competitive service to policyholders is central to the regulator’s Consumer Duty objectives.”

Ian McKenna, founder and CEO of the adviser protection product comparison site Protection Guru, said: "The detailed review into the UK protection market initiated by the FCA is unprecedented and highly welcomed.

"This review is long overdue, as there has not been such an in-depth examination since the introduction of the 1986 Financial Services Act. The protection market has evolved significantly, and while it operates more efficiently in many areas than it has in the past 38 years, there are still crucial areas that need regulatory attention."

• Term assurance is defined by the FCA as a policy which pays a lump-sum to beneficiaries if the policyholder dies within a specified period. Critical illness cover is a policy which pays a lump sum to the policyholder if they are diagnosed with a prescribed (non-fatal) serious illness or medical condition. Income protection insurance is seen as a policy which replaces part of a policyholder’s regular income if they become unable to work because of illness, accident, or disability and whole of life insurance, including guaranteed acceptance over 50s life insurance plans, is a policy that provides cover for the policyholder’s lifetime, paying out a lump sum to beneficiaries on the policyholder’s death. Guaranteed acceptance is a type of whole of life insurance which doesn’t require medical or health information for an individual to qualify for cover.