3 UK General Business Environment

Question 1

List all the factors to consider regarding the UK environment for writing new business. (39)

Answer 1

1. Regulation and government influence.
   
   • FSMA 2000
   • Mis-selling
   • Depolarisation
   • RDR
   • Charge caps
2. Policyholder tax
   
   • Premium tax relief 1984
   • Pensions taxation
   • LISA April 2017
3. Economic conditions
   
   • Low interest rates and inflation
   • 2000 and 2008
   • Effect on projection rules
4. Publicity
   
   • Mis-selling
   • WP not transparent
   • Poor admin
   • Equitable Life
5. Technology
   
   • Comparison sites
   • Website functionality competitive
   • Outsourcing legacy business
6. Target markets
   
   • Longevity
   • Interest rates
   • State support
   • “Savings Gap”
   • Auto-enrolment
7. Competition
   
   • Banks
   • Building societies
   • Fund management companies
   • Non-traditional financial companies
   • NEST 0.3% AMC
8. Industry bodies e.g. ABI
   
   • Code of Conduct on Retirement Choices 2013
   • The Guidance Guarantee 2015

Question 2

State the four main changes introduced in the RDR.

Answer 2

1. More stringent qualifications required from financial advisers.
2. Increased levels of capital adequacy required by adviser firms.
3. Commission is no longer permitted on investment products (a more transparent explicit policyholder payment is required).
4. A new definition of “independent” is used for advice.

Question 3

Give three examples where UK legislation has affected the premium bases or charges of insurers. (3)

Answer 3

1. Stakeholder pensions have a limit of 1% pa (1.5% for the first 10 years) on the fund charge taken to cover expenses (including any commission paid prior to RDR).
2. Since April 2015, fund charges under auto-enrolment have been capped at 0.75% on default funds.
3. Equality legislation, e.g. Equality Act 2010 has ahd an impact on the justification of existing charging structures.

Question 4

Give five examples of issues for which the UK ife insurance industry has been criticised in the media. (5)

Answer 4

1. Product mis-selling e.g. personal pensions, mortgage endowments.
2. Lack of transparency of with-profits policies.
3. Speculation about product suitability.
4. Poor policy administration.
5. Financial problems of certain companies e.g. Equitable Life.

Question 5

Give six examples of underlying environmental and demographic factors likely to drive increased demand for UK life insurance companies products.

Answer 5

1. Increased longevity
2. Low interest rates
3. Reduced State support
4. Changed population mix - pensioners vs workers
5. The “Savings Gap”
6. Auto enrolment

Question 6

Give four examples of possible incentives for consumers to save. (4)

Answer 6

1. Tax incentives, eg. tax relief on premiums
2. To protect an inheritance
3. Loan-related, eg. if it makes a lender more likely to provide the loan.
4. Employer related, eg. if the individual contributing to a pension would trigger employer contributions.

Question 7

List the five main insurance sales channels in the UK. (5)

Answer 7

1. Financial advisers.
2. Appointed representatives / tied agents.
3. Multi-tied advisers.
4. Direct salesforces.
5. Direct marketing.

Question 8

Briefly describe the four types of advice that can be offered by financial advisers under the RDR. (4)

Answer 8

1. Basic advice - applies only to stakeholder pensions. Standard pre-scripted questions to determine suitability.
2. Simplified advice - for customers with straightforward needs. Delivered through a decision tree with a limited range of products.
3. Restricted advice - fuller advice but adviser only recommends products from a limited number of firms, products or funds.
4. Independent advice - full advice on the whole market. Must be based on a comprehensive and fair analysis of the relevant market and must be unbiased and unrestricted.

Question 9

Describe the two types of remuneration introduced by the RDR for investment based products. (8)

Answer 9

1. Adviser Charging
   
   • Used where a face-to-face relationship exists.
   • Typically for individual investment business.
   • The level of remuneration is agreed with clients.
2. Consultancy Charging
   
   • Used for group pensions.
   • Advisers agree their remuneration with the employer.
   • But it is the policyholders who pay the remuneration

Question 10

What types of contract are subject to RDR rules?

Answer 10

“Investment” contracts, including:

 - Pensions
 - Bonds
 - ISAs
 - Annuities

Explicitly not included are:

 - General insurance
 - Stand alone protection business
 - Equity release products
 - Bulk purchase annuities