Hi there!

Well, with the power of modern technology - on the 25th November - the FSA announced its long awaited RDR Feedback statement to an audience of fee-paying conference attendees and many more who watched via the Webcast facility…I must say that the Webcast worked very well for me.

Now getting back to the Statement itself… where do I start? I think it would be fair to say that after the original DP in 2007, the proposed ‘distribution landscape’ contained in the ‘Interim Statement’ (IS) issued in April 2008 came as a surprise to many. Indeed, given the immense ground shift from the original position that the ‘IS’ contained - with the stark ‘polarisation’ between ‘advice’ (IFA only) and ‘Sales’ (NO advice at all) - some may even say it was a shock! Despite this, the FSA Feedback statement announced on Tuesday 25th November was another significant shift; albeit that it was back towards the current distribution landscape! Yes, believe it or not, the FSA is now saying that IFAs, Multi-ties, Single ties along with two variants of Guided Sales (advised – subject to ‘suitability regulations’ and no advice – considered to be a risk) can co-exist. Needless to say there was an interesting mixture of views expresses by the ‘discussion panel’. The ABI and the BBA were both supportive of the FSA statement – given that they represent the Providers and Bancassurers, this reaction is not a surprise. However, Chris Cummings of AIFA was less supportive; indeed, his comments were pretty direct and angry!

Given the legal interpretation on the use of the term ‘advice’, along with the implications of EU Directives and MiFID that affect commission etc., the FSA was left in a difficult position vis a vis the April statement. However, they have also had to take into account the implications of the potential changes upon existing distribution models and consumer take up of ‘advice’ in these circumstances. A cynic might argue that this apparent ‘retreat’ is not unexpected given the banking background of Jon Pain, the newly appointed Managing Director for Retail Markets. However, it has to be said that there was a real possibility of ‘disenfranchisement’ both of distribution models and of consumers resulting from the April proposals. Whilst this may not fit the ‘utopian’ ideal of some for polarisation, there was and still is a real issue of what the customer values and will pay for when it comes to ‘investment’ advice.

Cutting through the 220 page mini deforestation that is the output of the ‘Feedback Statement’, there are some significant challenges:

• Distribution models
How they are labelled and how they operate in a way that serves the consumers best interests.

• Remuneration
Factory Gate pricing and Client Agree Remuneration (CAR) are now replaced by a new term ‘Adviser charging’. This is now one of the most significant areas to deal with and the implications are potentially very complex. The devil is in the detail and should not be underestimated by Providers or Distributors.

Providers and Distributors should look carefully at whether the really are ‘manufacturers’ and/or ‘Distributors’ in the new regime. The reason for this is that despite some issues over how costs are apportioned to product and advice, the real question is whether the manufacturing and/or distribution of products [and services] is competitive and profitable in a ‘stand alone’ scenario (one should not be subsidising the other to disguise the price and value to the customer).

• Professional qualifications
The benchmark standard is being set at QCA level 4 and there will be no ‘grandfathering’ – though there are more issues and complexities with this that are outside of the scope of this blog.

• Professional Standards Board
A new non FSA body is being proposed… though the real need for this and costs are still to be discussed.

• Timetable
Consultation on new rules is expected in June 2009 and transitional arrangements are expected to be completed by Dec 2012.

Outsourcing
> Non core activities to specialists (not just cost cutting of labour)
> BPI (effective and efficient – doing the right things in the right way)
> Thinking and innovation (use disconnected business people who see things differently)

Cost effective supply chain management
> Still very cumbersome and paper based

Security
> Information and data needs to be protected
> Criminals are exploiting technology more than the insurers are

Risk awareness, implications and management
> Climate change, disasters, terrorism, crime and pandemics

Social networking
> Access to between half a billion to a billion people
> Exploit web2 technologies

Global marketplace
> Emerging markets are not just open to physical presence, but technology potentially means we have a ‘borderless’ world
> Legislation, regulation, political and cultural barriers may be put up as economic hurdles

Improvements in health and mortality
> We can predict the health and longevity of people fare better than ever before
> Technology improvements in prediction may not be fully utilised [but is it a matter of time?]
> Predictive capability of health and mortality of individuals could be used to focus on problem management and mitigation
> Science, technology, biology and pharmaceutical developments extend quality and longevity
> Providers could tailor product terms to benefit individuals (Annuity products already have tailored benefits for ‘impaired lives’)
> There is a significant social and political hurdle to overcome

Taking the last bullet point into more detail:

The life insurance industry is obviously facing a number of challenges in the current market environment. One of the potential future opportunities and key drivers for the industry is going to be life extension. We are rapidly approaching a time when we can begin to more accurately predict and improve people’s longevity through a combination of pharmaceuticals, life style management and eventually even medical devices. Individually personalised medicine is emerging, indeed if we look at the US as an indication of future trends, the consumer genomics marketplace is an increasing opportunity. Genomic information could be used to predict and promote health and life. With the pace of change accelerating, we are living in an era where people will be living dramatically longer than ever before and the quality of their life will be much better. There are significant social, political and economic implications that could affect what we have to do and what we choose to do with that extended and improved quality of life. Will we have the income and or capital to fund this extended future? Will we want to or need to work longer? If we live longer, will we need long term care? Will we end up with a society like that portrayed in the motion picture Gattaca?

Improvements in medical science will not stand still. Killers such as cancer and heart disease are and will increasingly be brought under control. Companies like 23andMe are offering to sequence your personal genome and analyse it against thousands of genetic tests for disease. While there is an argument about whether it is acceptable to use the potential new sources of knowledge such as genetic profiling to underwrite products, this argument has been focused on the ‘negative’ implications of insurability (or more particularly ‘uninsurability’!).

However, if and when people begin to start taking advantage of this technology, insurers will have the possibility to map that to different kinds of new insurance products tailored to individual circumstances. There is already a trend by some insurers towards creating products targeted at people who ‘live a healthier lifestyle’ and whilst this is currently a pretty crude judgement of health and longevity, if people eventually choose to access genetic knowledge, they will be likely to want to capitalise on ‘good news’ and be better able to manage and mitigate the ‘bad news’ through healthcare improvements.

With the problems of today being at the forefront of the minds of managers, it is likely that they will be analysing their businesses with a microscope. However, whilst this is important, they should not ignore to also use a telescope to ensure that they have a clear view of what the future may hold too.