FCA’s New Focus: Protection, Penalties, and Persistent Problems

Unknown Speaker

Hello everyone and welcome to the B-Compliant Podcast! I’m Vicky Pearce, and as always, I've got Rachel here with me today. We’re kicking off with the FCA’s latest look at the protection market — it’s the first of their two-part market study, and honestly, there’s a lot to chew over already. Rach, do you remember when we first mentioned this market study a few months back?

Rachel MacRae

Oh, definitely! We had that lovely chat where we both tried — and mostly failed — to do justice to the world of protection products. But here we are again, with fresh FCA insight. So for anyone who’s lost track since then, let’s recap: this study covers everything from life and critical illness cover, to income protection, and those over-50s plans you see advertised with a free pen on daytime telly.

Rachel MacRae

The findings — well, if you were hoping for a revolution, you might be disappointed… it’s still a handful of insurers, advisers in the hot seat, and a patchwork of odd exclusions, commission quirks, and, of course, 'wellness bolt-ons'.

Unknown Speaker

Exactly, Rach. But what really stood out in this report is the focus on vulnerable customers, especially those with pre-existing medical conditions. The FCA basically says, look — these clients get, well, slim pickings, often with big exclusions. So advisers need to be even better at helping clients weigh up price versus cover, and managing expectations. Not just, here’s the cheapest premium — what actually matters to the client?

Rachel MacRae

Yeah, and it’s the classic “what’s most important to you, price, cover, or peace of mind?” scenario, isn’t it? Which, by the way, always gets a laugh in meetings because people want all three and obviously you can’t pick ‘em all! But seriously, this shift is big: it’s about honest conversations, not shiny products. And you know Vicky, the report hammers home commission and persistency risk too — under that indemnity model? If a client cancels early, there goes your commission, right out the door with them!

Unknown Speaker

Yeah, that one stings. But it means retention has to be part of the advice process, not just an afterthought. The FCA points to the dangers of “one-off” advice — if you don’t plan to keep clients engaged after the sale, you might want to rethink your model. We need to ask: is the policy still fit for purpose a year on? Two years? Regular check-ins and post-sale engagement are huge here.

Rachel MacRae

And speaking of practical steps, they’re telling advisers to review their provider panels — keep up to date on which insurers are still active, what exclusions are in place, and what “little extras” you’re actually getting for the premium. Don’t just compare on price; work out what your client actually values. And track those lapse rates! High lapses could mean something’s not right with your engagement or client communications.

Unknown Speaker

It’s a lot to keep on top of, but the final verdict from the FCA will come later in 2025 — so this is just the first round. No surprise, Consumer Duty and all that PROD good stuff will be front and centre, so it fits with all those compliance trends we’ve talked about, especially as expectations around vulnerable clients keep ramping up… Actually, that reminds me of our chat last season about identifying client vulnerability — this pressure from the FCA isn’t slowing down, is it?

Rachel MacRae

Nope, not one bit! It’s just getting more intense. Honestly, I wouldn’t be shocked if the next paper goes even deeper, especially around how advisers demonstrate ongoing client value. But for now, it’s panel reviews, matching advice to what clients genuinely care about, and making sure you’ve got that persistency piece nailed.

Unknown Speaker

Alright, shifting gears a bit — as this podcast proves, robots are no longer just the stuff of sci-fi. The FCA has openly admitted AI is now in our boardrooms, our tools, possibly even in whatever is reminding me to go to meetings! Have you read that speech by Jessica Rusu, Rachel?

Rachel MacRae

Oh I have! She actually had some fascinating points. The FCA’s making it clear: they want AI in advice, but only if it’s under proper supervision. No wild west, “let the robots run wild” kind of thing. They’ve set up what’s basically a regulatory playground — kind of like a sandbox but more high-tech and… slightly less fun, maybe? If you want to test out a shiny new AI tool for advice models or customer risk profiling, now there’s a space for it, but with plenty of guardrails.

Unknown Speaker

Yeah — nobody’s writing a whole new handbook for AI just yet. The FCA’s sticking with principles-based regulation. So, firms are expected to apply existing stuff like Consumer Duty and SM&CR to AI. It’s a bit like — oh, what’s a good analogy — using your trusty old toolbox to fix a new gadget. Maybe you need a few new bits, but the basics are the same: transparency, accountability, robust data practices.

Rachel MacRae

Exactly — and that transparency piece is huge. If you’re using AI in your advice business, you’ve got to be able to explain, in plain speak, what the algorithm is actually doing — not just to the regulator, but to clients. It’s not enough to say, “the computer says yes!” We’re responsible for how those decisions are made, and the FCA wants good governance around that. Make sure your data is solid, keep it secure, and document why and how you’re using AI in client journeys.

Unknown Speaker

I think some firms might be a bit intimidated by AI, but the FCA’s not just warning — they’re supporting, too. They’re offering resource, partnerships, and more reachable testing labs. So it’s not all pointing fingers; it’s about lowering the barriers to innovation while keeping firms inside the regulatory lines. The key is: experiment, but make sure you can justify and explain everything you do.

Rachel MacRae

And for advisers, this is the time to invest in learning how these models work, what biases or gaps might lurk in the data, and where the client touch-points are. Honestly, it sits hand-in-hand with all the Consumer Duty work firms are already doing — transparency, suitability, understanding the client’s best interest. Just because it’s AI doesn’t mean you get to skip the rest!

Unknown Speaker

Spot on, Rachel. And, you know, it does feel like this is the start of a long journey. If you’re thinking of using AI — or already are — don’t wait for a prescriptive rulebook. Build those checks and explainers in now, because the FCA is watching how firms handle innovation responsibly. We might have to come back to this one as more guidance emerges!

Rachel MacRae

Right, let’s move on to LISAs. Vicky, did you see the new HMRC stats on LISA penalties? I had to double check I’d read the number right — over £100 million in penalties just from unauthorised withdrawals last year!

Unknown Speaker

I know! That’s a staggering amount. To put it into context, over 129,000 people used their LISAs for something they shouldn’t — anything other than a first home, retirement, or terminal illness — and got hit with a 25% penalty. It even claws back some of their original cash, not just the government bonus. Meanwhile, only seventy-odd thousand actually used theirs to buy a home. It just shows… loads of folks still don’t get how LISAs work, or why that penalty is so harsh.

Rachel MacRae

And what’s really worrying is, we don’t even know the reasons behind these withdrawals — high cost of living, a lack of information, maybe both. But it’s clear there’s still a massive education gap, and clients are losing out because of it. For advisers, that’s a threefold issue: misunderstanding means money lost, there’s a chance to start better conversations about product choices, and with Consumer Duty now in play, there’s a greater onus to show clients understand the risks.

Unknown Speaker

Totally. It ties back to something we’ve said loads of times on this podcast — suitability reviews and regular client check-ins aren’t optional, especially with trickier products like LISAs. Advisers should be revisiting recommendations, making absolutely sure clients really grasp the restrictions. And if you think another tax wrapper is more appropriate, don’t just default to LISAs because they sound clever. It’s about showing the FCA you’ve considered all angles, and that you’re actively protecting your clients from harm.

Rachel MacRae

And speaking of harm, let’s touch on historic DB pension complaints — this stuff just never goes away! FT Adviser was highlighting again just how some advisers are being hit with complaints years, even decades, after the event. It's brutal, and most of the time it comes down to… you guessed it: missing documentation and records, regulatory standards that have changed, and clients only discovering issues with their advice much later on.

Unknown Speaker

Yeah, and with networks, self-employed models, and firm restructures, it gets even murkier figuring out who’s actually on the hook. The FOS is still upholding cases where the records are weak or advice doesn’t stack up with today’s standards — regardless of when the advice was actually given! Firms need to be proactive: review those old files, tighten your record-keeping, double-check your PI insurance, and make sure you’ve got those legacy agreements to hand. Honestly, good documentation is still your best defence — even for advice that pre-dates the smartphone.

Rachel MacRae

Absolutely. It’s your audit trail, your proof you were doing your job right. These legacy issues are a timely reminder that our compliance habits need to stand the test of time — not just for today’s regulators, but for all those clients whose stories might resurface years down the line.

Unknown Speaker

That’s a perfect note to wrap up on, Rachel. Alright, that’s us done for another week! Thanks for listening — we’ll have plenty more updates as the FCA continues their protection paper saga, and of course, more headaches… I mean insights… from the world of compliance. Rachel, thanks for your wisdom as always!

Rachel MacRae

Thank you, Vicky! Always a pleasure having a natter, even about DB complaints… We’ll see you all next time — and remember, keep those records tidy and your advice even tidier! Bye for now!