Firms distributing 'payment protection' products - such as short-term income protection - must ensure salespeople do not have inappropriate incentives to sell them, the Financial Services Authority (FSA) has stressed in new guidance.
The regulator, in guidance published in conjunction with the Office of Fair Trading (OFT), has set out requirements both for the providers designing the products and the distributors - mainly banks and intermediaries - selling them.
Among its recommendations is that providers clearly state whether a new product is one where customers would be wise to seek financial advice.
The FSA identifies payment protection products as those which offer individual consumers short-term protection against potential loss of income.
It said the guidance was necessary to prevent the problems associated with payment protection insurance (PPI) recurring in a new generation of products.
Millions of PPI products were sold to unsuitable - and often unsuspecting - customers by the major high street banks in what has become the costliest mis-selling scandal in history. At the last count, banks had spent a combined £10bn compensating customers.
The FSA said short-term income protection - plus debt freeze or debt waiver as elements of a credit agreement or mortgage - was among the products within the guidance's scope. The guidance is not intended for the design or sale of long-term insurance products, such as permanent health insurance.
The regulator said distributors' remuneration strategies must not provide salespeople with the incentive to push the products on the public unnecessarily.
"Firms should take note of the lessons learned from PPI where a significant proportion of the premium paid by the consumer was used to pay commission," the guidance reads.
For providers, the FSA and OFT said product design and clearly identifying a target market are essential to ensuring good customer outcomes.
Product features or pricing structures should be reviewed regularly and must not create undue barriers to comparing, exiting or switching cover.
The FSA and OFT said they would continue to monitor developments in the market, and "will take appropriate action under their respective powers where firms' products or practices risk causing detriment to consumers".
Industry Voice: Scottish Widows pension expert Robert Cochran and economist Andrew Scott discuss the future of employment and income, in episode three of Scottish Widows' podcast series.
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