CIC usually pays out a lump sum if a person is diagnosed with certain specified conditions. Most sales of CIC are made to customers taking out a mortgage. While CIC can be bought as a stand-alone product, typically it is taken as part of a term assurance policy.

Many sales are made on an advised basis following a full assessment of the individual customer’s financial needs. Overall, CIC sales have been in decline – falling by around 30% between 2002 and 2004.

Firms selling critical illness cover (CIC) are making efforts to meet required standards but a new survey reveals they need to do more to show they’re treating customers fairly and helping them to have a better understanding of the product.

Visits to firms and mystery shopping exercises by the Financial Services Authority (FSA), have specifically looked at how compliant firms' sales processes work when selling CIC.

However, FSA Director of Retail Firms Sarah Wilson, said the survey had many positive findings but also recognised some problems.

"CIC [as a product] has launched initiatives to deal with them and to assist in the fair treatment of customers, especially to make policy documents and applications forms clearer. It is early days but these seem to be having a positive effect.

"However, our work confirmed some of the compliance concerns we already identified last year in the context of work on the financial promotion of CIC and on general insurance documentation. As CIC can be complex, firms sometimes have trouble getting customers to understand what they are buying.”

This lack of understanding makes it difficult for customers to make a judgement about whether CIC the right product to meet their protection needs as oppossed to a payment or income protection policy.

Before making a recommendation to buy CIC, most intermediaries undertook a detailed assessment of the protection needs of the customer. But where the firm offered more than one CIC product, price was often the only factor used to decide which one to recommend. Others, such as the conditions covered, did not usually influence the advice.

Most firms also had reasonable controls to manage the risk of mis-selling. For example, they had good training programmes and risk based compliance monitoring.

Other products were also considered with the evidence that advisers often considered whether or not there were other protection products that might better meet the customers' needs.

Because of the way CIC is sold, customers have time to reflect on their options before they buy, as with prime mortgage payment protection products. This helps to reduce the risk of making the wrong choices or buy in haste because their attention is on another product they are purchasing.

The findings are based on supervision visits to 42 firms. These were mainly mortgage and financial advisers, but also included banks, building societies and insurers. A market research company, Research International, was also commissioned to carry out 80 mystery shops across a total of 51 firms to look at what happens in practice.

The review of the sales of CIC is one of several thematic projects looking at the advice and information being given to retail customers when they buy financial products.