The Financial Services Authority's proposal to split the ICOB regime into two categories has been broadly welcomed by the industry, but questions remain over whether the line between ‘protection' products and ‘other general insurance' products has been drawn in the right place.
The FSA released a paper last week assessing the level of risk each type of insurance product presents and provisionally placing them into two categories: other general insurance products – motor, household, travel and private medical insurance (PMI); and protection products – term, critical illness, income protection and payment protection insurance (PPI).
The regulator believes the level of material market failure in the sale of protection products to retail consumers justifies it applying more stringent rules than to general insurance products, where it says the market “works reasonably well”.
But it is appropriate to simplify one half of a regime while applying more rules to the other? And has the FSA got its product categorisation right?
Nick Kirwan, protection market director at Scottish Widows, says he would like to see the ICOB rules simplified for all types of insurance products, but he recognises the need to retain safeguards in the protection market.
Kirwan says products such as critical illness (CI) and income protection (IP) are more complex than general insurance and, while there might not be evidence of significant consumer detriment, it is important to ensure an appropriate level of disclosure.
He questions whether term assurance is in the right category because it is relatively straightforward and one of the reasons the FSA gave for putting it in the more stringent camp was the existence of pension term assurance (PTA), which no longer exists following the Budget.
Kirwan says: “Despite PTA being killed off in the Budget, life cover is often recommended alongside CI to protect a mortgage so it makes sense to have the same regulatory framework for both. Otherwise, advisers might have to change regulatory horses mid-stream during a sale, so I think the FSA has made the right call.”
Another issue of contention is the fact PMI is in the general insurance category, as the product seems more complex and it covers people’s health, rather than material objects.
But Kirwan says there is not evidence of material consumer detriment in the PMI sales process and the industry managed for a long time without any regulation at all, during which there was a low level of complaints and lots of work on self-regulation.
Mark Davies, technical manager at Progress from Royal Liver, believes the split the FSA has made is reasonable because products like car insurance prescribe what people can and cannot have and it is therefore difficult to buy an inappropriate product.
In addition, he says it is sensible to place PPI in the more stringent category, despite it being a short-term product, because of the mis-selling problems experienced in the market.
Davies adds: “Overall, I think the two-tier approach is a good idea, especially as I hope the FSA will abolish the age 70 rule so all protection products will fall under ICOB. It looks like the FSA will implement ICOB in December and COB in November, so if it keeps the age 70 rule there could be inconsistency.”
Mick James, protection marketing manager at Standard Life, also welcomes the FSA’s proposals because he believes a ‘reading between the lines’ suggests the FSA wants what is best for consumers’ needs.
He says: “It seems that the FSA is not comfortable with the current sales practice and they want to up the ante. It wants advisers to be certain that consumers understand what they are buying by providing more information at the sales process.”
James believes the FSA has divided the products correctly because long-term contracts are more complex and should require advisers to re-consider their clients’ needs each year and ensure the products are flexible enough to meet lifestyle changes.
Short-term products like PMI and car insurance, on the other hand, automatically give consumers another buying opportunity at the end of each year.
Tom Baigrie, managing director of Lifesearch, adds the FSA must ensure it keeps protection products together as a suite of products, as simplifying the regulation of any individual product will not drive more people to buy the right one.
Instead, he warns he would cause a greater supply of standalone product sellers, which reduces consumer choice and access to the most suitable product.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7034 2680 or email [email protected].IFAonline
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