The FSA is proposing to split its insurance conduct of business regime into two categories and apply more stringent rules to protection products, which it deems a greater risk to consumers, than 'other general insurance' products.
As part of its review of the ICOB regime, the Financial Services Authority has assessed the level of risk each type of insurance product presents and has provisionally placed them into two categories – other general insurance products and protection products.
The other general insurance products category includes motor, household, travel, private medical insurance (PMI) and any other products which do not fall into the protection products category.
The FSA believes the markets for these products work reasonably well in the interests of consumers and most consumers do not rely on disclosure documents from firms, which are prescribed by the ICOB rules, when making decisions.
By contrast, the FSA says protection products – term, critical illness, income protection and payment protection insurance (PPI) – are long-term, are usually secondary or tertiary purchases, and consumers lack confidence and experience when buying them.
In addition, it says it has found considerable evidence of material market failure in the sale of protection products to retail consumers, such as advisers not collecting all the information they need to make a recommendation and not disclosing all the necessary information.
A product which the FSA believes does not fit neatly into either category is PMI because while greater use is made of documents and it is considered an emotional purchase, no market failures have been identified which would justify grouping it with protection products.
As a result of its findings, the FSA is considering removing most of the ICOB requirements which go beyond minimum EU directive requirements for other general insurance products, while introducing a small number of measures to improve selling practices of protection products.
It states: “The differences shown above in consumers’ experiences…are enough to warrant different treatments for different products.”
The FSA says it will not impose any requirements additional to an EU directive on protection products without making a clear cost-benefit case, which shows evidence of consumer detriment.
It believes the problems in the protection markets are not as straightforward as general insurance markets and, as a result, it says its thinking needs to be more innovative so it can develop risk-based, proportionate solutions. It is therefore considering a “stepped approach” of increasing measures to deal with the issues it has identified in different markets.
In general, the FSA says it would like to see more emphasis on ensuring consumer awareness of key information in sales where there is a combination of oral and written disclosure; a new requirement that firms should take reasonable steps in a non-advised sale to ensure customers understand they are responsible for checking cover is suitable for them; an outcome-focused rule on price disclosure, requiring firms to take reasonable steps to ensure customers understand the real cost of the insurance; and a requirement that firms tell customers taking out insurance linked to credit whether it will affect their credit application.
On PPI specifically, the FSA is proposing to extend the cancellation period to 30 days and require a full or pro rata refund of premium on cancellation.
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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