In December 2002, the FSA published its proposals (CP160) for regulating general insurance sales. Brokers and other intermediaries sent in their responses by the end of March and on Monday the FSA published its revised proposals (CP187). Here's the 300-page consultation in a nutshell

What's covered by the rules?
Everything except travel, reinsurance and large risks (based on turnover). For extended warranties, a decision based on the outcome of the Competition Commission report will be made in September.

Who is regulated?

  • Appointed representatives will be dealt with in another consultation paper
  • Insurers who deal with retail customers are covered
  • Insurers who deal with commercial customers are partly covered
  • Professional firms where insurance sales are incidental to core professional activity will be regulated by a designated professional body.
  • How are customers classified?
    The FSA has changed its stance from classifying customers as private (including small businesses) and non-private to classifying them as retail and commercial.

    New commercial customer rules
    To help smaller commercial customers (and many large ones too), the FSA has developed some additional rules.

    Insurers and intermediaries must provide - in good time - a policy summary, a price and explain any significant or unusual exclusions. Full terms and conditions must be issued promptly to the customer.

    The FSA wants to know whether the 21-day notice period proposed by the OFT should be included in FSA rules.

    New retail customer rules
    The policy document and information about the claims handling process must be provided to the customer in good time before the conclusion of a contract. That is unless the deal is done by phone in which case the intermediary must include an oral description of significant features, benefits, exclusions and limitations.

    Also included is a claims notification phone number and information about compensation should the insurer fail.

    Critical illness, PMI and payment protection
    The FSA has abandoned its notion of applying a separate "high risk" regime for critical illness, PMI and payment protection. But it expects firms to take extra steps when selling complex products and that significant or unusual exclusions - such as that surrounding the ABI's moratorium of genetic testing - should be explained.

    The sale of payment protection cover warrants its own table of rules, including the price of the cover. It must be separated from that of the loan and sales staff must make it clear whether the insurance is voluntary or compulsory.

    Independent brokers?
    Intermediaries do not need to state whether a sale is advised on first contact, but must do so in the "demands and needs statement". The FSA, above and beyond the requirements of the Insurance Mediation Directive, wants fees for mid-term adjustments to be disclosed.

    Before conclusion of the contract (defined as when the offer has been accepted by a customer or insurer), intermediaries must disclose whether they have more than a 10% holding in the insurers they are recommending. Intermediaries must also disclose holdings greater than 10% by insurers in their businesses.

    An intermediary must also disclose, in relation to the cover offered, the range of insurers that it has provided advice and information on. All of this information must be provided before the contract is concluded on a durable medium (paper, floppy disk, CD-ROM or in a storable e-mail).

    In CP160, the FSA proposed that independence would be linked to analysis of the whole market. It now realises this is too onerous.

    Demands and needs statement
    The statement must explain the reasons for the intermediary's recommendation. It must be provided by insurers and intermediaries, whether or not advice is provided, for retail customers and for advised sales to commercial customers. For non-advised sales to commercial customers, only intermediaries have to produce a statement.

    Reaction to grossing up
    Fees must be disclosed before the customer is liable to pay them. A fee is any amount charged on top of the insurance premium (which is classed as including commission).

    Change to stance on advice
    In CP160, the FSA proposed that existing cover should be taken into account so that no doubling up occurs. However, the FSA realises that this is not practicable, when customers do not know what cover they have.

    Training and competence
    The training and competence sourcebook will cover those giving advice to retail customers. The FSA will not require specific exams to be passed. Those advising commercial customers and claims handling staff will not be covered by the training and competence sourcebook. High level rules will apply instead of the prescriptive sourcebook

    Retail customers should be advised 21 days before the expiry of the contract whether or not they are inviting renewal.

    Unfair inducements
    The FSA has not been convinced that profit shares or volume rebates are unfair. But it is asking for further guidance on any specific aspects of inducements that should be prohibited.

    Cancellation rights
    Because so many covers are placed without the final documentation being in place, the FSA is extending cancellation rights so that customers can cancel when they have received and been able to review the full documentation. The period will be 14 days after documents have been received.

    Intermediaries can charge costs to customers who cancel, as long as they reflect costs, rather than being viewed as a penalty charge.

    Claims handling
    CP160 proposed there should be a five-day deadline in responding to a claim notification and a five-day deadline for payment once settlement terms had been agreed. The FSA is softening its approach and is now "setting indicative five-day deadlines". It now says payments and responses must be prompt.

    New proposals for third-party claims have been published. The FSA says that insurers should provide a response to third-party claimants without delay, stating what the claimant is required to provide to enable the insurer to consider the claim.

    Insurers must also treat third-party claims in the same way they treat claims by policyholders, in terms of prompt payment etc.

    One of the most controversial elements of CP160 was the introduction of the Financial Ombudsman Service (FOS) to insurance intermediaries. Brokers fear "greenbacking", where complaints are filed and brokers pay off the complaint at a level just below the level of fee charged by the ombudsman for handling the claim.

    The FSA has said it will continue with the plan to bring intermediaries in the scope of the FOS.

    Cost benefit analysis

    The FSA commissioned the National Economic Research Associates (NERA) to assess the cost of setting up the regime.

    Number of insurers - 320
    Number of intermediaries - 8,410
    Compliance cost per policy - £2.80