Departing income

From January 2009, travel insurance sold with a holiday will be regulated by the FSA. Until now only stand-alone travel insurance sold directly to the consumer, has been regulated by the FSA.

The Association of British Travel Agents (Abta) had successfully obtained an exemption for tour operators and travel agents selling travel insurance with a holiday. However, following a Treasury review which commenced in August 2006, Abta’s recent representations that the exemption should continue have fallen on deaf ears.

The Treasury’s decision has major implications for the UK travel industry. More than 20 million consumers buy travel insurance each year representing a turnover in excess of £670m. It is estimated that 50 % of all travel insurance policies are sold by travel companies.

This high yield, commission-based service can significantly affect the bottom line of small to mid-tier travel organisers (agents and operators). They argue that they are best placed to sell the product at the same time as consumers buy their holidays.

With well publicised problems around mis-selling and the misrepresentation of policy cover, the decision of the Treasury cannot have come as a surprise to the travel industry and its trade associations, however, Biba and interested consumer groups, such as Holiday Travel Watch, have long been concerned that the sale of travel insurance was not sufficiently transparent and that consumers should receive the same treatment in the sales process as those buying travel insurance alone.

Certainly, consumers are often confused about what policies cover. For instance, the majority of policies do not provide for the payment of medical expenses associated with terrorist risks, and medical bills for pre-existing illness are often excluded.

But the consumer is more concerned with the process of booking the holiday, than with exploring the small print of a travel insurance policy which is being sold at the same time.

From January 2009, the FSA regulated travel company selling travel insurance will have to explain to the consumer the main exclusions and key features of the policy. This will take more than the 10 minutes currently spent by most travel company employees – time better spent selling holidays.

The fear expressed by Abta and others, but discounted by the Treasury, is that the small to mid-tier travel organiser will cease selling travel insurance at the same time as a holiday. And the financial burden of becoming FSA regulated will be prohibitive to many travel organisers.

The consequence is likely to be more consumers holidaying without travel insurance, a point forcibly argued by Abta in its representations to the Treasury. Further, the travel organiser will have to conduct its sale of travel insurance with due skill and care, as the consumer can apply to the Financial Services Ombudsman for redress of disputes.

Travel companies will require better training and supervision for employees carrying out sales, which inevitably comes at a cost.

In an industry where bottom line margins are relatively low the commission funded, independent travel agent for instance, is unlikely to be able to stand the costs of the increased regulatory burden which selling travel insurance will bring.

“The consequence is likely to be more consumers holidaying without travel insurance protection, a point forcibly argued by Abta

Although disappointed with the Treasury’s decision, Abta must remain at the centre of the introductory consultation process which will close this September.

To soften the blow, the Treasury has promised that the consultation will look at ways of implementation which will be principles based and proportionate.
It has already been suggested that certain types of travel organiser will continue to benefit from the current exemption such as sales by car hire firms. Other categories of exempt company may also be introduced – a move that would be welcomed by the travel industry.

The options for travel companies who wish to continue to sell travel insurance from 2009 are limited. Applications can be made for full FSA authorisation, but these will be costly in relative terms and time consuming.

A second option will be for the travel company to refer the consumer to an FSA-approved and authorised travel insurance broker or insurer. But this is unlikely to produce the same commission yields they currently receive.

This option is nevertheless more attractive and realistic for many travel companies and may represent one of the best ways forward.

Perhaps the most practical solution will be the FSA-appointed representative scheme (AR) where the travel company can be the AR (a tied agent in effect) of an insurer. The travel company employee can receive the necessary training and the company the accreditation and monitoring required at relatively small cost.

The insurer is regulated by the FSA and takes responsibility for the AR’s compliance. Trade associations such as Abta are best placed to create schemes for their members.

Indeed, Advantage, the consortium of independent travel agents, has already launched its own scheme to avoid its members having to pay the associated costs of FSA regulation.

Over the coming months, Abta and other travel industry associations need to play a full role in the proposed consultation process with the Treasury.

It is crucial to ensure the interests of travel companies are properly represented – after all it is the travel companies which remain best placed to sell travel insurance with a holiday to the consumer.

Mark Hall is a partner and head of travel law at Weightmans solicitors