Has the FSA done the right thing with travel insurance?

On 5 June the Treasury announced that the government has decided that when FSA assumes responsibility for the regulation of general insurance sales in January 2005, travel insurance sold by Travel Agents as part of a package holiday will not be included within the regime. Travel insurance sold by insurers or intermediaries separately, however, will be regulated.

The Treasury has also rejected a "middle way" option of regulating the sale of travel insurance as part of package holidays under industry codes, effectively leaving travel insurance sold in this way as completely unregulated.

We all know that you cannot please all of the people all of the time but in this case the Government appears to be pleasing no-one (with the exception of Travel Agents) as both the insurance industry and bodies representing the interests of consumers have condemned the Government's decision not to regulate insurance sold as part of a package as inconsistent, short-sighted and bound to lead to a two tier system of regulation.

The Government's justification for their decision is that no evidence has been presented to them of mis-selling or consumer detriment in this area. This does not, however, address the key issue that for exactly the same type of insurance, one part of the industry will now be subject to a strict regulatory regime requiring them to advise consumers properly and ensure that they are sold appropriate cover whereas Travel Agents will be free from regulatory interference to sell inappropriate and often higher-cost policies to consumers which may not meet their needs and cover them in the event of a claim.

Insurance brought from Travel Agents as part of a package is rarely the best value option, but more important is the fact the consumers may not be getting the right cover at all. Given that over 50% of the 18-20 million travel insurance policies sold annually are purchased as part of a package, this leaves a huge number of consumers at risk from unregulated sales.

In the Treasury Report detailing their decision, it was concluded that the costs of imposing FSA regulation on Travel Agents could harm competition as smaller, independent operators may not be able to afford to continue to sell travel insurance, resulting in less choice for the consumer with only the larger players being able to continue to offer the service.

The Government, however, appears to have ignored the fact that under their proposals competition will be grossly distorted in any event due to the fact that exactly the same policies will now be able to be sold without the burden of regulation by one sector of the industry while another sector struggles under the burden (and cost) of detailed rules governing their selling process. All the industry wants is a level playing field, which the Government has singularly failed to deliver.

The Treasury has also announced that they intend to review this decision in 2007. Whilst it is of course sensible to continue to review the stance taken, is this an indication that the Treasury tacitly accepts that there should be a level playing field for all sectors of the industry?

Maybe the Government was unwilling to take on the job of regulating an industry that has to date been the subject of minimal supervision?