The FSA consultation paper on sales of general insurance products runs to over 100 pages. So for those of you with busy schedules over Christmas and the new year, here is the Insurance Times' review in a nutshell

"We think that individuals and customers need a greater degree of regulatory protection." That's what the FSA says about the sales of general insurance products in the UK. So the FSA, as well as being compelled by European legislation to regulate our sector, also feels that a stricter regime is necessary to improve standards.

The consultation paper (which is available in full at ) is intended to provide the FSA with feedback on its ideas of insurance mediation regulation.

When all replies are gathered in (by 10 March 2003), the FSA will conduct a cost-benefit analysis to see if the results will place too high a burden on the industry. When it has done this, the draft rules will be published for consultation.

It is important to bear in mind that this is just one of three consultation papers being published over the next couple of months that will inform the regulatory regime. Another paper will be published in January to deal with so-called high-level issues mainly to do with solvency, financial failure, business administration and training issues such as which organisations, if any, should be designated professional bodies (like the Law Society).

So which lines does this consultation cover? Personal lines, commercial lines , non-investment life insurance and reinsurance.

What is omitted? Travel polices sold within holiday packages. The government is still deciding whether or not to regulate this area. The government is also awaiting the results of the Competition Commission investigation into these products before taking any further steps.

Where will the rules be in force?

The Insurance Mediation Directive does not regulate beyond the boundaries of the EC. But the government has decided to extend the scope of regulation to certain non-commercial risks outside of EC. For example arranging the insurance of a UK citizen to drive a Swiss registered car in Switzerland.

So what does insurance mediation cover? Introducing, proposing, carrying out preparatory work, concluding contracts and assisting in administration are included. So that means secretaries. And the government has decided to extend the regulations to insurers as well as pure intermediaries to ensure a level playing field.

Are all risks the same? No, is the simple answer. The consultation, generally, reckons that large businesses can look after themselves. But small businesses with a turnover of under £1m will be treated as if they are individuals. Should small businesses be treated differently to big firms? The FSA wants to know. If you want more detail see page 20 of the consultation.

The IIB has picked out, as a matter of concern, that under the description of what the FSA calls private (under £1m turnover) and non-private risks (over £1m turnover), high net worth clients may receive better advice on product suitability than the majority of the public.

Under the proposals, brokers will have to provide a lot more information to small risks than large ones. In this instance large risk are: rail, aviation (including liability), marine (including liability), good in transit, credit and suretyship.

And for big companies, for instance employing more than 250 people, land vehicles, fire and natural forces, property damage, motor vehicle liability, general liability and financial loss are included.

So what are the big problems the FSA wants to tackle? The FSA is concerned about poor value policies:

  • Price transparency: is it possible to shop around and compare like with like? For both the above, the FSA says that caveat emptor applies to non-private clients.

  • Unsuitable cover: Either mis-sold or mis-bought because of poor information provision.

  • Consumers don't buy products they need: if insurance is not available for a risk, the FSA says it needs to examine whether there are any regulatory reasons for insurance not being provided.

  • Claims: the FSA is concerned about unfair treatment, delayed payment and claims not paid in full. In the London Market, says the FSA, intermediaries or insurers may delay handling a claim to increase investment income.

  • Lack of appropriate redress: Complaints must be dealt with fairly and promptly.

    Will the FSA differentiate between brokers, telebrokers and others?

    The FSA has come up with three categories that could be differentiated.

  • Advised sales: advising on merits of a policy

  • Non-advised filtering sales: Aimed at companies selling through call centres. Only information, no advice is provided.

  • Non-advised: where a customer requests a specific contract.

    The FSA wants your views on how secondary sales could be dealt with. For instance, should products like warranties that are sold alongside other goods and services be included. Does the customer have choice? Is there transparency?

    How will the rules affect your independent status?

    The FSA is concerned about intermediaries calling themselves independent. The consultation paper proposes that customers must be given some information before conclusion of initial insurance contract. And that this will help them determine the independence of the broker they are dealing with.

    Brokers and intermediaries may have to provide information on the following issues:

  • Does a broker have 10% voting rights or capital of an insurer?

  • Does insurer or its parent have more than 10% in voting rights or capital in broker?

  • Customers must be told if advice is based on fair analysis: that means analysis of a sufficiently large number of insurance contracts.

  • Customers can request the names of insurers the intermediary deals with (this is excluded for large risks and reinsurance).

  • Brokers must provide insurer details and details of other intermediaries in the chain.

    The FSA has tested an information form that might be used (see picture, far left). A key part of the form is whether intermediaries can declare they are providing "whole market" advice. This can be a panel based on "robust research". This must be regularly reviewed. The basis of this panel must not be primarily based on commission.

    The FSA wants to know if the provision of information should be done in full, face-to-face.

    And if through a telebroker, should just a subset of information be provided. Introducers will not have to provide a form, but will have to provide relevant information somewhere, such as in promotional literature.

    In short a firm can be called independent if the majority of its business is with the whole market.

    So, what are the requirements for advised sales? The policy must be adequate to meet customer needs - not the most suitable, as with mortgages. This means assessment shouldn't extend to products beyond insurance, like security products. Any assessment should take into account existing cover. Non-advised sales are based on simple statement of needs, after all customers are calling after making a judgment on the product they want and whom they might want to supply it.

    What about training and recruitment?

    For advised sales, recruiters should gather sufficient info about previous relevant activities and training. But what is sufficienct?

    For training, employers must identify needs and then address them. Employers must assess employees for competency. Only upon approval by the employer should employees be allowed to undertake the tasks for which they are competent. Employers must maintain that employees remain competent.

    There may well be exams for those selling "high risk" products such as private health insurance.

    So what about commission disclosure? Soft disclosure is preferred. The FSA says that compulsory commission disclosure could confuse customers because of information overload. However, the FSA is keen to eliminate "unfair inducements". That means a long look at profit sharing and over-riders.

    Claims handling

    Insurers should be responsible for all claims on policies, including where there is delegated authority.


    Insurance intermediation will be brought entirely under the Financial Services Ombudsman.

    There will be a separate consultation on fees and levy in 2003. The FSA will be funded by application fees (for first applications) and then regular annual fees. This will be based on scale and cost incurred by the FSA regulating intermediaries.

    Consumer education

    The FSA aims to make consumers more able to assess whether they need insurance or not and to make them aware that they can shop around. It also wants to improve the understanding of technical issues like exclusions.

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