The recent failure by the FSA to prove mis-selling hinged on stock wordings. Harriet Quiney reports

' Earlier this month, FSA chief executive John Tiner detailed the review of the FSA's enforcement process.

The review was prompted by the stinging criticism that the regulator received from the Financial Services and Markets Tribunal in its decision in the Legal & General (L&G) mis-selling case.

The tribunal's judgment is significant not just for the FSA and L&G; it has implications for brokers and insurers in the general insurance field as well as in the life sector.

Lessons may be drawn from the tribunal's criticism of L&G's use of sample wordings in 'reason why' letters that explain the recommendation of a product. The tribunal ultimately found that the sample wordings given to advisers did not make sufficient direct reference to the risk of capital shortfall.

It said: "If stock wording is used without being tailored to the particular facts of the customer, or bears no relation to the customer's particular circumstances, then a recommendation will be of little use either as a record of the transaction, as a 'reason why' letter or as evidence that the customer has understood the risk he or she is taking on."

How does this relate to sales of insurance products? When the Insurance Conduct of Business rules (ICOB) discuss statements of demands and needs, which record the suitability of products for customers, they are silent on the use of sample wording.

ICOB 4 says that style and presentation of the statement is left for insurance intermediaries to decide, so that they can design a statement which works best for the market in which he transacts business.

But it goes on to say that where a personal recommendation is made, the statement should "explain why the customer's demands and needs combine to make the recommended contract suitable for the customer".

It continues: "It should not merely state what contract is being recommended with no link to the customer's demands and needs."

The implicit message is that standardised wordings should be used with great caution. Although adopting a more personalised approach will place a greater burden on firms' resources, it should pay dividends in reducing the risk of costly and damaging mis-selling claims and possible enforcement action.

The tribunal was also critical of the FSA for drawing conclusions based on evidence that was only "strongly indicative" and felt that these conclusions "were not justified by the material before [the FSA]".

Produce evidence
The tribunal stated that if more evidence was needed the FSA should have obtained it, because it was for the FSA to prove its case and produce the evidence that it relied on.

The FSA has responded that future investigations may need to be more intrusive as it will need to look at a larger sample of files to obtain a more accurate view of the evidence.

In many cases, insurance intermediaries, like other authorised firms, will have extended their professional indemnity (PI) insurance cover to include the cost of regulatory investigations.

If investigations are more intrusive, they will be more time consuming and expensive. Firms should consider whether the sub-limits applying to these extensions are sufficient. If sub-limits need to increase, it is likely that the costs of PI will rise. IT

' Harriet Quiney is a solicitor at Reynolds Porter Chamberlain