Where retailers can go astray

In the past few months the FSA has published two documents for discussion, or consultation, which may significantly extend the regulator's influence and control over so called "perimeter business".

DP06/04 sets out the FSA's views for clarification and discussion, over the respective responsibilities of the product provider and that of the product distributor.

Both these consultations clearly outline an expectation that the standards of communication and selling in the regulated business will be extended beyond the perimeter for direct FSA supervision and control and into "out-of-scope" activities.

With many general insurance products being delivered direct to the end customer through distribution channels which may not require FSA authorisation, this early indication of the FSA's expectations should be ignored at your peril.

With some distribution channels successfully utilising the exclusions that enable selling without any FSA authorisation or regulation, it is easy at the moment never to receive the basic information that the regulator requires from others.

So the FSA has set out an expectation followed by a clear indication that the FSA regulated firm, as either product provider or distributor, will have to ensure that it has addressed this mis-selling risk.

Non-compliance risk
Using a example, we can show how easy it is to find non-compliance and mis-selling risk, almost without even looking very hard.

While on holiday recently, I indulged in some retail therapy and treated myself to a new kitchen and bathroom, complete with some appliances.

Purchased from a well known major retail store, they included in my package price some extended warranty insurance over the white goods, with an inception date almost into 2008. No policy summary, no exclusions explained and no initial disclosure document involved at the point-of-sale.

The documents which followed to confirm the sale included a simple insurance certificate issued by the retail store in the name of a reputable insurance company. Had all the documents been in order, then my sale would have been complete. But have I been mis-sold?

Without knowing exactly the relationship between the insurer (the product provider), and the retail store (the distributor), as a knowledgeable buyer, I wonder whether this insurance contract is legally enforceable.

From the FSA website, we can check the status of the retail store in question. It is an appointed representative, but unfortunately not of the insurer whose certificate of insurance was issued.

This does make the store "authorised" as is the insurer, but who is responsible for any mis-selling?

The communications made no disclosure of the regulated status of the distributor, although one document did confirm the normal retail price payable for the insurance cover provided.

No complaints or claims procedure was outlined, nor were there any details of the compensation that might be available should either the insurer or distributor cease operations.

On the back of the insurance certificate, were some high level exclusions which included the use of the goods in any commercial undertaking.

I work from home, so playing devil's advocate, there is both domestic and commercial use of both the kitchen and bathroom, albeit limited and perhaps incidental. So, exactly what is covered and should I have been given this insurance in the first place?

The FSA recently took enforcement action against firms selling unsuitable payment protection insurance, and has since issued warnings to consumers generally with regard to suitability standards applied by other distributors. The suitability issues highlighted are very similar to the exclusions which were not explained during this sale.

As a customer, at some point in the future might I justifiably question whether I had been "treated fairly", and seek appropriate compensation if, as with pensions and endowments, such mis-selling generated the compensation claim culture.

Arrow assessments
The next round of Arrow II assessments over products, distribution channels and the associated risk management of these areas should all seek to address the high level of mis-selling that currently can be found within product providers, when viewed against these FSA expectations.

The TCF implementation plans should be complete by March 2007. So whether distributor or product provider; there will be no excuse if firms have not at least assessed their risks in these areas and developed their action plans.

Selling your products through out-of-scope distribution channels will affect most product providers in some way, so firms must quickly get to grips with the cost benefit reviews and arguments if they are to have any hope of demonstrating that customers gained through such channels have indeed been "treated fairly".

Alex Peterkin is a director of FSA Solutions, a firm specialising in insurance related regulatory advisory services.