As the UK’s insurance industry soaks up the enormity of FSA regulation post 14th January 2005, we deal with some of the regulatory compliance basics for insurance marketers in a Q&A piece.
The impact of FSA regulation on marketing of insurance
Friday 14 January 2005: the most important day ever for the UK insurance industry. From that day on, broking, marketing, selling, administering and claims handling in respect of pretty much all types of insurance will be regulated by the Financial Services Authority ("FSA").
Scary stuff if you are doing any of these and not already "authorised" by the FSA, as you will already be committing an offence under the Financial Services and Markets Act 2000.
Life isn’t much better if you are authorised. That heady status entitles you to admission into the hallowed order of "the Regulated Ones", whose virtually every move is subject to an "R" or a "G" in the famously misnamed and enormous "FSA Handbook." In this exalted context, "R" stands for "Rule" and "G" stands for Guidance. Each R and G section has its very own, normally three digit reference number for ease of reference
So that's the sea on which we now embark on a quick fire Q&A voyage around just some of the ways in which FSA regulation will affect the marketing and advertising of insurance.
Q: Presumably we have an EU law to thank for all this?
A: You presumed right. It's the "Insurance Mediation Directive." This was approved by the European Parliament in September 2002 and all EU member states had two years from 15 January 2003 to bring the Directive into force. So we are just getting in under the wire.
Q: Are there still any types of insurance that are not FSA regulated?
A: Yes. Travel insurance will not be caught if it sold as part of a holiday package, though the FSA has promised to review this carve-out in 2007. Warranties that come with a product, for instance a car, are unlikely to be covered, whilst third party provided extended warranties for for example electrical appliances are likely to be caught by the rules, but take advice before supplying or advertising any warranty. Reinsurance contracts are excluded as are contracts of large risk where the risk is situated outside the EEA. Long term care insurance contracts are not governed by the insurance related Handbook rules, but they will still be FSA regulated as investment products.
Q: Where will I find the new rules?
A: The bible is the FSA Handbook. There are the "high level" Handbook rules that apply to most FSA regulated entities, whatever product or service they are involved in, but the bulk of the rules relating to marketing of insurance are in the Insurance Conduct of Business Sourcebook, or "ICOB." Drilling down even further, within ICOB, ICOB Chapters 3 (Financial promotion), 4 (Advising and selling standards) and 5 (Product disclosure) are likely to be the most relevant.
Q: When do the new rules come into force?
A: As of Friday 14 January 2005
Q: What if I am advertising and selling insurance products on-line, over the telephone or by post?
A: You should already be a long way towards compliance with, for instance the FSA rules about pre sale product disclosure and after sales cancellation rights. This is because these are "distance sales," and these have been governed by distance sales regulations since 31 October 2004. ICOB incorporates equivalent regulations, mostly in Chapter 5.
Q: Are there any particular "distance sales" rules I should be aware of?
A: We covered a lot of these in our "Super Sunday Q&A" feature on the Financial Services (Distance Marketing) Regulations 2004 in the October issue of Financial Marketing, but one of the many to watch for is the requirement to provide the full policy terms "in a durable medium," "in good time" before the consumer is bound by the insurance contract. On-line this should not present any major difficulty, but for postal mailings, this is more of a challenge. The "easy" solution of course is to incorporate the full policy terms in the first mailing. But if the drafting of the terms hasn't been concise (those lawyers again!) this may not be attractive. If so, more ingenious solutions will be needed such as postponing the time when the punter will be "bound." As ever, take advice and all may not be lost.
Q: What about cases such as motor or travel insurance where urgent cover may be needed? Surely we won't have to read out the full policy terms during the call?
A: No you won't as there are special provisions for scenarios including telesales, where the consumer requires immediate cover. These allow abbreviated disclosure subject to various conditions including the customer's "explicit consent". However the FSA has made it clear that these will only apply to genuine cases. It will not be permissible to get round the pre contract disclosure rules by, for example, including in a mailing standard affirmations by the consumer that the case is urgent and they are happy to be bound immediately without sight of the full policy terms beforehand.
Q: What if the entity marketing the product is not actually the insurer?
A: All marketing of insurance products must follow the FSA golden rules and be "clear, fair and not misleading." This means that the identity and role of the insurer/underwriter must be prominently disclosed.
Q: How about renewals? Can I carry on doing this on an opt out basis, where the default is that I can automatically renew and deduct the premium unless specifically asked not to?
A: The Handbook has a fair bit to say about renewals. For instance it requires that if there are any changes to the policy, including alterations to the cover or the premium, this information must be given to the insured within 21 days before expiry unless there is good reason to believe that renewal will not be required. With the prior express consent of the insured, tacit, opt out renewal will be permissible, but only in a genuine "renewal" scenario. Bear in mind here that in the Handbook's "Glossary" of defined terms (all of which appear in italics throughout the Handbook so you know there is a definition of them) it is clear that "tacit renewal" will only be possible if the new contract is between the same parties. So if a new insurer is taking over an existing "book" of policies and seeks a new contract with the insured, this will not be a "renewal" at all, even if the terms of cover are exactly the same, and very likely can only be done with prior proactive consent from the insured.
Q: What if I am an insurance broker simply introducing customers to insurers?
A: Provided your involvement in the process really is that limited, then you are exempt from giving in your promotional material the full status etc. disclosures required by ICOB 4.2.8R.These full disclosures include a need for brokers to declare information about the range of insurance companies from which they select ones to recommend, details of complaint processing systems and a status disclosure, for example that they are authorised and regulated by the FSA. However mere introducers will still have to disclose the firm's name and address and statutory status, details of any fees charged for introductions and whether they and any firm they are introducing the punter to are members of the same corporate group.
Q: Is there a useful starting point in the Handbook that gives an instant idea of what to watch for in creating marketing material?
A: It doesn't have all the answers, but you could do a lot worse than 3.8.2 E of ICOB and the guidance that immediately follows it at 3.8.3 G. At 3.8.2 E is a checklist of eight aspects to consider such as ensuring that the communication's promotional purpose is not disguised or misrepresented, not including any false indications as to the marketer's independence and designing the content so as not to obscure or diminish the significance of any statement, warning or other matter that the rest of Chapter 3 of ICOB requires it to contain.
Q: Are there any internal procedures I need to be looking at if I am involved in producing and publishing marketing for insurance products?
A: The Handbook has much to say about senior management arrangements, systems and controls for all those authorised to conduct insurance business. There may well be a need, for instance, to designate an "Approved Person" whose appointment must first be ratified by the FSA. When it comes to marketing, Rules 3.7.1-2 of ICOB require that before any firm publishes material marketing FSA-regulated insurance products, it must confirm, using an individual with appropriate expertise, that the material complies with the rules in ICOB Chapter 3. So in case the FSA ever comes knocking at your door, ensure you fully document and record the process whereby a decision is taken that the approving individual has appropriate expertise as well as the process of getting relevant marketing material approved as compliant and signed off for production. Also remember that under ICOB Rule 3.7.3, marketers must cease publication of any promotional material as soon as reasonably practical if they become aware that it is no longer compliant. Guidance 3.7.G recommends that to help this occur, marketers should have systems and personnel in place to routinely monitor all their marketing communications and designate for every marketing piece a "review date", when it will be checked again for compliance with a view to withdrawing it if it fails the review.
Q: Is that it?
A: We fear not, and don't forget that even if you think you are compliant with the Handbook, the Advertising Standards Authority ("ASA") may come knocking on your door: FSA authorisation gives no immunity from investigations under the CAP Code of Advertising, Sales Promotion and Direct Marketing if a competitor or customer of yours complains to the ASA. The ASA may not have the FSA's power to mete out swingeing fines for non compliance, but a complaint upheld finding and a requirement, for example, that all future posters must be pre-cleared with the ASA's sister body the Committee of Advertising Practice is hardly attractive.
But we hope this gives a flavour of the full delights in store for "The Authorised". For a fuller appreciation and an "assured" happy and prosperous future, early and full immersion in the Handbook and judicious use of expert advice and guidance is as ever recommended.