Soon, the long arm of the Financial Services Authority will extend to regulate the advertising and selling of general insurance products. The new rules are already being formulated.
Topic: New Law
Insurance New FSA General Insurance Repulations
Background:
Up until now, the marketing of general insurance products in the UK has not been subjected to any dedicated control regime. From the beginning of 2005, that is all set to change. The financial services super-regulator, the Financial Services Authority, is limbering up to bring this entire area under its wing. Products which will be caught by the new regime will include household contents and household emergency cover, travel insurance sold as a stand-alone product (but not travel insurance linked to the sale of holidays), motor warranty insurance, general car insurance and critical illness, income protection and private medical insurance.
What will change:
There will be detailed requirements as to the information to be provided to retail customers by both brokers and insurers.
There will be requirements for "initial contact disclosure" for telephone sales, stipulating for example that at the beginning of any such call the name of the firm is given. The name of the person in contact with the customer and his link with the firm should also be explained.
This is similar to the requirements in respect of the distance selling of other types of product and service included in the Consumer Protection (Distance Selling) Regulations 2000.
In all selling situations, before the customer incurs liability to pay any fees, any fees to be charged for advice or for arranging the contract must be explained, and before conclusion of the insurance contract, the following information must be provided:
– the name and address of the firm and where relevant the name and address of the appointed representative;
- the firm's statutory status (e.g. that it is authorised and regulated by the FSA);
- how to check the FSA register to confirm the name, address and statutory status of the firm; and
- in relation to the insurance on offer, the range of insurance undertakings on whose products the firm has provided advice or information. This is pursuant to the EU Insurance Mediation Directive, which it is proposed that these rules will partially implement. The customer must be told here whether the advice is based on a "fair analysis" (defined as advice based on analysis of a sufficiently large number of insurance policies available on the market that enables the firm to recommend, based on professional criteria, which insurance policy will be adequate to meet the customer's needs.)
For brokers only, the following must also be disclosed:
- whether the broker has links with the proposed insurer by way of a holding, direct or indirect, representing more than 10% of its voting rights or of its capital;
- whether the proposed insurer or parent of the insurer has a holding, direct or indirect, representing more than 10% of the voting rights or of the capital in the broker; and
- how to complain to the firm and that complaints can subsequently be referred to a higher level.
There will be detailed rules as to the medium in which and the time at which this information must be supplied. In most cases, unless the customer asks for the information to be provided orally or urgent cover is required, it must be supplied in a durable medium before the conclusion of the contract. FSA commentary suggests that information on a website will not classify as information in a "durable medium".
So far as advising and selling standards are concerned, these are going to be relatively light touch. Where the service includes advice in terms of the merits of buying a particular non-investment insurance policy, it is proposed that there should be a requirement to give "adequate" advice. This differs from the standards applicable for investment business and mortgages, where firms are required to recommend the "most suitable" product from the range they are advising from.
The draft rules on "adequate advice" will allow firms to recommend a product that does not necessarily meet all the customer's demands and needs providing the firm makes clear which demands and needs are not met. Sellers will also only have to consider the customer's existing insurance cover based only on information that the customer is able to provide or which the intermediary or insurer already knows of as a result of having arranged existing cover.
A separate section in the consultation paper deals with advertising and product disclosure.
So far as premiums and savings references in insurance advertising are concerned, the following guidance is suggested:-
- firms must ensure that premiums quoted, if not accurate for a particular customer, are based on a reasonably representative situation and include a statement that the quotation is only an estimate;
- if the promotion states that the advertiser can cut costs, advertisers should make clear in the marketing material the basis on which the costs are being reduced;
- advertisers should ensure that any significant limitations on any saving should be given equal prominence in the promotional material to that of the proposed saving itself.
When it comes to product disclosure, it is proposed that there should be four stages at which different types of disclosure are made. These are pre-sale, post-contract conclusion, at renewal and post-sale.
There are to be five different elements of disclosure.
Policy summary
This will contain the main features of a policy that all customers should know before the conclusion of the contract. This will include significant features and benefits, significant or unusual exclusions and limitations (guidance will be given by the FSA to help firms determine whether an exclusion or limitation is significant or unusual), whether or not the contract is subject to the Financial Services Compensation Scheme or another compensation scheme and how to complain to the insurer and whether complaints can subsequently be referred to the Financial Ombudsman Service, plus, for long term policies, a reminder that customers may need to update their cover periodically, where appropriate.
Price information
This will essentially be the premium, separate from the price of associated products, fees or charges and must include a statement, where the insurance is sold with other goods and services, about whether insurance is compulsory or not. Any product-related fees must also be stated.
Other information required under relevant directives
Policy document
In other words, the full policy terms and conditions.
Claim notification information
How to notify a claim and what the customer must provide when a claim is notified.
As regards when these different types of information must be supplied, this will vary depending on the sales channel.
In a face to face situation, the policy summary and price information must be supplied in a durable medium before the conclusion of the contract. The firm must also draw the policy summary to the attention of the customer orally and explain the implications of any significant or unusual exclusions.
Any other directive-required information must be supplied before the conclusion of the contract, where practicable. The policy document itself must only be supplied after the conclusion of the contract, although a specimen policy must be available on request before conclusion. Claims information must be supplied after conclusion of the contract.
With distance sales, all of the five elements of disclosure listed above must be provided in a durable medium before the conclusion of the contract. This will ensure compliance with the Distance Marketing of Financial Services Directive. If this is not practicable because of the way in which the customer has agreed to the contract, for example by telephone, then the seller must provide policy summary and price information before conclusion of the contract. Where a policy summary is given in a durable medium, it is proposed that it should be in a distinct section if it forms part of another document or it must be a separate document. Either way it must be clearly identifiable as information that is important to the customer. To help this process it is proposed that the policy summary must include the FSA's "KeyFacts" logo.
When it comes to renewal, it is proposed that for contracts of longer than one month, a firm should inform the retail customer 21 days before expiry of the contract, whether or not they are inviting renewal.
For policies of more than one month and no more than one year's duration, it is proposed that the seller should also inform the customer of the following, 21 days before expiry, if they are inviting renewal:-
- an explanation of any changes to the original policy; and
- that a new policy document is available on request.
With contracts of more than one year's duration, the Distance Marketing of Financial Services Directive requires that the renewal is treated as a new contract and all the pre-sale disclosure rules will therefore apply.
In the post-sale disclosure category, insurers will be required to notify customers in advance of any premium changes, whilst any mid-term changes to the terms of the policy must be notified to the customer in a durable medium in good time before the change takes effect.
There are also other proposed rules in relation to cancellation rights, claims handling, complaints handling, training and competence standards for individuals selling or administering insurance policies and disclosure of commissions.
What happens next:
Comments are invited on these proposals by 30 September 2003.
Timetable:
It is expected that the FSA will publish final rules in this area in January 2004, with a view to them coming fully into force when the FSA starts to regulate the selling and administration of general, non-investment insurance policies on 14 January 2005.
