With the FSA setting the wheels in motion on its regulation changes and Treating Customers Fairly initiative, Sam Barrett finds out what the effects will be on the protection market
Ever since it was announced that the Financial Services Authority (FSA) would regulate the insurance industry, the body has been keen to ensure the level of regulation was commensurate to the risk posed to the consumer. To achieve this, it has constantly reviewed the market and the rules in place, making changes wherever necessary.
Here are some of the main areas of the FSA's regulatory review that will affect the protection market.
ICOB
The FSA's review into the effectiveness of its general insurance conduct of business (ICOB) regime continues apace, with the findings of the first phase of the review due shortly.
One finding that is widely anticipated, is a differentiation between insurance and protection products. "Commoditised products such as motor, house, travel, medical and pet insurance present less consumer risk, so we would look at ways to lighten the rules and possibly even deregulate some areas of these products' sales processes," explains Robin Gordon-Walker, a spokesman for the FSA.
This leaves the protection products facing a different regulatory regime. "Consumers aren't always getting the right deal with these products, or necessarily understanding what they are buying, so it makes sense that the sales process should be more regulated than the commoditised products," he adds.
Many, however, are finding the concept of a new category for protection products unpalatable. "Although I'd accept that general insurance products could be regarded as different to insurances of the individual I don't think we need another category," says Roger Edwards, products director at Bright Grey.
In particular, Edwards is concerned that a new protection product category will attract a higher-risk label. "Protection products aren't Chinese investment bonds," he says. "The protection industry has done a lot to improve the way it communicates with consumers, and it is essential that this good work isn't undone."
A compromise may be possible. Gordon-Walker says that a different set of rules will definitely be proposed, but acknowledges that the term high-risk can be ambiguous. "I don't think the problem will be solved by rule-making alone though," he adds.
While the protection industry is concerned about possible changes in this area, it is welcoming the potential reduction in paperwork. Edwards says that he has come across mortgage brokers that have stopped selling protection because, especially when compared with a mortgage sale, the commission does not justify the amount of work that is required.
A consultation paper is expected this summer with new rules implemented by the end of the year.
Training
In another bid to streamline its handbook, the FSA has also announced proposals for a shorter, more outcome-focused training and competence (T&C) sourcebook.
The proposed changes are part of its move to principles-based regulation and will see some of the prescriptive elements being removed from the sourcebook. It will see the introduction of a single high-level competence requirement for all firms, with a much shorter and simpler T&C sourcebook applying only to retail firms.
The consultation period ends on 23 May, with changes coming into force at the beginning of November 2007. In the longer term, it plans to get rid of the T&C sourcebook altogether, although this will depend on its assessment of T&C across the industry.
TCF
Work also continues on the FSA's Treating Customers Fairly (TCF) initiative, with the end of March the deadline for firms to have reached the implementation stage of their TCF strategies.
"At top level, TCF is formalising common sense," says Edwards. "But the fact that we've had to formalise it means we've not been doing it properly, which is sad. If you treat your customers fairly then you have a better business."
The FSA will start to assess progress in April, publishing summary results of its findings. Larger firms dealing with retail customers will be given individual feedback, while smaller retail firms will be part of a qualitative survey to be undertaken in samples of 700 firms.
Simon Burgess, managing director of British Insurance, expects that this will catch out a lot of firms. "Culturally, businesses are geared towards making money and the concept of TCF may not sit so well with this," he says.
Cultural differences aside, for some, the main stumbling block may be the audit trail. Certainly, one of the FSA's requirements is to ensure there is adequate management information for firms' management to monitor TCF. "Documentation is essential for TCF," says Laura Shanks, marketing communication manager at Aegon Scottish Equitable. "This will show the progress firms have made from their gap analysis through to implementing and embedding changes."
However, the FSA is keen to assure firms that it will take a broad view when considering enforcement action. Last July, it said it would be less likely to take action where the firm had considered the implications of TCF and had made a genuine attempt to deliver. "Given the principles-based nature of TCF, it will be very interesting to see how different firms have interpreted it when the FSA starts publishing its findings," adds Shanks.
PPI investigation
One area where the FSA may be inclined to say TCF has not been wholly evident, is the payment protection insurance (PPI) market. It has been monitoring this market since 2005 and, in January, it announced the next phase of its investigation.
This next phase, which will run until the end of June, will include mystery shopping and visits to firms not previously visited, as well as following up firms that were found to have problems with their sales processes. This time, it will particularly look at firms for which PPI is a minor activity relative to their main business. "We're determined that sales standards in the PPI market are improved so we're moving ahead with this investigation faster than with other, less pressing, reviews," says Gordon-Walker.
So far, as a result of its investigations of more than 200 firms, it has issued 10 enforcement notices. Additionally, it launched a consumer education programme in March to help the firms understand the types of questions they should ask when buying insurance products including PPI.
Burgess is pleased the FSA is taking this action. "I've been thoroughly impressed by the pragmatic approach the FSA has taken towards PPI. There are some terrible products out there, but also some that deliver benefits to consumers and it will be good if the FSA helps to highlight this."
But there are some fears about how consumers will perceive the industry as a result of this investigation. "There is a danger we will all be tarred with the same brush," says Edwards. "There are some horrible PPI products out there, but the average consumer won't know the difference between these products and the good ones or, indeed, income protection products."
Edwards is also concerned that the FSA may take too hard a line on PPI, outlawing it altogether. "I can see the market designing mortgage payment protection insurance plus products in the future, but if the FSA comes down too hard on PPI it would restrict product development," he explains.
Certainly, rule changes are expected, with details due in the next few months. The FSA is also considering adding PPI to its suite of web-based tables to make it easier for consumers to assess what they are being offered.
Over-70s regulation
More positively, the protection industry is readying itself for the FSA's findings on its consultation into over-70s regulation, with everyone expecting it to scrap the current rules on selling life assurance to anyone that would be over 70 by the time the policy expired.
The current rule, widely seen as anomalous, prevents protection-only advisers from selling term assurance products where the term is greater than 10 years, and this takes the customer beyond age 70. In these cases, it is regarded as an investment product and can only be sold by an adviser with appropriate authorisation.
"The rationale was that, where this happened, there could be Inheritance Tax planning implications so you needed to be able to advise on this area too. But this is rarely the case," explains Bernie Hickman, protection director at Legal & General. "It's a strange rule and we expect it will go."
Although the FSA is also exploring an option to lift the age from 70 to 80, this is regarded as equally impractical and therefore unlikely to be adopted. "Why 80? Why not 85 or another age?" says Edwards. "As long as you're honest with your clients, then there shouldn't be a problem."
But, although the rule is likely to be scrapped, Hickman doesn't believe this will result in a flood of new business. "I expect we'll see more flexibility around what advisers recommend to this group of customers. This will make it easier to recommend renewable and convertible term assurance policies," he says. "The removal of this rule will make the situation a lot clearer," he adds.
Sam Barrett is a freelance journalist
