Many across the industry have been distinctly underwhelmed by the new Insurance Conduct of Business sourcebook but, as Lucy Quinton writes, it still holds a few surprises.
A s the deadline of the publication of the Insurance Conduct of Business (ICOB) sourcebook drew closer at the end of 2007, the market began to hold its breath over what the regulatory body was going to inflict on the sector — particularly after the unwelcome Christmas present the Government handed out at the end of 2006 when it decided to scrap pension term assurance.
When the delay at the back-end of last year was announced, there were a few nervous moments as the market waited to see exactly what the regulatory body had up its sleeve.
The Financial Services Authority (FSA) has remained tight-lipped about the reasons for the delay, with spokesperson Robin Gordon-Walker merely saying the regulator decided during a board meeting that further discussions were needed before the book was published.
But while Gordon-Walker refuses to be drawn on what caused the delay, Peter Le Beau, managing director of Le Beau Visage, believes the Northern Rock debacle was the overriding reason for the hold-up.
However, insurers need not have worried; after close inspection the document holds few nasty surprises. The 153 pages boil down to term assurance being placed alongside income protection (IP) and critical illness (CI); payment protection insurance (PPI) will be scrutinised under new standards; and private medical insurance (PMI) will be placed in the 'lighter touch' bracket as general insurance.
So, perhaps finally there is a respite for the industry after a year of worry and contention over regulatory changes? Not quite.
Another achievement
On the publication of the sourcebook, Dan Waters, FSA director of retail policy and themes, said it was another achievement for principles-based regulation but that a close eye would be kept on PPI. In addition, the FSA had responded to "continuing market failure and consumer detriment by introducing carefully targeted rules to help ensure that consumers achieve a fair deal".
Louise Cuming, head of mortgage and protection services at Moneysupermarket.com, says the approach allows flexibility for firms and is a much more "grown-up" approach to supervision of regulated firms.
What does come across in the majority of cases is that the market is happier with its lot from the FSA than this time last year; both on the adviser and the provider side of the table.
Such relief has not gone unnoticed at FSA towers. During its consultation with the industry, it proposed that where the sales process included oral disclosure of one main characteristic of a policy, there should be oral disclosure of all the main characteristics. These features include significant benefits, exclusions and limitations, duration and price information. The rule would apply to sales where the policy was discussed over the phone and face-to-face. In addition, there was a somewhat heated debate about how to categorise life cover, which has now been resolved.
Neil Walkling, head of compliance services at Sesame, says the extra verbal disclosure key feature was "fair enough but in practice it will be difficult to enforce" — suggesting that the FSA would need to do more mystery shopping.
The general consensus appears to be business as usual because, as Bright Grey technical manager, Ian Smart, explains, the decision was made to not put life cover in the lighter category but instead keep it with CI. "This was a sensible decision and, given that most CI is sold alongside life cover, the only decision that should have been considered," he says.
The FSA acknowledged firms that sold pure protection contracts did not think it would impose changes to their sales practices or additional costs.
However, Joe Wiggins, Legal and General's PR manager for housing and protection, says he was surprised most firms agreed term assurance should sit in the protection category given the lack of historic evidence that there has been any mis-selling in that area.
The market seems to have accepted its fate with good grace while the FSA has shown that it intends to work with the industry on ICOB. As Cuming says: "The area highlighted for most change is the sale of payment protection contracts. The FSA report published in September 2007 highlighted a third of the firms visited were not properly explaining the significant exclusion and limitations of a policy to a customer. The ICOB sourcebook should lead to greater clarity in this area."
No great surprises
Smart explains the publication did not hold any great surprises apart from "the FSA listening to those who were telling them that separating out life cover would cause more detriment to consumers than it would solve".
Joanne Hindle, corporate services director at Unum, goes further and describes Unum's disappointment at the lack of change to the final paper as presented by the FSA. After it was highly publicised that the market was actively responding to the consultation paper, she argues "no substantive changes were made to the original proposals".
Le Beau says the outcome is desirable for writers of PMI as the general insurance regulatory regime is much less constraining. "There is a logic in putting the rest of protection products together and I am particularly pleased that there were no favours for PPI despite what I imagine was strong lobbying from banks and other lenders," he adds.
However, Cuming says that the whole thing "is like using a sledgehammer to crack a nut in terms of the rigours of consultation and paperwork that has driven out very few apparent improvements as far as consumers are concerned".
Meanwhile Andrew Strange, policy analyst at the Association of Independent Financial Advisers (Aifa), is more reserved when it comes to heaping praise on the ICOB sourcebook. "While it is a step towards a more principles-based regime, we have concerns over the ability of smaller firms to engage fully with principles-based regulation, although we believe that the flexibility provided will be beneficial to some firms," he explains.
However, Strange comes to the conclusion that the publication will not actually mean much more work for intermediaries. He says: "The rules around oral disclosure, and the evidencing of this, will require firms to consider their processes but the overall weight of regulation has been reduced. The exception to this is perhaps PPI products."
While providers seem happy to accept the cards that FSA has dealt, Walkling says principles-based regulation will mean more work for smaller firms.
To combat any unease smaller intermediaries feel about complying, Aifa will issue a fact sheet to help smaller member firms deal with the changes. Overall, however, Strange says the association considers a lighter, more flexible and proportionate regulatory regime is valuable.
Smart adds that from the provider's perspective, he does not think the regulatory body is "out to get us". Those people that do not comply and modify with change will be the ones that eventually fall by the wayside as advisers and consumers get used to a better standard of service and communication from those that do make the effort.
Consumer patience will be required by the industry as any change cannot happen overnight. "People aren't suddenly going to understand the intricacies of every policy on the market overnight. There is still a huge amount of education that needs to be done with consumers before there will be any improvement on many of the issues the industry faces," Smart says.
However, Hindle seems disappointed, highlighting a number of potential pitfalls such as the lack of connectivity between the Retail Distribution Review, the Thoresen Review and the ICOB review, which may result in additional costs as firms have to change the way they conduct business each time the recommendations of a new review are accepted.
a Different perspective
At the opposite end of the scale, Wiggins says he hopes the impact on the industry will see customer-focused firms gain a competitive advantage with both advisers and customers by being allowed to develop the appropriate balance between innovation and consumer protection.
"We acknowledge that this will not happen overnight as many firms will in the first instance look to remain compliant and take a medium-term approach to think about innovation and flexibility," he explains.
While the ICOB sourcebook's contents appear to come as no surprise, what is clear is the industry is left feeling rather underwhelmed. It had clearly geared itself up for something big, but in truth, it seems to just be business as usual. n
