FSA anniversary

This month is the big anniverary of the first birthday of the Financial Services Authority (FSA) as the insurance market regulator. But how well do the new regulations sit with the market, and is some further tailoring needed to trim them into a more bespoke fit?

With the Christmas spirit still lingering in the air, it is perhaps best to start on the positives. Nobody doubts the size of the task the FSA has taken on, and market opinion is generally that a good job has been done, with only certain areas in need of alteration. In moving into a statutory regulated environment, the biggest impact has perhaps been the threat that non-compliance now carries, namely large fines and possible imprisonment.

However, operating under the auspices of the FSA has raised the stakes considerably, and firms simply cannot risk not knowing or adhering to the rules of the new game. As Simon Burgess, managing director of British Insurance, comments: "I think the FSA has done a first-class job. It has taken on an enormous amount of work, and has generally done very well. People are jumping up and down with fright, and when people are frightened that means the FSA is doing what it is supposed to do. It is speaking softly at the moment, but it has teeth it is quite prepared to use."

Quite how long the FSA will decide to 'spare the rod' remains to be seen, but by its own admission, there are some poor practices taking place in the market that it is rather keen to see eradicated.

The two product areas that have been specifically stealing the headlines for all the wrong reasons are payment protection insurance (PPI) and critical illness (CI).

Discussing their initial investigations into practices in the PPI market, FSA managing director Clive Briault explains: "We were concerned about the risk of poor or aggressive sales practices, unsuitable products, small print and complex terms, and the risks arising from where these products are sold to consumers on the back of another transaction."

The FSA's work uncovered poor disclosure, poor training and complicated exclusion clauses, and matched criticisms from the Citizens' Advice Bureau that claimed the market was simply not operating effectively in favour of the end client.

In addressing the problems in the PPI market, Briault claims there were three broad approaches: "First, we could - if justified by cost-benefit analysis - introduce tougher requirements. This could include more prescription on the disclosure of pricing, policy exclusions and alternative sources of payment protection; it could also include unbundling PPI from the primary transaction.

"Second, the competition authorities might act, just as the Competition Commission set out remedies for the sale of PPI linked to store cards.

"Third - and to my mind the simplest, quickest and most effective way forward - the industry could decide to improve its own standards and move decisively towards putting the elements of a considerably more competitive market in place."

With commission rates running as high as 80% in certain areas of this market, it is questionable how quickly providers will want to change their modus operandi. If this proves to be the case, then the FSA must use its stick to good effect.

In the CI market, the biggest concerns from the FSA's point of view has been over the marketing of products, issues of disclosure and ongoing problems over the medical definitions used. Briault says the FSA would be looking further into the problems relating to CI and would also be working closely with the Association of British Insurers (ABI) as it seeks to update its notes on best practice and overhaul the definitions used to describe the critical illnesses covered by various policies.

Bamboozled

One of the main fears, however, is that in trying to legislate for every eventuality, the FSA, ABI and participating providers are likely to overcomplicate the matter, leaving consumers feeling bamboozled.

Chris Cummings, director general of the Association of Independent Financial Advisers, explains: "When I look at the proposed critical illness definitions, I have great concerns as although the current definitions are quite complex, the proposed definitions require infinitely more technical knowledge."

He continues: "Although an educated consumer has always been in the long-term interest of the industry, we should not expect them to be physicians - when we talk to them about different types of cancer in detail, and try to get them to understand them, then it does worry me. They are not interested in knowing that, and we can't keep going into finite detail on every single thing and expect consumers to be interested or to care. It is up to us to come up with products that are both simple and transparent, rather than relying on consumers to become medically cognisant."

While CI providers battle to keep abreast of the medical sector, the term assurance market is struggling with historical problems that have seen certain anomalies created by the statutory regulation in terms of the types of policies that protection and investment advisers can sell.

Nick Kirwan, protection market director at Scottish Widows, explains: "We have a ludicrous situation where if you write a life insurance policy, the age at expiry of the policy determines whether it can be written under the ICOB or the COB rules. Any policy that is going to expire after the age of 70 is treated as an investment, and so cannot be sold by specialist protection advisers. That creates some rather odd anomalies."

In turn, he says, this creates problems for the end consumer in terms of competition, price and access to the right type of product. He comments: "In practice, fewer companies offer policies that go beyond 70 and that means it is a less competitive market and so it is less widely available and even when you do find the right product it is more expensive than it needs to be."

At a time when we are living and working longer, having children at a later stage in our lives and taking on longer-term debt, there is a growing need for life insurance beyond the age of 70 and insurance regulation should not be getting in the way of its provision and development. Kirwan says: "It is disappointing to find that the regulation gets in the way, although I am pleased to see that the FSA is looking at it again."

Elsewhere, the regulator has taken on board concerns surrounding the need for six-monthly accounting. Discussing the problem, Stephen Walker, chairman of the Association of Medical Insurance Intermediaries, says: "I think there is still a lot that needs to be tweaked. One of the main areas is the financial reporting - at the moment it is every six months, and before regulation was put into place, there were consultations on the various aspects of the new rules, with one of them related to the reporting process.

"The point was made at that time that a six-monthly reporting process with the accountancy data they wanted was going to cost firms - and particularly small firms - a lot of money as they would have to consult an accountant twice instead of once a year. The FSA assured us that everything would be straightforward, but having completed the first form ourselves, we have certainly found we will need to get our accountant involved."

Level playing field

He adds: "For firms that do not hold client money, even if they are insolvent, is that going to affect clients and their policies? The answer is no - they are still going to have their insurance in place if the broker goes out of business. I would have thought once a year is sufficient for those not holding client money."

In highlighting another imbalance, Kevin Carr, senior technical adviser at Lifesearch, says independent advisers and those offering information-only sales have not been afforded a level playing field. He worries that the information-only route does not express its limitations clearly enough in terms of the restricted product range it offers clients, and believes that clearer warnings must be put in place so that consumers are aware of what they are being offered.

He says: "One of the key differences for the consumer is that if they buy without advice, they are not told that they cannot seek redress from the ombudsman if what they buy is unsuitable. That may be common sense to the industry, but it is certainly not to Joe Public."

Despite these problems, the overarching sentiment of the FSA's intervention in the protection market remains positive. While some further change will be necessary, the market must be careful how it goes about it.

Cummings concludes his analysis saying: "It is very easy only a year into a regulated market to press for change, and although there are some things that could do with some modification, I would not be advocating a wholesale review of the regime at the moment."

Edward Murray is a freelance journalist.