With an FSA review of the proposed ICOB regulation changes pending, Peter Barnett analyses the potential outcomes and implications on product viability and adviser confidence.
The Financial Services Authority (FSA) has launched a consultation process on proposed changes to the Insurance Conduct of Business (ICOB) rules. The FSA is proposing a lighter-touch regulatory regime that should be applied to some 'other' general insurance protection products such as private medical insurance (PMI) but not to personal protection products like income protection (IP) and simple term cover.
Many commentators do not believe a significant difference exists between the risk profile of these products, but, should the proposed changes come to pass, the impact on those products in the protection group could be significant in terms of adviser participation. An example of the difference is that intermediaries selling 'other' products will no longer have to disclose fees to retail customers, whereas with 'protection' products they are obliged to do so.
More consideration needs to be given to the product categorisation to avoid tilting the market towards short-term products and hindering product innovation. Essentially, the FSA has placed PMI in the 'other' category on the basis of there being 'limited market failure'. However, there have been very few or no market failures with IP and, since the FSA's Market Failure Analysis has not been made available, it is hard to judge the FSA's interpretation of it. Also to be questioned is the implication that payment protection insurance (PPI) has been the subject of an FSA investigation into mis-selling and that IP falls into the same category. IP should not be compared to PPI and this is further evidenced by the fact that IP complaints to the Ombudsman fell by 24% in 2006/07.
As the majority of IP sales are advised, does this process not minimise the risk of consumer detriment compared to a non-advised sale of protection products? This is not to propose a deal with the ongoing Competition Commission review of PPI, but, since the outcome will in all probability have significant impact on the product distribution methodology, it may make better sense to defer any ICOB changes until after the Commission delivers its judgement.
On this latter point, why the haste to change the ICOB rules, which only came into force in January 2005 so have hardly been road-tested? Surely, it would be better to take the time to consider these rule changes in the wider compliance context, such as with the Association of British Insurers' Customer Impact initiative. Similarly, the lack of consumer understanding that the FSA research captures means that protection should be an important consideration for Otto Thoresen's task force (Review of Generic Financial Advice) and the FSA's own Retail Distribution Review (RDR).
It is important to remember that ICOB also applies to the group market and so it would be false to assume that the proposed changes will only apply to individual business. Similarly, the FSA's proposals could aggravate rather than improve efforts to close the protection gap, which Swiss Re estimates to be over £2trn and the IP element of this was calculated in 2005 as equivalent to £170bn annual benefit.
An upside of the current situation is that this challenge from the FSA presents the IP industry with an opportunity to alert the potential customer to the existence of IP products. This meets a significant consumer need, recognised by the FSA's own consumer priority hierarchy, namely 'protection in case of loss of employment through illness or injury'. IP is long term with a reviewable premium and has more to do with maintaining an enduring valued relationship between the individual and their workplace than it does with remedying any acute or chronic medical condition. No other product will provide cover for the eventuality of sickness-related loss of employment - which the figures show will affect one in five of the UK working population.
So, while no one will argue that anything increasing consumer confidence is not to be greatly desired, a better use of resources would be for everyone to work together in a measured timeframe and use all the available evidence - such as ICOB, the Thoresen Review and RDR - to surround the market with a relevant fit-for-purpose regulatory envelope that works to everyone's benefit - especially consumers. n
Peter Barnett is head of external affairs at Unum
