ICOBS is son of ICOB, but has it lived up to its expectations? Julie Pardy investigates
In January 2008 the FSA implemented Insurance: Conduct of Business Sourcebook (ICOBS) which replaced the old Insurance: Conduct of Business (ICOB) Sourcebook.
Apart from confusing the industry with its subtle name and acronym change, what the regulator really set out to achieve was a move towards a more principle-based approach for the general insurance market.
Was this the right approach, and did the regulator achieve what it set out to achieve? Well, in a recent post implementation review of the changes that (ICOBS) brought, the FSA has sought to identify this.
As with reviews of this nature there were surprises both for the regulator and those involved in the post (ICOBS) review.
When ICOBS was introduced it sought to divide protection products into three distinct areas which were: Protection Products including critical illness, term assurance and income protection; Payment Protection Insurance; and other (which is where all other general insurance products were categorised).
With ICOBS came more detailed rules and guidance for protection product sales, following market failures identified when the FSA carried out their previous ICOB review.
Lack of understanding
In particular, consumer research and thematic work with firms conducted in 2006 found that consumers did not understand protection policies. The FSA thought that this was driven at least in part by poor explanations during the sales process.
As a result the more detailed rules brought in through ICOBS included a rule for firms selling pure protection (and payment protection) policies to ensure information provided orally allowed customers to make an informed decision when purchasing a policy.
Before these more detailed ICOBS requirements, firms were required to provide customers with adequate explanations. Through the FSA consultation process on ICOBS, it revealed that firms believed the proposed new rules reflected existing ideas of good practice.
Part of the aim of the review, was to look across these three distinct groupings and identify whether any ICOBS driven changes were affecting any of these areas either negatively and/or positively.
So, on a positive note, the regulator has reported that in areas where process changes have been made by organisations across these protection areas in line with a more principle-based approach to the sales and supervision of protection products, their research did not show that any consumer detriment had come from this.
One interesting, worrying and unexpected outcome of the review for both the regulator and the firms involved in the review was that in the majority of instances the oral disclosure processes in place in firms, especially in respect of critical illness (CI) sales, did NOT meet the standard(s) expected by the FSA.
As you can imagine, this was not a result that the regulator was expecting.
As it is universally accepted in the industry that critical illness is a complex product, regardless of whether it is sold as a stand alone product or as a rider, this then led the FSA to delve further into how sales practices affected a customer's understanding of what they had purchased.
Improvements in oral disclosure
During this recent review, the FSA tested how the new ICOBS requirements had been implemented by firms selling CI. In addition, they commissioned some consumer research to establish if consumers understood the product better following the introduction of the ICOBS rules. They decided to carry out this work in parallel because if firms were found to be generally complying with oral disclosure requirements, any improvement the FSA found in general consumer understanding could be assumed to be a direct result of improved oral disclosure.
The review itself involved 11 firms within the sample of research. Those firms chosen were a mixture of banks, building societies, insurance companies and a network. Out of all the firms reviewed, there was a mix of advised and non advised sales. Some firms sold critical illness as stand alone policies and some sold them as rider products.
234 sales calls were assessed by the FSA and every call that they listened to resulted in a sale being made by the adviser.
What the FSA found has no doubt been a huge surprise to both the regulator and the firms who were part of the review.
Overall compliance with ICOBS was unacceptable, with all firms failing on some, or most, of the key ICOB requirements in the majority of their calls.
The FSA had intended to test if improved oral disclosure results in improved consumer understanding, however, the unexpected lack of compliance in firms that were surveyed meant that the FSA were unable to come to any conclusion on the effectiveness of oral disclosure.
So, out of all of the nine areas that were part of the search, there are a couple that can be highlighted as possibly being the most serious of all.
People buy critical illness to ensure that should they ever be unfortunate enough to suffer from one, that they have got some financial security. Most people if asked would associate critical illness cover with illnesses such as cancer, stroke and heart attacks, so it really is quite shocking to see that in 95% of the 234 cases sampled, the adviser did not adequately explain the significant exclusions and limits in the policy they were selling. That coupled with the fact that in 86% of cases the adviser did not adequately explain the limitation on illnesses which were covered by the policy, you can easily understand the regulator's concern.
So, what should an organisation be doing to try and guard against exactly these kinds of problems surfacing?
Well, in the extreme, the purists might say that due to the complexities of CI contracts, there is no place for selling them through call centres and through online comparison websites. Due to the nature of the product, make firms sell them only through face-to-face channels. That's all very well I hear you say, but that fly's in the face of how the financial services market place is developing. Statistics clearly demonstrate that there is huge public demand for the use of call centre's and comparison websites for the purchase of financial services products, so that is unlikely to be the answer to the issues identified here.
While we know that critical illness is complex, it also has a huge role to play as a product in a family's overall protection strategy, so providers and sellers need to find a way to ensure that the public do get the right information, at the right time, within the sales process, and in a way that is easily understood.
Training and supervision
So, what other options exist for trying to resolve the issues with the sale of CI? Well, probably two areas that are often overlooked, but also taken for granted, namely the training & supervision of these sales forces.
A betting man would bet that a link exists between a firm's training programmes and the competence of their managers, when problems such as these surface. Experience leads me to suspect that where there is such a high level of non-adherence to the rules, that it is likely to be down to a combination of inadequate induction and remedial training, together with ineffective supervision and management.
So, how can the industry move forward on this? Well, for a start it will need to react positively to this review, by going on to demonstrate to the FSA that they have indeed now got robust systems and controls in place. But that's obvious, isn't it? So where do they start? Well, by ensuring that their sales teams are fully briefed on the complexities of the products that they sell, and are clearly able to demonstrate adherence with the ICOBS disclosure rules across all of their client meetings.
In my opinion the only way that a firm will achieve this is by having a good long hard look at their training & competence regime and reviewing it to ensure that it is fit for purpose and constructed with the end consumer in mind, as opposed to just covering off a minimum level of supervisor and adviser interaction.
If the protection industry read across to the current feelings of the regulator in all of the recent RDR papers, they have voiced that they see the supervisor as having a pivotal role in ensuring the competence of front line staff, so the insurance industry might like to take note that this is a developing theme from the regulator and one that would be best to be prepared for.
Julie Pardy is regulatory liaison manager at compliance software developer Worksmart
