The FSA is being criticised for coupling short-term income protection (IP) with payment protection insurance (PPI) in a letter warning providers about contract terms.
According to the Income Protection Task Force (IPTF), short-term IP does not merit being "tarred with the same brush" as PPI, which was the subject of a two-year investigation by the Competition Commission (CC).
The FSA last week wrote to companies suggesting some PPI and short-term IP contracts may be deemed unfair under the Unfair Contract Terms legislation because they contain a provision allowing companies 20 days notice for revising the terms of the contract.
But the IPTF says short-term IP should not be compared with products that require regular renewal, allowing terms and conditions to be changed, or have short notice periods.
A number of insurers have entered the short-term IP space in recent months including Pioneer, which launched Bills & Things, and Foresters Friendly Society, which unveiled its FFS Sickness Policy.
A two-year investigation by the CC concluded lenders have an unfair advantage selling PPI with credit products, resulting in an uncompetitive market where consumers are overcharged. As a result, PPI was banned from being sold alongside credit cards and personal loans.
"Short-term IP products that provide cover throughout an insured's life but pay for a specified period such as one or two years, should not be tarred with the same brush as products that require regular renewal, at which point terms can be changed or withdrawn," IPTF co-chairman Peter Le Beau says.
"They may also contain very short notice periods for significant changes to the terms of the customer's cover and may have significant exclusions.
"It is important that the FSA and Competition Commission appreciate the distinction between these products."
Le Beau adds the IPTF intends to press ahead with plans, first unveiled in its recent white paper, to issue a kite marking system for both long and short-term IP.
"This would, inter alia, ensure the payment period is crystal clear and understood by buyers and which can give them confidence that the products are sound," he says.
