You could be forgiven for not noticing that the final rules to the Financial Services Authority’s (FSA) Insurance: New Conduct of Business sourcebook (ICOB) had been published. It slipped out just as most of us were preparing to close down for the festive season.
The upshot for most general insurance business (including household, motor, pet and private medical insurance) is that the FSA is relaxing its grip, removing the detailed rules and introducing high-level standards in line with its more principles-based approach.
The one area of exception is, as expected, protection products, including critical illness, income protection, term assurance and payment protection insurance (PPI).
Looking at the new rules
PPI is clearly perceived to be the black sheep of the insurance family, but many have questioned whether it is under too strict jurisdiction? So let’s first look at some of the new rules for those firms selling PPI.
Firstly, they are now required to tell customers in non-advised sales that the customer is solely responsible for deciding whether the policy is suitable for his or her needs.
They must orally explain the main characteristics of a policy – significant benefits, limitations and exclusions, duration and price – during sales conversations before the customer makes any decision on purchase.
Again the spotlight is on non-advised sales, and it remains to be seen whether this format is viable going forwards.
Firms selling PPI will also have to take reasonable steps to check that customers are eligible for benefits under policies before they sell the insurance, telling customers if they would not be able to claim under one or more elements of a policy.
Eligibility checks will vary depending on policy terms, but are likely to include things like: resident outside the UK; over 65; self-employed; on a temporary or short-term employment contract; or employed for less than 16 hours a week.
All PPI policies must now have a cancellation period of 30 days to provide consumers more time to decide whether the policy is suitable for them.
Firms must remind customers of their right to cancel the policy within 30 days and that they should check the policy documentation during the cancellation period.
The FSA has amended the rule, in response to industry concern, so that a full refund is not payable where a consumer has made a claim and settlement terms have been agreed.
Finally, firms must disclose elements of price – total policy cost, total interest payments and regular payments – to protect consumers at the point-of-sale, ensuring they make informed decisions.
On revolving credit, price information should be given in such a way that a typical customer can understand the cumulative cost. For single premium PPI, firms must tell customers during any sales discussion the monthly and total price of the cover and the interest that will be payable.
The rules came into force on 6 January and the transitional period for compliance is six months (6 July 2008). There are obviously no new requirements for firms that sell ‘other’ products and that already comply with the principles and the current ICOB rules.
Not too onerous
All in all, these rules should not be too onerous for PPI firms. They are very much in line with the FSA’s thematic work on PPI and the ‘Treating Customers Fairly’ principles; so most firms should be close to doing these things anyway.
For a long time now, the FSA has made its expectations quite clear and, in its view, still too few PPI firms have acted fast enough or gone far enough to make sufficient improvements.
The FSA now argues that the introduction of carefully targeted rules for firms selling PPI is a proportional response to continued market failures and consumer detriment. It is hard to disagree in the light of the 2007 enforcement decisions.
In any case, it is in the interests of the PPI industry to repair its battered reputation before it becomes irreparably damaged. If we don’t, then we will not only be letting ourselves and the regulator down but, more importantly, we will be letting consumers down at a time when one could argue they need the safety net of financial protection products more than ever.
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