Cicero Policy Briefer

Issue 2, July 2006

FSA ICOB review: where next for general insurance regulation?

By Mark Twigg

This month finally saw the Financial Services Authority announce details of its review into its general insurance conduct of business regime. While everyone will support the Regulator’s promise of a more principles-based approach, the devil will remain somewhere in the detailed rule book.

At best, the UK’s implementation of the EU directive on insurance mediation left some unfinished business. The decision to exclude two markets (travel insurance and warranties on consumer durables) from the FSA’s scope was odd, especially when one considers that consumers in both markets would actually stand to benefit from a regulatory shake-up, and also as the FSA included other markets, such as motor insurance, which worked well without the need for further regulation. Already, the FSA has ruled out a decision to bring travel or warranty products under the spotlight in the current review.

So what will the review look at? Clearly, there is little appetite within the Treasury to see the review become too broad. After all, any significant rule changes so soon into the new regime would suggest that important mistakes were made the first time round. For now, the FSA will be concerned with information-gathering to assess just what is happening in the marketplace. But the Regulator has left some chinks of light for meaty reforms with talk of possible changes to the rule book in late 2007.

Some policy reversals would be welcomed. The possible deregulation of motor insurance, a product which is already subjected to fairly clear, standard product features and has never been considered a major source of consumer detriment, would make sense subject to the constraints imposed by the Insurance Mediation Directive and the Distance Marketing Directive.

The decision to look at protection products must also be welcomed. The ongoing inquiry by the Office of Fair Trading into payment protection insurance (PPI) has highlighted a number of problems facing consumers regarding the current range of consumer choice and the potential lack of price transparency in secondary sales. Unlike other general insurance products – such as motor insurance – protection products are considerably more complicated and do not benefit from standardised features.

The FSA makes specific reference to critical illness cover, but problem areas extend across the whole market. Not least, because successful claims often have implications for an individual’s tax position (for example, life policies not held in trust) or any entitlement to state benefits (for example, income protection is treated differently to payment protection when calculating benefits). Therefore, these are not simple commodity products, and the sales process should not give consumers the impression that they are – especially as the lack of access to wider financial advice means that many consumers are poorly equipped in making the best choices.

The effective functioning of regulation across this market place is far from being resolved. For all these reasons, the review may need to be a little bit broader than the Treasury would like.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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