Hot on the heels of CP186 comes CP187: Insurance selling and administration & other miscellaneous amendments. Another weighty consultation paper, this sets out how the Financial Services Authority (FSA) plans to regulate the selling and administration of insurance contracts and seeks comments on its draft rules.
While primarily aimed at insurance providers and intermediary firms, this consultation does have importance for mortgage firms who sell insurance products such as mortgage payment protection insurance (MPPI) and buildings insurance.
The main regulatory requirements concern the insurance sales process and there are a number of differences to the rules for mortgages.
One key point of note is the proposals for high-risk products. In view of the responses to the high level consultation paper, CP160, the FSA has decided not to impose a two-tier approach of standard and higher risk products (this included critical illness and income protection). Instead it proposes to introduce rules and guidance to address product features or sales situations that might pose particular risks. In the case of long term care insurance it is now proposed that this is treated as an investment contract.
With regard to disclosure of status, CP187 not only sets out what the requirements are for insurance intermediaries in terms of status disclosure it also sets out what a firm must disclose when it sells different regulated products at the same time. It is proposed that:
l Firms must use a combined initial disclosure document (IDD) when they are selling mortgages and packaged investment products at the same time; and
l Firms have the option of including the services they provide in relation to insurance contracts in the combined IDD if they wish to use it. Alternatively, they can choose to provide the information separately.
Rather than develop a prescribed IDD specific to insurance sales, the FSA has instead set out what it requires to be disclosed to the customer in respect of the firm’s service and by when. For initial contact by telephone, this will only include the name of the firm, the purpose of the contact, the name of the person in contact with customer and their link with the firm.
Other information such as name and address, statutory status, the range of insurance undertakings on whose products the firm has provided advice or information on, how to complain, and compensation arrangements only need to be disclosed before the contract is concluded (when the quote is accepted) and not on initial contact as it is for mortgages.
In terms of ‘range of insurance undertakings’ and ‘fair analysis’ when disclosing the ‘range of insurance undertakings’ on which the firms has based its advice or information, the firm must state whether:
• the advice is based on a ‘fair analysis’;
• there is any contractual obligation to sell exclusively with one or more insurance providers;
• the firm is not under a contractual obligation and does not give advice based on a ‘fair analysis’.
There is no ‘whole of market’ concept for insurance sales as there is for mortgage sales. ‘Fair analysis’ is defined as advice based on a sufficiently large number of insurance contracts available on the market that enables the firm to recommend which insurance contract would be adequate to meet the customer’s needs.
As with mortgages and investments, the rules over standards of advice only apply when a firm effectively makes a recommendation to a customer to buy a particular insurance contract. However, the standard of advice does differ. Rather than advise the ‘most suitable’ product, insurance firms are obliged to give ‘adequate’ advice. In essence what this means is that the advice must be suitable for the customer’s demands and needs but not the most suitable. Importantly, the assessment of the customer’s needs does not extend to cover alternatives to insurance contracts or to types of insurance contracts that the customer is not interested in.
For all sales, a statement of demands and needs must be given to the client. This can be incorporated into an application form and can be as simple as: ‘You are homeowner who needs to insure your property and contents’. It should also state whether or not advice has been given, and where it has the statement must also explain the reasons for the intermediary’s recommendation.
It remains the FSA’s intention to extend the requirements of the training and competence sourcebook to all individuals giving advice. However, there is no intention to require advisers to pass a specific examination. It will be for firms to decide whether they wish to ensure the competence of their staff by using examinations.
Those advising on insurance contracts will be required to meet the product disclosure rules. The disclosure will be made up of a number of elements, including a policy summary, price information, a policy document and how to notify a claim.
The policy summary will include the main features of the policy and the price information will include the premium and product related fees. There are detailed rules for each sales channel, but for face-to-face sales the policy summary and price information must be provided before the conclusion of the contract. The policy document can be provided after the conclusion of the contract, although a specimen document must be available on request. The claims information may also be provided after conclusion of the contract.
Unlike the proposals for mortgages, there are no proposals for commission disclosure rules but intermediaries will still be subject to agency law, which will require them to disclose commission if the customer asks. In respect of inducements, these will not be prohibited as long as they are not used in a way that results in customers being treated unfairly.
This gives a quick overview of the differences in the mortgage and insurance regimes. Even if insurance sales only represent a small part of the business, do not get tripped up by the new rules, even if they appear less onerous.
