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Assessing the impact of an FCA ban on opt-out sales

by: Geoff Hall
  • 02/04/2015
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Assessing the impact of an FCA ban on opt-out sales
The FCA has proposed to ban opt-out sales on insurance products but it's likely to be business as usual for the industry, writes Geoff Hall, managing director, Berkeley Alexander.

A Financial Conduct Authority (FCA) market study last year confirmed that ‘opt-out’ selling often results in consumers purchasing insurance products that they don’t need, and in some cases, aren’t even aware of. Concerned about this, the FCA has now entered into industry consultation with a view to introduce plans which will largely stop this type of sale.

The authority’s stance on this shouldn’t be a shock to anyone – ‘opt out’ selling has never really sat well with the principles of treating customers fairly (TCF). Clients should be making informed choices about cover that they want, rather than what they don’t want (or perhaps never discover that they have it).

There are two main areas where the proposed ban will have a significant impact:

1. Extensions to the ‘main’ policy – for instance, a home insurance that allows additional aspects of cover at extra cost. Most often this will be things like legal expenses or home emergency cover. It could also include policy ‘options’, for instance, accidental damage cover could be classed as an add-on, as could personal possessions cover away from the home. However, these basic requirements would normally be part of the client conversation during the quote process, and if they are, then that’s fine. The client should be fully aware that these aspects of cover are optional, and they would be making an informed choice about including them. However, any adviser who simply defaults to include, say, accidental damage, without checking first with the client, could fall foul of the FCA’s stance.

2. Additional policies sold alongside the ‘main’ policy – these would be separate policies with possibly a separate insurer, and again could include things like legal expenses, home emergency or key cover. FCA principles already require a separate quote process for each policy, so if an adviser is bundling various policies, this should be made abundantly clear, and information must be provided on each product. Most importantly, this must include premium costs, the fact that they are in no way linked, and that none of them is compulsory. It’s possible that not all have been doing this, hence the findings by the FCA.

What the proposed ban on ‘op-out’ sales will not affect is where the main policy automatically includes cover that some other insurers offer as an optional extension. For example, some home insurance policies will include legal expenses, perhaps key cover, and potentially home emergency cover.

All clients with that insurer will have this extra cover, and it’ll be being provided within the standard price. These would not be classed as an ‘add-on’, or ‘opt-out’ sales, and would therefore be unaffected.

It’s been suggested that income protection sales will be affected by the ban, but following the PPI mis-selling scandal, it would be surprising to find that advisers are selling IP or ASU (including MPPI) on an opt-out basis still. If so, then any ban would rightly prevent that from happening in future.

If the FCA press on with the intended changes, then what we may see is more insurers offering ancillary cover as an automatic policy inclusion, and fewer of them offering ‘add-on’ products as such. It may well be that, as a result, we’ll see fewer people buying these ‘add-ons’, which will probably increase the insurer’s loss ratios, and inevitably push up prices.

The proposed ban isn’t too surprising, and we at Berkeley Alexander would support it, but surely this is only restating what every good adviser should be doing already – making no assumptions on the clients behalf, making the client aware of what cover is included as standard, and fully explaining what optional cover is available, and at what cost.

As such, there should be no real panic about the proposed changes, as they should have little impact on existing best practice. Hopefully, it’s going to be ‘business as usual’.

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