Forgive me, if you will, for once again using these column inches to look at the thorny, and admittedly somewhat dry, subject of statutory regulation. But the formulation by the FSA of a regulatory regime that is appropriate to the needs of the industry, and that will not restrict the future working practices of intermediaries, is so fundamentally important that it cannot, and indeed should not, be ignored and simply left to chance.
If the industry does not influence the FSA’s thinking, no one will and the end result will undoubtedly be the introduction of inappropriate and overly restrictive regulation. No one wants that – not insurers, nor intermediaries, nor even, I suspect, the regulator. Indeed, the FSA has made a concerted effort to indicate that it wants to be educated about the general and health insurance sectors. And although the consultation period has now ended, there are still opportunities to influence the FSA’s thinking.
It was pointed out to me recently by Bob Cheesewright, technical manager at Swiss Life, that unless the FSA puts in place advice requirements for general and health insurance intermediaries that are on a par with those of IFAs, the industry could be setting itself up for criticism in future years. To explain, the European Insurance Mediation Directive (IMD) – which set a precedent for general insurance regulation in the UK – states that advice given by intermediaries should simply be “adequate” to meet consumer needs, whereas IFAs have to demonstrate “suitability” – a requirement that includes the need for guidance about value. Consumers generally assume, whether they are seeing an independent general insurance broker, health insurance intermediary or IFA, that the adviser will search the whole of the market on their behalf and find a product that is not only the most suitable for their needs but that is also the best value for money.
But, under the current IMD “adequacy” requirements, there is no need for intermediaries to demonstrate the value aspect. Unless the FSA acknowledges that advice requirements should be akin to those of IFAs, the general insurance sector could end up being criticised by consumer groups for not taking account of value even though the regulator didn’t state this as a requirement. A second moot point, highlighted by Cheesewright, is the FSA’s categorisation of certain products as “higher risk”. I have previously stated in this column reasons why medical insurance should not be regarded as a high risk product. But this time the focus is on income protection (IP). The FSA looks at three main criteria when assessing various products and the associated potential for consumer detriment: barriers to switching; complexity; and impact (in other words, is there an alternative or fall-back option available?).
Firstly, there aren’t any barriers to switching with regards to IP. Secondly, IP is a simple concept – the insurer will pay the policyholder when he/she cannot work. Contrast this to just one general insurance area – that of marine insurance, where there are at least five different sums assured in the same policy for different purposes: risk to the boat (loss and damage); liability insurance (in case the owner causes some kind of marine disaster); legal expenses insurance; medical expenses insurance; and last but not least, personal accident insurance. Yet, as opposed to IP, marine insurance is not classed as high risk by the FSA. On the final criteria – that of impact – the fall-back option, with regards to IP, is provided by the state in the form of incapacity benefit. So where is the risk?
One final point. It is notable that recent reports have highlighted a protection gap of between £11bn and £12bn. If the regulator insists on classifying certain protection products (primarily medical insurance and income protection) as high risk, the protection gap will never get smaller. In areas where there are no apparent consumer detriment issues, and where there is a clear need for protection products, let’s look at measures to help rather than hinder the industry.