When it comes to the health insurance sector, the regulation of financial services in the UK could be said to be in a mess. Consider this. A unit-linked critical illness or income protection plan costing £50 a month is a regulated product, but if it is written as non-linked or as annually renewable, even if it costs £100 a month, it is not. Private medical insurance is not regulated, nor is long term care insurance, even for vulnerable, elderly people who are likely to be paying more than £1,000 a year for their cover.
The Association of British Insurers has selling codes of practice, but these are voluntary, and not every insurer is an ABI member. The Chartered Insurance Institute runs the financial planning certificate exams, which cover PMI and long term care insurance, but these too are voluntary.
It is a tribute both to the professionalism of intermediaries practising in the market and to insurers, that the sector has not been hit with widespread accusations of mis-selling that are all too commonplace in pensions. But the Office of Fair Trading has flagged-up that the industry must do more if it is to avoid statutory regulation replacing self-regulation. And the move towards a single regulatory system encompassing all financial services areas has already started.
The new Financial Services Authority, the single quango that is replacing the previous generation of self-regulatory organisations, including the Personal Investment Authority, is likely to have reserve powers to regulate general insurance. And in May this year the OFT reiterated its view that the selling of long term care insurance should be regulated as soon as possible.
All of which begs two questions. How did we get to where we are today, and how will regulation develop in the future?
Regulation of financial services investment products began seriously when Professor Jim Gower wrote the report in the early 1980s that eventually led to the 1986 Financial Services Act. This Act introduced regulation of investment products through self-regulatory organisations or Recognised Professional Bodies. Through this, Fimbra regulated brokers, and Lautro covered insurers, with both bodies responsible to the Securities and Investments Board. Then, in 1994, the roles of Fimbra and Lautro were brought together in the Personal Investment Authority, which along with the Securities and Investment Board, will be replaced by the new Financial Services Authority.
Regulation is expected later this year setting out precisely the FSA’s role but its work is already well underway. And from late 1999, the FSA will effectively take over most of the current framework of regulation, having taken over the supervision of the banks from this June.
A single ombudsman service will protect consumers and all licensed intermediaries and insurers will be supervised by its 1,700 plus staff.
Over the years, additional regulation has built up elsewhere. Policyholders have gradually gained more rights under a series of Acts: the Policyholders’ Protection Act 1975, the Data Protection Act of 1984 and the 1994 Unfair Terms in Consumer Contracts Regulations. Other protection has been gained as insurers are regulated by the insurance Companies Act 1982 and brokers by the Insurance Brokers (Registration) Act 1977.
Any gaps have largely been filled by voluntary selling and other codes laid down by the ABI. In the critical illness (CI) market, insurers have agreed standard core definitions with the IFA Association, largely due to the efforts of IFA and CI guru John Joseph.
Intermediaries may currently only call themselves brokers if they are regulated under the 1977 Act, while those licensed to sell investment products will, from 1 October, have to be individually licensed by the PIA.
Some of the main changes, facing the industry over the coming months are as a result of comments by the OFT. Two years ago it published a report critical of many health insurance practices. And on 28 May this year, it produced a rather grumpy second report.
Director general John Bridgeman complained: “The response of this £2bn industry to my 1996 report was dismal.” He was not convinced by arguments that suggested all that was required was a little fine-tuning and he criticised the Association of British Insurers for taking 10 months to respond.
His new report called for the industry to present a code of practice defining benchmark “core term products” by 30 September, and, although it no longer called for moratorium underwriting to be banned, it wants to see plans more tightly regulated.
Bridgeman suggested that this could only be achieved through such plans coming under the authority of the FSA under its reserve powers to regulate general insurance.
This time the industry has not been slow to respond. ABI assistant manager, media, Suzanne Moore, says that the Association has already started discussions both within the industry and with the OFT. And although activity is still at an early stage, industry commentators believe that strengthened ABI guidelines and codes of practice are likely to emerge as a result.
The OFT is not the only administrative body looking for change. A recent Treasury discussion paper on the future of the Insurance Brokers Regulatory Council could see just one set of rules across all general insurance intermediaries with the common title of broker available to all again.
But for this to happen, training and competence will become increasingly important to all in the industry. And in this area, the Chartered Insurance Institute is leading the way.
Over 350,000 of its Financial Planning Certificate papers have already been taken, and while other organisations offer similar qualifications, its academic reputation and chartered status, together with its ability to organise so many examinations, place it in prime position.
It offers an Advanced FPC paper covering the sale of long term care insurance and other health insurances, as well as two PMI exams as part of its Certificate of Insurance Practice qualification. It is, believes Liz Hammond of Cheshire-based PMI Intermediaries, essential for advisers to hold the appropriate qualifications. Hammond herself has just passed the first CII exam on PMI and is now studying for the second.
The issue of long term care insurance is likely to become increasingly important. The Royal Commission on long term care funding was set up last December and is expected to report early next year.
The last Government had developed a complex set of partnership proposals which would have seen the cost of long term care limited for those who had the foresight to insure against the eventuality.
The new Government quickly abandoned those plans but now faces the prospect of having to consider recommendations from an independent body.
The Government has already established a reputation for not necessarily liking the proposals put forward by its own ministers, on pensions and welfare reform for example, so there is no guarantee that it will accept the Commission’s findings when they are published. It may decide to buy time by postponing any changes until after the next general election.
This may suit the FSA too. One of the Commission’s recommendations is likely to be the regulation of long term care insurance, and the FSA may prefer to see this postponed as it struggles to get up to speed.
But IFA Care director Ted Yeates of Warwick Butchart Associates, believes that regulation is essential to protect vulnerable, elderly clients who may otherwise be susceptible to misselling.
Others argue that it is not just long term care insurance that should come in for scrutiny. They believe that while PMI is an annually renewable plan, it is long term in nature because clients who have suffered a medical condition since taking out the insurance may be unable to obtain full cover elsewhere.
Many older clients now pay substantially over £1,000 a year and the question has to be asked whether they are any less vulnerable than those taking out insurance for long term care.
Generally, the industry remains unconvinced. The ABI, which supports long term care regulation, argues that current supervision of PMI works well in practice. It dismisses arguments to bring it inside the regulatory net as pandering to a neatness solution that ignores market practice. The ABI claims its codes of practice can adequately meet any theoretical concerns.
But BUPA’s general manager, marketing, John Castagno, argues the greater transparency advocated by the OFT is the best way of ensuring that the product is not mis-sold.
However, FSA chief executive Howard Davies is known not to be keen on extending regulation to general insurance, and having to regulate PMI could jeopardise this position and even lead to gridlock as the new FSA looks to consolidate its position and to develop a less cumbersome and less expensive regulatory system.
BUPA’s Castagno argues the best way to regulate is through training and competence schemes. “We know from our research that most customers don’t read the literature because they don’t find the subject interesting enough. Proper supervision of the sales process, together with setting the right standards, is therefore the most appropriate way to regulate sales.”
Legal & General compliance director, Diana Miller, agrees with him: “It is important to have an effective but simple method of regulation. We believe that the way the FSA is moving towards risk based regulation with an emphasis on senior managers within the regulated business being responsible for a compliant culture is good, and we support that.”
Norwich Union Healthcare’s spokeswoman, Louise Zucchi, believes that regardless of the regulatory regime, most insurers take the view that non-regulated plans should be treated as though they were regulated as far as possible. This not only gives greater consistency but also acts as an internal constraint on ideas, which, though not illegal, are outside the spirit that regulation was supposed to bring about.
Zucchi, emphasising that the debate is far from over and that Norwich Union would not want to pre-empt any outcome, says the real key to effective regulation is greater discussion to get agreement both across the board and with the regulators.
And many now believe that only through speaking with one voice – something it has not had a strong reputation for in the past – will insurance get the regulation it deserves.