The publication of the FCA's report on the impact of consumer credit regulation on the retail general insurance market adds another interesting dimension to a sector already under increasing regulatory scrutiny following recent legal developments, such as the imminent coming into force of the Insurance Act 2015.
Treating Customers Fairly remains under regulatory scrutiny
TCF obligations under PRIN 6 and 7 are at the heart of the FCA's criticism of insurers and insurance intermediaries for the lack of clear and appropriate information being provided to consumers. Focussing specifically on the disclosure obligations at the beginning of the customer's online journey, the regulator considers there are 'significant risks' at this early stage if key information is not provided or clearly presented. Linda Woodall, acting director of supervision at the FCA said:
"Consumers should expect clear information about the payment options available to them. Regardless of whether people choose to pay upfront or in instalments, it's important that they can see exactly what they are signing up for and how much it costs so they can decide whether they are getting a fair deal.'
The FCA's criticism of the role that insurers and insurance intermediaries play when arranging premium finance essentially falls into three key categories: (i) inadequate disclosure of cost, namely the additional cost associated with paying by instalments; (ii) inadequate disclosure of key data in relation to firms arranging premium finance under a regulated credit agreement; and (iii) the lack of appropriate steps taken by firms acting as credit brokers to provide customers with clear and sufficient information on the role and services being provided. As a result, the regulator suggests customers are inhibited from making informed decisions and understanding the nature of the service being provided to them.
An tougher world for insurers?
Implicit in the FCA's warning that it will be taking a range of actions following the outcome of this thematic review, including supervisory engagement and following up with individual firms where it found specific examples of failings and poor practice, is the underlying threat of potential enforcement action.
Given the FCA's emphasis on disclosure obligations relating to arrangements under a regulated credit agreement, it appears that the FCA's relatively new regulatory powers for policing the UK consumer credit industry under the Consumer Credit Act 1974 (CCA) and the CONC sourcebook has provided a 'way in' for the regulator to increase its scrutiny on insurers and their intermediaries. Of course disclosure obligations on regulated firms have long been on the regulator's radar so some may not consider this to represent much of a change. However these regulatory developments are now coupled with legal developments which present considerable risks for insurers.
Insurance Act 2015
In addition, the Insurance Act 2015 which comes into force on 12 August 2016, will make life increasingly difficult for insurers. This follows the reform to consumer insurance contract law by CIDRA as previously discussed by Sam Bishop.
Two main areas of overhaul will be to the duty of disclosure and the position relating to warranties. These changes are primarily driven by concerns that the existing law in relation to these areas is too 'insurer-friendly'.
I mention the Act to highlight, simply by way of example, any potential regulatory issues that may flow from this legislative change. Amongst some of the most significant changes are the abolition of the general right of avoidance for breach of duty of disclosure and the abolition of any rule of law that a breach of warranty results in the discharge of the insurer's liability (albeit these rights are reinstated in certain circumstances).
It follows that, if insurers are forced to change wordings on proposal forms, policies and other key documentation, then the FCA's requirement that insurers and intermediaries must provide clear and easily understandable information about the overall cost of paying for insurance will be intensified by a regulatory focus upon the extent to which insurers are complying with the spirit of the new legal landscape.
The FCA's report makes clear that failure rates relating to the disclosure obligations of insurers and their intermediaries are unacceptable. It remains to be seen what fall-out will occur following this report, and how recent legal developments such as the imminent coming into force of the Act will play into regulatory issues that are likely to remain very topical for some time yet.