GENERAL INSURANCE ADD-ONS
The Financial Conduct Authority's General Insurance Add-ons Market Study of July 2014 found that competition in add-on markets is not effective and is not working in the best interests of customers. It proposed four remedies:
- a deferred opt-in for Guaranteed Asset Protection Insurance (GAP) which concerns motor vehicles that came into on force 1 September 2015;
- the introduction of "value measures" such as publication of a claims ratio - a discussion paper was published in June 2015 and a consultation paper is due out soon; and
- a ban on opt-out selling of add-ons sold in conjunction with regulated financial services products; and
- measures to improve the information provided to customers to make informed decisions when buying add-ons, the subject of a Policy Statement (PS15/22) and final rules in September 2015.
This briefing discusses in question and answer format the third and fourth remedies, that is the ban on opt-out selling and measures to improve the information provided to customers.
BAN ON OPT-OUT SELLING
When does the ban take effect?
The rules (and handbook guidance) will come into force on 1 April 2016. The delay is intended to give firms time to comply.
What is banned?
A financial services firm must not enter into an agreement with a customer under which a charge is, or may become, payable for an optional additional product (see definition below) unless the customer or client has actively elected to obtain that specific product. A default option that is already ticked is not allowed. The phrase "actively elected", which is used throughout the FCA's rules is not defined, but explained as referring to a positive decision by a customer to take a product. A customer's omission cannot be regarded as an active election (e.g. to change a default option such as a pre-ticked box).
The ban is aimed primarily at the sale of general insurance add-ons, but also affects the sale of non-insurance optional products when they are sold in conjunction with regulated financial services products for an additional fee or charge. There are, therefore, consequential changes to rules in COBS, ICOBS, MCOB, BCOBS and CONC.
What does a "charge" mean?
A charge includes a financial consideration of any kind, whether payable to the firm or any other person ( i.e. the ban doesn't apply to free products).
What is an additional product?
An optional additional product is a good, service or right of any description, whether or not financial in nature, that a customer may obtain (or not, as the case may be) at his or her election in connection with (in the case of COBS, for example,) a designated investment. Please note that the additional product need not be regulated.
If the client/customer is required to obtain the additional product as a condition of the transaction related to the designated investment (in the case of COBS), then that product is an optional additional product if the customer is given a choice (1) as to the seller/supplier or (2) which product.
What happens on (annual) renewal?
For renewal of add-ons where they have been defaulted into the purchase of the add-ons before 1 April 2016, firms must provide the customer with an opportunity to make an active election or take reasonable steps to inform the customer that they need not take the product and the effect of non-renewal. The transitional rules require firms to be mindful of their obligation to pay due regard to customers' interests and treat them fairly in respect of these procedures.
This is not necessary where the customer had already actively elected to obtain the add-on and at renewal it is offered on substantially the same terms. However, if the product is substantially different (excluding a change in price 1), even though the changes are favourable to the customer, there must be a fresh active election.
Are there any exceptions?
An unbreakable bundle (e.g. a packaged bank account) is not regarded as a collection of add-ons and therefore the ban does not apply. For example, a packaged bank account which includes travel insurance that cannot be declined by a customer.
A second exception is overdrafts. In BCOBS there is an exception for borrower-lender agreements enabling a borrower to overdraw on a current account. This is for reasons of customer convenience and also reflects ongoing EU financial regulatory work in this area which the FCA does not wish to anticipate.
Finally, the ban does not apply to free products by which it is meant that that the additional product is offered to customers at no extra charge. This exception is not available where a charge may later become payable.
Does the ban affect intermediaries and price comparison websites?
The Policy Statement states that the ban on opt-out selling does not apply to options selected by a customer on a price comparison website (PCW).
The wording in the various conduct of business handbook rules vary slightly, but see ICOB 6A.2.1(11) below:
"A customer may make an active selection for the purposes of this rule through an intermediary in the sales process or through a person acting on behalf of the firm ."
The FCA's earlier consultation paper explains that some firms will receive information from a PCW detailing what add-on selections a customer has actively made. In such cases as long as the firm is satisfied that there has been "an active and express choice" by the customer it is not necessary to ask again. The wording of the rules appear to include intermediaries other than PCWs, for example, brokers, where a customer completes an application form.
What if a firm cannot comply
A firm can apply for a waiver from the rules where they can establish that the ban could lead to harm or inconvenience to customers. This is subject to the statutory test for waivers where a firm must show that compliance would be especially difficult and would not fulfil the purpose of the rules.
Is there any guidance?
There is guidance in each of the relevant FCA conduct of business handbooks alongside the rules, but the regulator has also published Finalised Guidance which goes to fulfilling the Market Study's fourth remedy to improve the information available to customers to make informed decisions when buying add-ons. This guidance applies with immediate effect and is relevant to firms that operate PCWs for general insurance products and other participants in the distribution chain, although firms have been given until September 2016 to make the necessary changes to ensure compliance.
The central message in the Final Guidance is for firms to focus on providing customers with "appropriate and timely" information. In particular, firms should avoid presenting information about add-ons at the end of a product quotation, and should provide annual rather than monthly pricing information to give customers a better idea of the total cost. The guidance also includes suggested good practices for PCWs. In particular, reference is made to ICOBS 6.1.5R which requires that: "A firm must take reasonable steps to ensure a customer is given appropriate information about a policy in good time and in a comprehensible form so that the customer can make an informed decision about the arrangements proposed."
The FCA considers that there exists a similar prohibition on opt-out selling of add-on products where the main sale is not a financial service or product through the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. This is a reference to a ban on inertia selling inserted by those regulations in the Consumer Protection from Unfair Trading Regulations 2008 in the context of unfair commercial practices. Inertia selling is defined as: "demanding immediate or deferred payment for or the return or safekeeping of products supplied by the trader, but not solicited by the consumer."