A new set of rules and guidance covering the sale and administration of non-investment insurance was adopted by the Financial Services Authority (the FSA) in December 2007. Non-investment insurance covers all general insurance. It also covers most life insurance that does not have an investment or surrender value, apart from long-term care insurance. The FSA refers to noninvestment life insurance as ‘pure protection’. The rulebook is called the New Insurance Conduct of Business Sourcebook (ICOBS). It came into force on 8 January 2008. Regulated firms that are complying with the old rulebook (ICOB), however, will have until 8 July 2008 to comply with the new rules.
The FSA began a review of the old ICOB in September 2005. The rules, which had come into force in January of that year, had been criticised for being too detailed and onerous compared to their continental counterparts. There was also market failure analysis to determine which insurance products presented the highest risk of consumer detriment in the absence of regulation. Following the initial results of the review, the FSA’s proposals for a new rulebook were published in June 2007 (CP07/11). The FSA considered that certain insurance products presented a real risk of consumer detriment, including payment protection insurance (PPI) and critical illness cover. PPI failures included:
- inadequate price disclosure (especially for singlepremium products);
- sales of unsuitable products (in particular to people who were not eligible to claim under the policies); and
- firms’ failure to explain that products were optional and not a condition to obtaining related credit.
Following this review the FSA proposed:
- to remove many of the detailed requirements for most general insurance products; but
- to add further requirements for the sale of protection products.
Outcome of consultation
Following the outcome of its consultation the FSA has adhered to this approach in the final version of ICOBS, while making changes in the detail. The new rules distinguish between two groups of products.
- First, there is the ‘protection’ products group. This includes pure protection contracts and PPI, even though PPI may consist of or include general insurance instead of, or as well as, pure protection cover.
- Second, there is the ‘other’ products group. This includes motor, pet, home and travel products, which tend not to be so problematic.
Private medical insurance is in the ‘other’ category. The FSA accepts that it is a complex product. It considers, however, that any relevant market failures have not been on a scale warranting imposition of the additional rules. All term assurance is included in the protection group.
Although it is regarded as insurance of a relatively simple nature, it does not fit comfortably into the ‘other’ group of products.
Main changes in approach
There are three main types of changes from the old rules.
- Many detailed rules in the old ICOB are replaced with high-level standards in ICOBS. This is done where the FSA’s research and consultation show that there is no market failure needing detailed rules.
- Additional requirements for the protection group are introduced. This is done where the FSA considers that the rules in the old ICOB need reinforcement.
- There is an overall move towards simplification or ‘principles-based regulation’. This brings the rulebook more closely into alignment with the high-level requirements in the European directives underlying ICOBS. The simplification extends to sales to both retail and commercial customers of products in both groups.
Structure of ICOBS
ICOBS is structured as follows.
- It contains high-level standards applicable to all products and all customers. These will be the sole or main requirement for the ‘other’ products group. They will only be supplemented by rules to the extent that those rules are required by the directives.
- There is some guidance on the high-level standards where the FSA thinks it is necessary to provide clarity and certainty for firms on their application.
- There are additional detailed rules or guidance applying to protection products and PPI.
The challenge for firms
The FSA points out that principles-based regulation requires a higher degree of senior management involvement. The challenge for management is to ensure that firms comply with the spirit of the principles rather than simply with the letter of the rules. This means that firms will need:
- to take into account the nature of the products sold, the types of customer the products are intended for, the sales medium and the sales process; and
- to put together systems and controls and customerfacing documentation that comply with ICOBS high-level standards as well as other parts of the FSA handbook that may be applicable.
Changes in the rulebook
The main changes in ICOBS are as follows.
- A payment protection contract is widely defined as: ‘a non-investment insurance contract which has elements of a general insurance contract and the benefits of which are described as enabling a policyholder to protect his ability to continue to make payments due to third parties, or can reasonably be expected to be used in this way.’
- Most of the rules applying to insurance intermediaries do not apply to insurers selling insurance directly.
- The status disclosure rules and the requirement to produce a demands and needs statement are being brought more in line with the text of the Insurance Mediation Directive (IMD). Any requirements ‘superequivalent’ to the IMD have been removed. The remaining rules will apply to intermediaries only and not to insurers, although additional rules apply for insurers selling protection products.
- The following rules are replaced with high-level standards.
- Suitability – the old detailed rules are replaced by a high-level rule reflecting the wording of the FSA’s Principle 9 (relationship of trust with customers). This will apply to both insurers and intermediaries selling all products on an advised basis. There will be additional guidance for the protection group.
- Product disclosure – there is a high-level standard applying to all the stages of a contract preconclusion, mid-term adjustments and renewals. The rule (ICOBS 6.1.5R) requires firms to ensure that customers are given appropriate information in good time and in a comprehensible form. Most of the prescriptive form and content requirements are being removed.
- Claims handling – chapter 8 of ICOBS contains a high-level standard applying to all customers and all products, requiring firms (including insurers) to handle claims fairly and promptly, and not to unreasonably reject them. There are additional rules and guidance explaining what this means.
- For the protection group:
- there are detailed rules on status disclosure, suitability, eligibility and demands and needs statements, closely resembling the words of the old ICOB text;
- where the sale is made on a non-advised basis, apart from the eligibility rule, a customer is to be informed that he is responsible for the suitability of the products to meet his needs; and
- for secondary sales, the rules on separate price disclosure and details of whether the product is optional are retained.
The move to more principles-based regulation
ICOBS represents part of the FSA’s move to more principles-based regulation (MPBR). The reduction in prescriptive regulation places more responsibility on firms to determine how to comply with high-level rules, such as those contained in The FSA Principles for Businesses. Significant parts of the rulebook have been simplified (for example, the rules on commission disclosure to commercial customers contained in ICOBS 4.4 are much shorter and more readable than old ICOB 4.6).
Another example is the guidance in ICOBS 6.1.10G that firms selling general insurance ‘may wish’ to provide policy summaries or ‘key facts’ for consumer customers. Under the old ICOB this was a mandatory requirement. Policy summaries may indeed be inappropriate for some complex general insurance products such as private medical insurance. On the one hand, if all exclusions (eg for specific medical conditions) are set out in the summary it may result in a very long document. On the other hand, the insurer may find it difficult to rely on exclusions that are not mentioned in the summary. The same comments sometimes apply to household insurance. The FSA describes this product as ‘simple’ but it is often, in fact, a complex amalgam of a number of distinct forms of cover.
An alternative approach to achieving the FSA’s Principle 7,
‘a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading’, may be to redraft policy documentation in a more readable format, omitting unnecessary detail and highlighting the more significant clauses.
Policy summaries will remain mandatory, however, for all protection products, including PPI. There are other detailed requirements on product information for protection products set out in ICOBS 6.
Equally important, however, in developing compliance policies for protection products, will be to follow:
- the FSA’s thematic work on regulating insurance products such as PPI and critical illness insurance, which it considers may create threats to its regulatory objectives;
- the lessons to be learned from its enforcement action; and
- standards published by the Association of British Insurers. Although none of these have yet been ‘confirmed’ by the FSA, they usually set out what may be regarded as best practice.