In March 2015 the Financial Conduct Authority (FCA) published its second consultation paper on competition remedies, which is intended to address some of the issues identified in the FCA's general insurance add-on market study.
The market study, launched against the backdrop of a series of mis-selling actions – most notably in relation to payment protection insurance, card protection and identity protection products – was the first under the FCA's competition mandate. In July 2014 the FCA concluded that competition in general insurance add-on markets is ineffective and the add-on mechanism has an adverse impact on consumer behaviour and decision making.
This update recaps the findings of the FCA and provides an update on its subsequent design of, and consultation on, four proposed competition remedies:
- a deferred opt-in regime for certain add-on guaranteed asset protection sales;
- banning opt-out selling for add-on products sold alongside financial products;
- improving the provision of information for general insurance add-on products; and
- introducing a 'value for money' measure so that customers can easily compare general insurance products.
In particular, firms should note the wide applicability of the four remedies in each case and that, in all cases, sales to both retail consumers and commercial customers will be captured.
FCA market study
The study aimed to establish common findings across the general insurance markets. It focused on the travel, gadget, home emergency, personal accident and guaranteed asset protection markets, because these markets:
- differ in terms of complexity, price, familiarity to consumers and market maturity;
- have not been subject to recent thematic work; and
- involve product sales through different distribution channels.
The FCA identified the following issues with the add-on mechanism:(1)
- The add-on seller's point of sale advantage restricts customer choice and weakens customer engagement – the customer's focus on the purchase of the primary product means that the majority of add-on buyers do not shop around and are more likely to buy products that they do not want or need. Even with deferred add-on sales, the 'endowment effect' (where the customer feels that he or she owns the product from the outset of the purchasing process) and brand recognition weaken customer engagement in the add-on sale. Add-on product information is often introduced very late in the sales journey and this has a significant impact on sales rates. The behavioural experiment also showed that add-on buyers struggle to select the best deal, with half of the mistakes driven by selecting the cheapest primary product rather than reducing the cost of the overall bundle.
- Poor product value – the FCA estimated that customers overpay by at least £108 million a year for four of the products studied. The significantly higher profits enjoyed by add-on distributors compared to standalone distributors indicates poor product value. Low claim ratios (the proportion of premiums paid by customers that is paid out in claims) were observed in both general insurance add-on and standalone markets.
- Poor product awareness – both add-on and standalone buyers misunderstand basic policy details, with the majority of buyers answering questions on basic product features incorrectly. One in five add-on buyers were unaware that they had purchased add-on insurance only three months after the point of sale and, to the extent that they did recall the add-on purchase, had poor price recollection.
- Opt-out selling prevents active and informed decision making – opt-out selling (ie, any sale where the customer must override a default setting that pre-selects a purchase, which commonly takes the form of a pre-ticked box) typically results in customers buying products that they do not want or need. Customers are reluctant to override the 'authority' of an insurer or intermediary that has decided that they should purchase the add-on product. Opt-out selling increases the risk of customers unknowingly purchasing add-on insurance, thereby reducing the likelihood of customers making claims to which they are entitled.
- Severe impact on the guaranteed asset protection market – the add-on mechanism has a pronounced effect on the guaranteed asset protection market, influenced by guaranteed asset protection sales usually being face to face, where the add-on price, often presented as a discount to the primary product, may seem small against a high reference price (eg, that of the car which the customer is about to buy). Further, the customer, typically more risk sensitive because of the expensive purchase, is more receptive to the add-on sale. Broadly equivalent cover offered by standalone guaranteed asset protection products is typically half the price.
- Customers cannot easily compare general insurance products – the timing of information provided and complexity of options make it difficult for customers to understand or compare both the cover and price of add-on products. The absence of a commonly available measure to assess the monetary value of general insurance products reduces pressure for competitive pricing and high-quality products.
In designing the four competition remedies, the FCA has recognised that customers value an easy purchasing process and that they buy for peace of mind as well as on the basis of coverage and price.
Remedy 1 – imposing a deferred opt-in period for add-on guaranteed asset protection sales
The FCA has consulted on a deferred opt-in regime for certain add-on guaranteed asset protection sales.(2) The new rules will be confirmed by June 2015 and come into force on September 1 2015.
The deferred opt-in regime will 'pause' the add-on guaranteed asset protection sales process so that add-on guaranteed asset protection cannot be introduced and sold to a customer on the same day. The deferral period will start when the customer is given certain prescribed pre-sale information (Day 1) and will end on Day 4 when the distributor can contact the customer to conclude the add-on guaranteed asset protection sale. Customers will be able to 'break' the pause on Day 2, but customers must not be encouraged to cut short the deferral period and any customer-initiated contact must be monitored.
Remedy 2 – banning opt-out selling
On March 25 2015 the FCA launched a consultation(3) on its proposal to ban opt-out selling across financial services and has invited comments by June 25 2015. Finalised rules are expected to be published in the second half of 2015.
The ban will apply to any add-on product, whether regulated or not, when sold alongside a regulated financial services primary product by an authorised firm (or its representatives), subject to a few exceptions. All sectors, including those outside of general insurance, will be affected and the primary product will not need to be insurance based. This remedy complements the existing opt-out selling ban under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulation 2013, which came into force on June 13 2014 and applies where the primary product is non-financial (eg, guaranteed asset protection insurance sold alongside a car or mobile phone insurance sold alongside a handset). The new FCA rule will therefore close any gap in consumer protection (eg, breakdown cover sold alongside motor insurance or card protection sold alongside a credit card) without overlapping with the consumer contracts regulations.
There will be a number of exceptions to the proposed ban:
- auto-renewals of primary products;
- renewal of add-on products where the add-on product contains substantially the same terms and the customer has made an active decision to purchase the product at some point (ie, on an opt-in basis, whether originally or subsequently);
- unbreakable bundles, where it is a condition or requirement of the purchase that the customer buy the other products forming part of the bundle;
- free add-on products, which are included at no extra cost (although notably, the customer's active and express consent must be obtained before any charge at a later date is to apply);
- overdrafts; and
- unregulated credit union loans.
Firms which receive information from a price comparison website detailing the add-on selections which a customer has actively made will not need to re-ask questions when the customer is taken through to the seller's website, but can do so if they wish.
Remedy 3 – improving provision of information about add-on products
The FCA consultation paper on March 25 2015 also sets out the FCA's proposed guidance for price comparison websites and other participants in the distribution chain on good practice in providing information to customers about general insurance add-on products. The proposed guidance suggests that firms identify and introduce to customers the most common add-ons earlier in the sales process and improve customer comparability of primary product/add-on packages. It identifies as best practice showing to customers the annual (as well as monthly) price of add-ons.
The FCA will also amend the information provision rule under Insurance Conduct of Business Sourcebook 6.1.5R – which requires firms to provide appropriate and timely information to customers so that they can make an informed decision when buying general insurance products – to clarify that it applies to both standalone and add-on products.
Remedy 4 – introducing a value for money measure in general insurance markets
The FCA will publish a discussion paper in the second quarter of this year on options for introducing a value measure in general insurance markets, which will include the claims ratio proposal outlined in the FCA market study. This remedy is designed to incentivise firms to improve the monetary value of their products, drive competition and lead to better consumer outcomes.
For further information on this topic please contact Marisa Orr or Martin Membery at Sidley Austin LLP by telephone (+44 20 7360 3600?) or email (firstname.lastname@example.org or email@example.com or ). The Sidley Austin LLP website can be accessed at www.sidley.com.
(1) "General insurance add-ons: Provisional findings of market study and proposed remedies" (MS14/1), March 2014, available at www.fca.org.uk/static/documents/market-studies/ms14-01.pdf; and "General Insurance Add-Ons: Final Report – Confirmed Findings of the Market Study" (MS14/1), July 2014, available at www.fca.org.uk/static/documents/market-studies/ms14-01-final-report.pdf.
(2) "Guaranteed Asset Protection insurance: a competition remedy" (CP14/29), December 2014, available at www.fca.org.uk/static/documents/consultation-papers/cp14-29.pdf.
(3) "General Insurance Add-ons Market Study – Proposed Remedies: Banning opt-out selling across financial services and supporting informed decision-making for add-on buyers" (CP15/13), March 2015, available at www.fca.org.uk/your-fca/documents/consultation-papers/cp15-13.
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