On 7 June 2013, the FCA published the report on its thematic review of motor legal expenses insurance (MLEI). MLEI provides cover for legal expenses incurred when a not-at-fault policyholder tries to recover uninsured losses from the driver who caused the accident. Some policies also provide cover for criminal defence costs where a policyholder is facing prosecution. MLEI is typically offered as an extra to motor insurance policies, often on an opt-out basis. The FCA’s research suggested that most of the benefit to consumers of this sort of cover comes from pursuing personal injury claims.
The review, the first of the FCA’s thematic projects, covered 16 firms of varying sizes and structures that make up 75% of the UK private motor industry by gross written premium. It also included research on consumer attitudes and understanding of MLEI. While the majority of firms believed that consumers understood MLEI, the consumer research did not corroborate this. Around 4/5 of customers believed that the product provided cover for legal costs if they were at fault for an accident and/or sued by another driver. This clear lack of understanding, coupled with often inadequate explanation at point of sale, was cited as a major cause for concern.
The FCA regards MLEI as a convenience purchase because it packages together products and services which can be obtained elsewhere. However, it also regards it as a product that can be useful to some consumers at least in the current market. This is particularly relevant given the UK’s recent legal funding reforms, which make “no-win, no-fee” claims a less attractive option than before because many personal injury claimants will now be expected to pay their lawyer a success fee (under a Conditional Fee Agreement) or a proportion of their damages (under a Damages-Based Agreement). If MLEI is available to support a claim for uninsured losses against an at-fault driver, the obligation to pay a success fee or a proportion of damages is likely to fall away. MLEI probably also means that the insured is more likely to be able to claim compensation for his uninsured losses because the reasonable prospect of success (RPS) test employed by insurers when they decide to fund a claim is generally lower (51% chance of success) than the test applied by no-win no-fee lawyers (75% chance).
Even so, the FCA now expects insurers to review the level of cover they provide and its potential value to consumers to make sure that each of these things is appropriate from a consumer perspective. The FCA has also explained that it regards the payment of criminal defence costs as valuable to consumers, but that a significant proportion of this value may be lost if cover does not extend to prosecutions where alcohol or drugs are a potential factor – something that many will regard as surprising from a public policy perspective.
The report raises serious concerns about the way MLEI is sold. The customer is generally asked whether he wants the product at the end of a long buying process. His decision is often, therefore, made without too much thought. This is exacerbated by:
- the consumer’s apparent lack of understanding about what MLEI is, and what it does and does not provide;
- the fact that the product is often sold as an add-on, on an opt-out basis - many consumers appear to lack the confidence to opt-out when the insurer’s default position is to include the product unless the consumer deselects it;
- the fact that the product is sometimes sold “bundled” with other add-ons; and
- the insurer’s response to de-selection, which may include alarming pop-ups which ask the customer whether he can really afford to be without MLEI.
The FCA therefore now expects MLEI providers to:
- review their MLEI policies, to make sure they are useful and provide value to consumers – especially if the policy includes protection against the costs of defending a criminal prosecution, but that cover is subject to an RPS test or it is subject to drug, alcohol or other material exclusions;
- review their sales practices, including considering replacement of the opt-out model with an opt-in system, to make sure their practises are fair, before adding that bundling in particular is “not consistent with fair customer treatment”; and
- more clearly explain the scope and benefits of MLEI at all stages of the process.
The FCA is clearly also demonstrating its keen interest in behavioural-economics-informed (so-called “nudge”) selling practices, and takes a dim view of them when they may lead to mis-selling. This would be difficult to object to where a nudge is clearly in the seller’s interest at the expense of the consumer, but such clear-cut judgments will be rare. It raises concerns that in following the FSA’s lead and making value judgments on behalf of the average consumer, the FCA risks discouraging people from buying products from which some would benefit. Such policies also imply that consumers cannot be trusted to make informed decisions for themselves. It is, of course, important for the regulator to intervene to curb mis-selling; however, actively steering all consumers away from products the regulator does not consider useful in the general case could be a step too far.
Follow-up will be carried out in a year’s time, and firms who cannot justify their continued use of these practices are likely to face regulatory action. Some firms may consider avoiding the opt-in/opt-out debate altogether by including MLEI as part of their core motor offering. However, this may be difficult to justify in a market where most consumers buy on price, as it may cost the insurer its competitive edge. It is also important to note that this will not absolve firms of responsibility, as the report says, “firms that automatically include MLEI still need to provide a clear explanation of what the product covers and what it does not.”
The FCA’s report will be added to the findings of the “General insurance add-on study” which the FSA announced in December 2012. Several oblique references to opt-out selling practices in other types of insurance (eg home insurance) suggest that a similar approach may be applied across the industry, with the regulator expecting “nudges” to be more clearly in the consumer’s interest rather than what might otherwise be regarded as the other way around.