When the Financial Services Authority (FSA) implemented its Banking Conduct of Business regime on 1 November 2009, it promised to review the packaged bank account market. It finally published its proposals on 27 October 2011 in "Consultation Paper 11/20** Packaged bank accounts: New ICOBS rules for the sale of non-investment insurance contracts".
Between 2009 and 2011, the FSA did all it reasonably could to stop the mis-selling of Payment Protection Insurance (PPI). Some mis-sales occurred because consumers were sold PPI when they would never be able to meet the eligibility criteria for making a claim.
In those days, the FSA was a "principles based regulator". It preferred to use principles to require firms to achieve particular outcomes, rather than making prescriptive rules that told firms what to do.
That approach worked well enough. The FSA's handbook was slightly shorter than before. But there was no obvious detriment; the courts were content to allow the FSA to rely on a single principle (principle 6 of its Principles for Businesses (treating customers fairly)) to stop PPI mis-selling and require compensation to be paid to those consumers who were mis-sold.
How times have changed.
The FSA's proposals
Today, the FSA's "primary concern is...that customers might rely on one or more of the insurance policies [in a packaged current account] and unexpectedly find that they are ineligible when they try to make a claim".
That policy shift may be pragmatic. The policies included in packaged current accounts are often designed to cover small losses. And they are sold as part of a package, not on a menu basis.
Unfortunately, the FSA's proposals are less pragmatic.
The proposed rules
Although the FSA accepts that "bundling...different products together creates a large amount of information for the consumer to assimilate and therefore an increased risk...that consumers may not adequately understand whether each policy meets their needs", its proposals will require firms to produce and give their customers more.
- Eligibility Firms will be required to:
- check whether each customer is eligible to claim the benefits under each policy in a packaged current account
- tell the customer whether they are eligible
- record the assessment and keep it for at least three years.
- Demands and needs If the firm is giving advice, it will be required to:
- establish each customer's demands and needs using information already available to the firm and by obtaining more, including details of existing insurance cover
- establish whether each policy included in the package is suitable for the customer's demands and needs
- tell the customer if any demands and needs are not met
- explain its recommendations and the reasons for them
- record its assessment and recommendation and retain it for three years.
- Annual eligibility statement Firms will be required to send an annual eligibility statement. This should explain the eligibility requirements for making a claim under the relevant policies, before recommending that the customer reviews his circumstances and whether he meets the requirements.
This all seems right and proper. But does it work from a cost-benefit perspective?
Firms will incur set up costs of up to £21 million as they prepare for compliance with these rules. They will also incur more than £13.5 million of annual costs complying with the rules. These estimates do not include the costs banks will incur reviewing and amending their insurance mediation agreements. In addition, the FSA has not told us how much firms have spent complying with FSA research information requests; nor how much it spent developing these proposals and "road testing" them with consumers to check their value. The FSA is also silent about the cost of storing assessments and recommendations when there are already more than 10 million packaged accounts in existence and the market could reach 50 million accounts over time.
So what about the benefits?
Well, at least from one point of view, there won't be any. As the FSA's consultation paper explains:
- "...there is evidence of claims being rejected because the customer is ineligible; complaints about policies bought within a packaged bank account for which the complainant is ineligible, and about the suitability of insurance policies recommended in advised sales".
Even so: "the proportion of claims rejected and the number of complaints relative to the number of customers is not significantly out of line with equivalent standalone policies".
This perhaps suggests there is nothing wrong with the current sales process for packaged accounts. In effect, the outcomes are materially the same whether the relevant insurance is sold as part of a packaged account under the current rules or on a standalone basis, where the rules are more prescriptive (and akin to the proposed rules for packaged accounts).
- "...most of the benefits of our proposals [will] come from the eligibility and suitability requirements at the point of sale. The annual statement will give consumers an opportunity to re-assess if their circumstances have changed and whether the insurance policies in the package continue to meet their needs. Given what we know about consumer behaviour...we cannot be certain...they will act on it".
Consumers buy packaged current accounts for many reasons. Some want the insurance cover included in the package. Others are more interested in the preferential interest rates and overdraft facilities on offer, and so pay no heed to the insurance that comes as part of the wider package.
Even so, if the FSA implements its proposals, every consumer will have to be told what the eligibility criteria are for each of the insurance policies included in the packaged account, whether or not eligibility is material to him. Is that really necessary? We wonder whether the FSA's existing principles, together with a paragraph or two of guidance, might be used to deliver the same benefits with less prescription and for less cost?
With the FSA's consultation period due to close on 27 January 2012, firms are encouraged to respond so their comments can be taken into consideration.