Insurance update - Europe

In this week’s update, we report on a number of papers issued by the Financial Conduct Authority (FCA). The UK regulator has proposed remedies to improve competition in the Guaranteed Asset Protection (GAP) insurance market. The measures, if introduced, will affect insurers and distributors of add-on GAP insurance sold as part of a motor vehicle sale. The FCA has also issued the results of its thematic review into annuity sales. The report concludes that firms need to do more to improve annuities sales practices and introduces four annuities consumer outcomes. In addition, the FCA published the interim results of its retirement income market study which has found that competition is not working well in this market. Finally, the FCA is consulting on policy proposals to improve firms’ complaints handling including a new requirement to report and publish all complaints to the regulator.

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On December 12, the Financial Conduct Authority (FCA) issued a consultation paper on the detail of the proposed add-on Guaranteed Asset Protection (GAP) insurance remedy. The FCA carried out a market study into general insurance add-ons, finding that:

• the add-on mechanism often affects consumers’ decision-making and weakens engagement resulting in a point-of-sale advantage for distributors; and
• there is a lack of transparency and comparability about the value provided by general insurance products leading to poor value for consumers.

The FCA proposed four remedies, one of which related specifically to GAP insurance. Most of the 1.3 million GAP insurance policies in force were sold as an add-on during the motor vehicle sales process. This consultation paper proposes specific rules to improve competition in the GAP insurance market. These are:

The deferred opt-in

The market study found that the main harm to competition in the GAP insurance market is the advantage held by distributors of motor vehicles. GAP insurance distributors benefit from a point-of-sale advantage and from customer inertia – 83 per cent of buyers of add-on GAP insurance did not consider other policies when purchasing compared to 9 per cent of standalone GAP insurance buyers. The FCA proposes a deferred opt-in meaning there is a pause in the add-on GAP insurance sales process known as the ‘deferral period’. When add-on GAP insurance is sold as part of buying a vehicle, distributors cannot introduce the product and conclude the sale on the same day. The deferral period would start when the customer is given certain prescribed pre-sale information and end four days after that information is provided.

The FCA proposes a variation to enable a confident customer to make the purchase sooner if they wish to do so. If the customer initiates contact, the distributor can conclude an add-on GAP insurance contract on the day after the start of the deferral period. Customers who contact the add-on distributor must give their agreement that they are aware of the longer deferral period but want to proceed with the sale anyway. The FCA would expect firms to monitor high-levels of customer-initiated completions of sales and warns that this variation should not be used to circumvent the primary rule.

Information to encourage shopping around

The second component of the remedy package is the provision of prescribed information to encourage customers to consider whether they need GAP insurance and encourage shopping around for the most appropriate product. The FCA proposes to require firms to provide specified information, some of which is in addition to the existing regulatory requirements in ICOBS 6.1.5. Provision of this information would trigger the start of the deferral period. Distributors must provide customers with the following information, as a minimum, in a clear, accurate and prominent manner in writing:

• The premium of the add-on GAP insurance policy, separately from other prices.
• The main benefits, exclusions and limitations, as well as the duration of the policy.
• That GAP insurance can be purchased from other sources.
• Whether the GAP insurance policy is optional.
• How the deferred opt-in works, including the date on which the prescribed information was provided so that it is clear to the customer when the ‘clock’ has started.
• Where add-on GAP insurance is being offered alongside vehicle financing, it should be clear that GAP insurance can be purchased elsewhere.

The deadline for comments on the remedy is March 13, 2015. The FCA intends to publish final rules in a Policy Statement by June 2015 with a view to the rules coming into force on September 1, 2015. These rules will impact any firm that distributes add-on GAP insurance in connection with motor vehicle sales, insurers that underwrite GAP insurance products and other intermediaries involved in the distribution of GAP insurance.

These requirements only apply to GAP insurance sold as an add-on as part of a motor vehicle sale. Standalone GAP insurance and GAP insurance sold alongside motor vehicle insurance, for example, are excluded from the scope of these proposals.

Interestingly, the FCA also cites the recent Supreme Court decision on commission disclosure in Plevin v Paragon Personal Finance. While it does not affect these proposals directly, the FCA notes that it is considering the issues raised by the judgment and suggests that firms do the same. For our analysis of Plevin please refer to our Insurance update - November 28, 2014.

For further information:

CP14/29 Guaranteed Asset Protection insurance: a competition remedy

On December 11, the FCA published the results of a thematic review into annuities sales practices (TR14/20). The FCA found evidence that firms’ sales practices contributed to consumers not shopping around and switching when purchasing an annuity. The FCA found that sales practices may have led to consumers buying the wrong type of annuity and, in particular, not purchasing an enhanced annuity when they may have been eligible for one. As a result, some consumers may miss out on the opportunity of a higher income in retirement as a result of these sales failings. The FCA has also found examples of where the Association of British Insurers’ (ABI) Code of Conduct on Retirement Choices is not being applied.

The FCA is asking firms to do further work to determine if the findings of the thematic review are indicative of more widespread problems and consider if the issues raised in the review have led to poor consumer outcomes – in particular to discover whether customers with certain medical conditions or lifestyle factors have missed out on a higher retirement income. Importantly, the FCA states that it will not apply new standards retrospectively but will examine the period following the FSA’s thematic work undertaken in relation to Open Market Options in 2008.

As yet it is unclear whether any enforcement action will be taken as a result of poor conduct within individual firms. The FCA is now planning to work with firms in order to ensure that they improve annuities sales practices in accordance with the four FCA annuities consumer outcomes. The outcomes have been developed with regard to the risks to consumers in the market, FCA rules and principles in addition to the ABI Code of Conduct.

The four FCA annuities consumer outcomes are:

Outcome one: Consumers are actively encouraged (and not discouraged) to shop around, and can make informed decisions about how and when to buy annuities.

Outcome two: Consumers are provided with relevant and timely information about the potential benefits of any guaranteed annuity rate or risks of a market value reduction that exists in their existing pension contract.

Outcome three: Consumers are provided with appropriate and timely information about (a) the benefits of enhanced annuities and their potential eligibility; (b) an enhanced annuity being available on the open market (particularly, where their pension provider does not offer one); and (c) the potential for variation between different providers’ underwriting and its impact on the income offered.

Outcome four: Consumers are provided with appropriate information about the different annuity options available to them (joint v single, level v escalating, and various guaranteed periods) and the implications of selecting different annuity types.

The FCA will review the additional evidence gathered by firms and consider whether further action is needed.

For further information: TR14/20: Annuities sales practices

In addition to publishing the results of its thematic review, the FCA has also published the interim results of its retirement income market study. The FCA has found that competition is not working well in this market as consumers are missing opportunities to shop around and switch providers and are not therefore getting the best possible annuity.

The FCA is proposing five market remedies which seek to address the issues identified in the interim report. The objective of the remedies is to increase the usefulness of the information given to the customers not by providing yet more information, but providing better information that seeks to encourage shopping around and switching and tackling customer inertia.

The provisional remedies are as follows:

• Firms will be required to make it clear to customers how their quote compares relative to other providers operating on the open market.
• Firms and pension guidance providers must take into account framing effects (i.e. how information is set out) and other biases when designing customer decision making tools.
• The FCA will work with the Government to develop an alternative to the current ‘wake-up’ pack.
• In the long-term, pension ‘dashboards’ should be created which enable customers to view their individual entitlements including all of their defined contribution pension savings. Over time these dashboards could be developed to enable customers to view entitlement to defined benefit and state entitlement.
• Ongoing monitoring by the FCA.

Interested parties are asked to provide comments on the study by January 30, 2015.

For further information:

FCA publishes interim results of market study into retirement income (MS 14.3.2)

Last month, the FCA published its thematic review into complaint handling involving 15 major retail firms and five trade bodies. The FCA has considered the findings of the review and is now consulting on a number of policy proposals in CP14/30 Improving complaints handling. The proposed changes to the complaints rules affect all FCA-regulated firms including insurers and intermediaries.

CP14/30 contains three policy proposals which are intended to improve the way complaints are identified, recorded and handled. The FCA is proposing to:

• Extend the time period for dealing with a complaint less formally, to increase the efficiency and speed with which complaints are resolved. Firms are currently required to send a ‘final response’ letter to complainants by the end of the next business day following receipt of the complaint. The FCA proposes extending this deadline to the end of three business days which, it says, will benefit consumers by allowing firms longer to deal with less serious complaints informally without having to escalate them to a formal complaints process.
• Require firms to send a written communication to all consumers whose complaints are handled by the end of the three business-day period, explaining that they have the right to refer a complaint to the Financial Ombudsman Service (FOS) if they are not satisfied. The FCA proposes to amend its rules to allow consumers to refer their complaint immediately after receiving a response from the firm, rather than having to wait eight weeks to refer a complaint to the FOS as is currently the case.
• Ensure firms report and publish all complaints to the FCA – not just those complaints resolved after the close of the next business day, as at present.

The regulator is also proposing measures to increase transparency around complaints data including a new ‘complaints return’ that firms are required to submit twice a year. The key elements of the FCA’s proposal are:

• More focus on information that may be useful to consumers, as well as information that is useful for the FCA’s functions.
• A revised complaints return, with a new list of categories of complaint, set against product or service groupings.
• New metrics added to the complaints return relating to the number of sales, policies or accounts, depending on the product/service grouping. The FCA’s complaints publications will include some contextualisation-based information.
• To record and publish data on how quickly complaints are dealt with.
• A simplified complaints return for firms with fewer than 500 complaints.

The consultation closes on March 13, 2015.

For further information:

FCA consults on complaints handling improvements