In October 2011 the Financial Services Authority (FSA) published proposals for new rules governing the sale of non-investment products as part of a packaged bank account (CP11/20). The FSA has now published feedback (CP12/17) on its proposals and sets out some further amendments and steps to implement the new rules with effect from 31 March 2013. The FSA believes that this date will allow sufficient time for firms to implement the changes.
What are bundled products?
A packaged bank account is typically a current account bundled with a range of insurance policies and other benefits such as access to airport lounges and music downloads. This market has grown significantly in the UK with more bank accounts being offered for a fee with additional benefits.
The issues identified by the FSA
Although in many cases such products can represent good value, even where parts of the package are not used, the FSA is concerned that consumers may not understand the limitations which may have an impact on their eligibility to claim under the policies. Policies are sold without sufficient attention to their suitability for the individual customer. One common issue is that travel policies are bundled without sufficient attention being paid to the exclusions under the policy for certain pre-existing medical conditions. A customer who might rely upon the insurance included in their bundle may not have had the opportunity to understand what is included and the value of that product. Furthermore, bundling products makes it difficult for customers to understand the cost of the insurance they are purchasing. Consequently, the proposals in CP11/20 focused on eligibility, suitability and price transparency.
The new eligibility rules to be included in the Insurance Conduct of Business Sourcebook (ICOBS) specify the steps a firm must take to establish whether a customer is eligible to claim under each policy in the package, and to inform the customer whether or not they would be eligible to claim. Where the customer proceeds with the policy, a firm must record the eligibility assessment and retain it for at least three years.
Firms will also be required to provide customers with an annual eligibility statement. This is intended to remind customers to review their eligibility under each policy on an annual basis. Firms have requested that the FSA clarify the requirements for the content and distribution of the annual eligibility statement. CP12/17 proposes an additional rule to ensure that the customer is alerted to the relevant information. This rule also takes into account feedback suggesting an exception to the general rule (that the statement does not need to include personalised information) for travel insurance. Ineligibility under a travel insurance policy is a significant risk and the FSA believes this to be the one area where it would be proportionate to include personalised information, such as when a customer reaches the age limit under the policy. The rule therefore provides that:
- where a firm is aware that anyone covered under a travel insurance policy is already over the age limit or will reach the age limit for cover under the policy before the next statement is due, it must state this clearly and prominently in the statement; and
- the statement must not be part of another document or mailing and must contain only the information required under the annual eligibility statement rule, i.e. the qualifying requirements to claim each of the benefits under the policy.
As an additional point, the FSA makes it clear that the new eligibility rules will apply to all types of policies provided as part of a packaged bank account, including payment protection and pure protection policies. To avoid confusion, the FSA intends to switch off the specific eligibility provisions that currently apply to payment protection policies in a packaged bank account (contained within ICOBS 5.1.2R and 5.1.3G). Similarly, specific guidance on suitability of protection policies found in ICOBS 5.3.2G will be switched off.
The FSA received a variety of responses in relation to transparency. Although the FSA is keen to improve transparency in the bundled products market, it acknowledges that it is difficult to know what information would be most beneficial for consumers when choosing a product. There is a risk that customers will not be interested in the information they receive and the amount of disclosure required will have the effect of putting customers off buying bundled accounts. The feedback on the proposals in CP11/20 did not indicate one answer for improving transparency and, therefore, the FSA will consider a possible suite of measures to help consumers compare packaged products using the regular information it receives from firms.
In contrast, respondents unanimously agreed with the FSA that the requirement to separately disclose premiums for each insurance policy under ICOBS 6.1.13R is not helpful to consumers. The FSA believes it is unlikely that a breakdown of premiums will affect a consumer’s decision when choosing a packaged account and therefore proposes switching off ICOBS 6.1.13R with effect from 1 January 2013, subject to consultation responses.
An uncertain future for bundled accounts?
Finally, CP12/17 notes that ‘tying’ is banned in the proposed changes to the Insurance Mediation Directive. Tied products would be those which could not be bought separately. In the consultation the FSA states that: “The effect of these proposals is not yet clear, but it is possible that the current packaged bank account design where the customer chooses a fixed package for a single price might not be permitted”. Given the uncertainty of the final provisions for revised mediation rules and a likely implementation date of 2015, the FSA plans to continue trying to improve transparency in the current market.
The FSA invites responses by 29 October 2012 and expects to issues a policy statement in December 2012 containing final rules. In the meantime, the FSA will continue to monitor the packaged products market particularly in relation to transparency and will begin by looking at the effect of financial promotions on consumers’ understanding of this area.
For further information: CP12/17 Packaged bank accounts