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A consumer’s view

Consistency is not something for which the FSA is well known and nowhere is this more apparent than in the regulation of general insur-ance which came into effect on January 15.

The FSA has insisted upon stringent disclosure rules by IFAs with regard to commission on investment business but no such similar requirement has been imposed on general insurance.

Why not? The less than convincing explanation from an FSA spokesman is that after considering all represent-ations, the regulator decided that lighter-touch regulation was required with general insurance.

The FSA’s argument is that the sums of money involved in general insurance are usually not big compared with investment premiums and that the consumer stands to lose proportionately less.

Tell that to the hundreds of thousands of elderly people who bought what they thought was whole-life cover and now cannot afford to pay the premiums because they did not understand that the policy was reviewable and that premiums would rise.

Most of these policies were taken out by the over-55s on a second-death basis and were intended to cover an inheritance tax liability but many policyholders have been paying for 10 years only to discover when the premiums double or even treble that they cannot afford to maintain the policy and it has all been money down the drain. The loss in this situation can run into tens of thousands.

Because of the age at which the policies commenced and the fact that these policyholders were, by definition, relatively wealthy because they sought to mitigate the worst effects of IHT, the premiums were not cheap to start with. Premiums of sev-eral thousand a year were, and are, commonplace.

For example, a policyholder who took out a jointlife second-death policy with Skandia Life in November 1985 was paying 1,781 a year for just over 60,000 of cover. That was a hefty premium in 1985. But today, after several rev-iews, that premium has been increased to 5,829 a year.

Commission was undoubtedly a significant factor in some IFAs’ recommendations of these policies and could also have accounted for the forgetfulness of others in drawing attention to the premium and cover reviews written into the small print.

But according to the FSA, commission is not an issue. The worst aspect of the general insurance regime is that even if the customer asks what commission the IFA is getting on general insurance business, the IFA is not obliged to reveal his remuneration.

The fact that some IFAs may choose to do so voluntarily is irrelevant. It would be a simple matter to require this information to be disclosed on the key features document and there is no logic in leaving it out but logic is not something with which the regulator seems too concerned.

The notion that commission disclosure on general insurance is unimportant is nonsense. Broker Burgesses has calculated that the commission on many loan protection, MPPI and income protection policies is 75 per cent of the first year’s premiums. If the consumer knew that this was the case, might they not be tempted to ask for a discount? But they have no means of finding out this vital information.

Every time the FSA comes up with inconsistent and deficient rules, it not only loses credibility but it lays itself open to the criticism that it is too swayed by industry lobbying rather than common sense.

The retail sector would be just as well served if most of the regulatory panoply was abolished and the powers of the Financial Ombudsman were strengthened.

The FSA has shown that regulation cannot prevent fin-ancial disasters or at least it has so far singularly failed to do so. If this is the case, adequate compensation and the free arbitration service provided by the FOS will deal with all but the most complicated cases.

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