Under proposals revealed by Money Marketing last week, the FSA is looking at creating two separate regulatory regimes – one for protection products and one for commoditised insurance products.
Commoditised insurance products are expected to include travel, car, personal accident and private medical insurance while protection products are expected to include term insurance, all types of payment protection insurance, income protection and critical-illness cover.
The FSA is considering whether to strengthen the rules around protection products such as income protection, PPI, critical illness cover and life insurance in a bid to reduce consumer detriment in these areas.
The new proposals could also see commoditised insurance products deregulated to meet the minimum standards which are currently in place through the Insurance Mediation Directive.
CBK principal Peter Chadborn says this fragmentation of regulation could be confusing for providers and advisers operating across different product areas.
He says: “What happens if you are an adviser, distributor or provider that works across all markets? There would be effectively three different regimes if you include Cob and two Icobs to adhere to which would be difficult.
“Advisers have enough on their plates at the moment, what with trying to get their heads around principles based regulation, treating customers fairly, new Cob rules and now this.”
Bright Grey products director Roger Edwards says he does not see the need to tighten the current Icob rules on protection products.
He says: “If the customer has been told what their options are and they can make an informed choice then regulation is working and we do not need to change that. I fail to see why we need to change things for protection products again unless there is definite consumer detriment.”
But the FSA says it is considering strengthening the regime in light of its recent findings on criticalillness cover and PPI, which it says shows consumer detriment is occurring. It believes tightening regulation could combat this.
Edwards believes the FSA is sending out mixed signals by talking about lightertouch regulation and less prescriptive rules on the one hand and tightening up rules on the other.
He says: “This will add a layer of complexity that perhaps we do not need. I wish the FSA would just lump it all under one category with some simple, sensible rules or at least split it into two sensible categories, such as insurance for people and insurance for inanimate objects, such as buildings and contents.”
The knock-on effect of introducing more stringent rules on protection products could have a detrimental impact on the market because, as Royal Liver chartered insurer Mark Davies points out, more regulation means more paperwork and time for advisers.
Davies says: “Advisers may have to fill in more documentation and paperwork, with the customer and that takes time out of the advice process and any extra financial costs may be fed back to customers.”
The proposed relaxation of the commoditised insurance regime has also led to concern among intermediaries and providers.
The FSA stresses that deregulation of the GI market does not mean that rules would be removed altogether or that brokers and companies would no longer have to be authorised.
The proposal is that the stringent rules in areas such as travel insurance would be reduced and relaxed because the FSA says there is little evidence of consumer detriment in this market.
The IMD applies to intermediaries but not to providers and when general insurance regulation was introduced in January 2005, part of the reasoning behind its introduction was to regulate intermediaries and providers equally to ensure a level playing field.
If the FSA is proposing to relax Icob rules for general insurance to below minimum IMD standards, as some sources suggest, it would create an uneven playing field as insurers would have less of a regulatory burden than advisers.
Davies says: “It would seem a retrograde step to increase regulation on the advice route and decrease it for insurers. It would push up costs for advisers which may be fed back to the consumer and would also mean it would take more time to give the consumer high-quality advice due to increased documentation needed for compliance.”
British Insurance Brokers’ Association head of compliance and training Steve White says: “We support the Government’s original decision to apply the Icob rules to insurers as well as intermediaries. 0.”
FSA spokesman Robin Gordon Walker says: “The focus on commoditised insurance is around reducing prescriptive rules because there is less consumer detriment in this area.
“We are looking at the possibility of strengthening the rules on protection products as a result of our findings on PPI and other more complex insurance products. Two different Icob regimes might be the outcome but we cannot predict this yet.”
The outcome of the Icob Review is due to be published next month and will include recommendations on the new rules.
It is expected that the industry will be able to give feedback to the FSA on its recommendations but it is not believed that an official consultation will be included.