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As the Financial Conduct Authority’s (FCA) first market study into the practice of selling insurance add-ons gets underway, Chris Finney, Partner at Edwards Wildman Palmer, advises financial services firms that have been asked to complete an FCA market study questionnaire to consider carefully what they say, and how they say it.
The FCA is to conduct its first market study into the selling of insurance ‘add-ons’. The FCA will investigate whether there is sufficient and effective competition in the sector and whether customers are being provided with sufficient information to make informed decisions on their insurance products at the time of sale.
What’s the aim of the FCA market study?
The FCA has a competition objective: ‘To promote effective competition in the interests of consumers in the markets for regulated financial services’. The FCA’s market study is intended to help it meet this objective in respect of the general insurance add-on market. The aim of the study is to help the FCA:
• understand competition in the general insurance add-on market
• understand whether the market, and the competitive forces at work within it, are meeting consumers’ needs, and
• work out what (if anything) the FCA can and should do to make competition in the market work more effectively for consumers
What sort of data or trends are the FCA looking for?
The FCA wants to find out (for example):
1. Whether add-on insurance policies are too expensive—for example:
◦ If a consumer is offered an insurance policy at one price when he buys a car, a mobile phone or a holiday, could he buy materially the same cover from another provider at another time, for a much lower cost?
◦ Are profit margins and commissions in the distribution chain much higher than normal commercial rates?
2. Whether add-on insurance policies generally meet consumers’ reasonable needs and expectations—for example:
◦ How well do consumers understand these policies, and the things they will and will not cover?
◦ Are these policies generally sold in a way that helps consumers to understand them, or in a way that creates misunderstanding and increases the probability that consumers’ expectations will not be met?
3. Whether consumers are more or less likely to buy an add-on insurance policy if it’s offered or sold in a particular way and, if so, whether taking that approach to sales is in the consumer’s best interests or not—for example:
◦ Are consumers more likely to buy cover when they buy the associated product or service, because that’s when the value of the product or service, or the risks associated with owning or buying that product or service, are most obvious?
◦ If the consumer buys at that point, is he more likely to frame his value-for-money and other purchasing decisions by reference to the price of the product or service he’s buying, than the price he would have to pay if he bought equivalent cover elsewhere?
◦ What other factors do consumers take into account (if any) when they buy add-on insurance with the main product or service or on another occasion?
4. Whether consumers shop around and if so, to what extent or, if not, why not—for example:
◦ Do consumers buy because they feel under a moral obligation to do so?
◦ Do they realise some or all of the add-on insurance products on offer are available from other providers at other times?
◦ What part (if any) does convenience play in any decision not to shop around?
5. Whether there are barriers to entry for new firms, or barriers to expansion for existing firms.
Does this present concerns or opportunities?
There is a significant risk the FCA will intervene in the way the general insurance add-on sales market operates and that, if it does, its intervention will reduce:
• the number of policies that are sold with the main product or service, and
• the number of policies that are sold overall
Experience also suggests that the FCA will look for what it regards as ‘poor sales practices’ and ‘excess profits’ in the general insurance add-on market and that, if it finds these things, it will take enforcement action against some firms—as it should. The concern is the FCA’s view of ‘poor sales practices’ and ‘excess profits’ is likely to be materially different to the views previously expressed by the Financial Services Authority and (as a result) the views commonly held in the market. Enforcement action in these circumstances may therefore be a cause for concern as well.
There is a reasonable chance, if there are barriers to entry or barriers to expansion, the FCA will lower or remove them if it can. There is also a significant chance FCA market intervention will shift some sales from the point when the main product or service is sold, to another occasion in a way that will help providers operating in the non-point of sale environment to increase their market share—especially if they can offer more competitive terms or pricing.
How might the market study develop?
The FCA is expecting to publish the results of its evidence gathering and analysis in early 2014, together with its proposals for market intervention (if any).
Recent FCA rhetoric, and its approach to similar issues, suggests that it will intervene in the market to try to make it work more effectively and efficiently for consumers. When it does, I would expect it to look at ways of reducing the pressure to buy add-on insurance that some consumers feel when they decide to buy the main product or service. I would also expect the FCA to look at ways of:
The FCA also says it will work hard to find poor practice somewhere, and work equally hard to be seen to punish it when it’s found. I would therefore expect to see it taking action against at least one insurance intermediary at around the same time it publishes its report and proposals.
Finally, the FCA states it intention to express value judgments about add-on insurance policies in general, or add-on insurance policies of a particular kind—especially if the profit margins in the distribution chain and/or the number of rejected claims are high.
Should financial services firms be taking any particular action now?
Firms that have been asked to complete an FCA market study questionnaire should carefully consider what they say, and how they say it.
Firms should also take a careful look at their sales practices, premiums, profits and so on. Are they sure they can explain what they do, how they do it and why? And that they can explain these things in the ‘new language’? For example, are their policies ‘sold’ (because the sale is in the best interests of the firm) or ‘bought’ (by well-informed consumers, who believe—on reasonable and rational grounds—ie the product offers good value for money and will meet their reasonable needs)?
Firms may also wish to contingency plan against the changes that are most likely to follow in this market—especially if they rely on the sale of general insurance add-on policies for a significant part of their income.
This was first published as a Legal News Analysis piece in LexisPSL Financial Services.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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