The Protection Issue and Regulation Cover Forum, 5 October 2006 Stephen Walton Manager, Retail Firms Division Financial Services Authority

Agenda Take stock of work so far ICOB effectiveness review the “age” issue

The story so far … Regulation of insurance intermediaries from January 2005 About 8,000 newly authorised firms – from brokers to car showrooms Time for the regime to bed down Thematic work – emphasis on protection products (where most evidence of market failure)

Payment protection insurance Autumn 2005 Dear CEO letter and Reports of –thematic work and –mystery shopping Autumn 2006 Report on follow up round of visits to firms

PPI: Key messages Whether oral disclosures provide clear, fair and not misleading information about the product, in terms of: –exclusions and policy terms; and –issues relating to single premiums. Establishing eligibility and suitability.

Critical illness Review of financial promotions (some evidence of scaremongering) Review of policy documents Visits to over 40 firms Mystery shopping

CIC: Key issues No particular evidence or rule breaches, but still many claims rejected. We focused our messages on whether firms treat their customers fairly: –How firms explain to consumers the nature (and limitations) of the cover –Consumer understanding of the need to disclose medical information –Changes to underwriting terms – how do firms communicate the significance and refresh advice?

ICOB Effectiveness review – timetable Q1 07Report of effectiveness review Q2 07Consultation on rule changes, if necessary Q4 07Make rule changes, if necessary Learning lessons – ICOB review

Recap on our approach ICOB review Is there a case for product differentiation? Products where there may be scope for deregulation What does deregulation look like? Products where there’s no scope for deregulation Are current rules effective? or Is a different combination of rules required? Is there a case for more principles-based regulation? Role of industry codes Reliance on Principles or higher level rules

Is there a case for product differentiation? Selected 11 personal lines products –Motor –Household –Pet –Travel –Health cash plans (HCPs) –Standalone personal accident –Private medical insurance (PMI) –Term assurance (inc pensions term assurance) –Critical illness –Income protection (IP) –Payment protection insurance

Desk based initial market failure analysis Info provided by industry Market reports FSA data – complaints, claims ratios, PSD, RMAR Supervision & enforcement experience inc thematic work FOS

Indicators of consumer detriment ProductPrice dispersion Immaterial focal points Secondary /linked purchases Commiss- ions Complex products Infrequent purchases Switching costs/lock ins Motor Household-- (33%)---- Pet Travel (price only) FSA does not regulate ---- HCPs-?----- Personal accident ?? --- PMI??-- - Term?- Only PTA - CIC?? IP?? PPI

ICOB or COB? (the “age issue”) Regime for sales of “protection products” depends on the term of the policy and the age of the policyholder. Leads to increased costs for some firms and limits the availability of protection products. Consultation proposed two options: i) Increase age from 70 to 80 ii) Remove age and term conditions

Consultation responses Overwhelming support for proposal to remove age and term condition. However, this would mean some whole of life products with investment characteristics would become ICOB regulated. ABI have proposed a ‘third option’ to mitigate risks from this.

Where next? Working on feasibility of option three Continue to liaise closely with HMT Aiming for January Board with rules taking effect early next year.

Next steps Publication of PPI report Output from ICOB effectiveness review Conclusion of the “age” issue for protection products