Extensive work carried out by the FSA, ABI and FOS shouldhelp restore confidence in reviewable rate products, as NickKirwan explains
Almost two years ago the Financial Ombudsman Service (FOS) raised the question of how the Unfair Terms in Consumer Contracts Regulations (UTCCRs) 1999 apply to reviewable rate insurance products.
The UTCCRs ensure that consumers are protected against unfair terms in contracts, in particular, where there is an imbalance in power and one party has the power to alter the contract, potentially to the detriment of the other.
As rates on a reviewable policy can be changed by the provider without the express permission of the policyholder, it was especially important to ensure that these contracts fully comply.
Confidence The FOS put their questions to the Association of British Insurers (ABI) and let the Financial Services Authority (FSA) know they had done so.
This triggered a stream of work involving all three parties, working together to find the appropriate solutions that would work in practice.
At first this put a cloud of uncertainty over reviewable rate products, but the recent publication of the FSA Statement of Good Practice (SoGP) and the ABI advice on the subject has lifted this cloud, which comes as very welcome news indeed.
For consumers, it means they can buy reviewable rate products with confidence.
For intermediaries, it means that comparing reviewable products becomes much simpler, so it is easier to give good advice.
The ABI advice and the FSA SoGP both give lots of detail on the practical considerations.
Indeed, the FSA SoGP covers inte rest variation clauses as well as insurance.
However, for reviewable rate insurance prod ucts, the two documents essentially boil down to the following key points:
• Making sure that the basis of reviewable premiums is clearly explained to the consumer.
• Ensuring that review clauses are operated fairly in practice.
Taking the issue of clarity, anything that helps make the terms and conditions of financial products clearer to consumers is welcome.
Intermediaries have a key role to play by explaining to their client, before the sale is concluded, how reviewable premium policies work as well as ensuring that every client gets the appropriate product literature for the policy they are taking out.
Equally, insurers need to ensure that their product literature clearly explains reviewable rates.
The ABI advice gives examples of how this can work in practice.
The FSA statement and ABI advice both set out important safeguards to ensure reviews are operated fairly in practice.
One fear that some intermediaries may have had in the past was that insurers might be offering a reviewable rate product cheaply at the start with the view to increasing the cost, and the insurers' profit margins, when the premiums are reviewed at a later date.
However, detailed rules in the FSA statement prevent this happening.
There are also detailed provisions that ensure any premium increase at a policy review is proportionate to any change in the assumptions on which the premium is calculated.
Furthermore, there are provisions to ensure that changes can only be made for valid reasons.
This means that any change in premium will be fair, and proportionate to the valid reasons for making the change.
Potential disputes Importantly, the FSA recognises the crucial role that reviewable rate products play in the insurance market.
They often increase consumer choice by providing lower cost alternatives to their guaranteed cousins.
They also play an important part in product innovation.
Insurers can launch new product types on a reviewable basis if they have insufficient data on which to calculate the cost of offering a guarantee.
A good example of this is critical illness (CI) insurance.
When CI was first invented, only reviewable products were available and, without this option, it is doubtful whether CI would have ever existed.
Restoring confidence in reviewable rate products is not the only good news.
It also shows that when the regulators and the industry work closely together, practical solu tions can be deve loped.
In this case, the FOS raised this topic before any complaints had come up as they felt that it would be helpful to avoid potential disputes in the future.
Let's hope this signals a new era of the industry and the regulators working together.
By warding off issues before they surface, we can avoid creating reasons for consumer confidence in the industry to take another bashing.
It just shows what can be achieved through teamwork.
Nick Kirwan is protection market director at Scottish Widows
