It is arguable whether the regulation of CI and IP would reduce risk to the consumer, says Deepak Jobanputra
The Treasury recently announced that the Financial Services Authority (FSA) will regulate the selling and marketing of long term care insurance (LTCI). This has been widely welcomed, although some argue that critical illness (CI) and income protection (IP) should have been included. These products are often referred to as being 'unregulated'. While it is true these products can fall outside the FSA's rules, it is misleading to imply that there are no minimum selling and marketing standards.
Association of British Insurers' (ABI) members write the majority of CI and IP business in the UK. Members must comply with various codes of practice that set standards for the disclosure of product information and selling practices.
The ABI's Standards of Best Practice for Critical Illness and Income Protection require that customers are given a key features document, which closely resembles the format and content of those required by the FSA. In addition, customers are given a cooling-off period when they can cancel their policy and receive a full refund of any premiums paid.
Standards for selling practices are reflected in the ABI's Life Insurance (non-investment) Selling Code of Practice. ABI members may only accept business from intermediaries who agree to comply with this code.
Regulation should seek to address areas of risk for consumers. It can be argued that purchasers of CI and IP are not exposed to the same risks of mis-selling as the purchaser of an LTCI contract.
The premiums are lower, the benefits are simpler to understand and a high percentage of business is being sold in connection with mortgages. Also, there may be several options open to a customer in terms of how they plan for the risk of needing long term care, but alternative financial planning strategies are less likely to exist for customers purchasing CI or IP.
Concerns have been expressed that some mortgage customers buy these protection products in the mistaken belief that it is a compulsory condition of their mortgage offer.
However, standards required of mortgage advisers are increasing. The quality of advice is the responsibility of the Mortgage Code Compliance Board (MCCB) and the quality of information provided to customers comes under the FSA at N3 in August 2002. Although these regulations primarily relate to the mortgage, it is likely practitioners will apply the same process and standards to all elements being sold in connection with a mortgage. Customers will be taken through a fact-find relevant to mortgages and any advice will be confirmed in a written recommendation.
One of the requirements of the FSA is that it should consider the cost and benefits of increasing regulation. It is questionable whether extension of the FSA's remit to include CI and IP would materially reduce the risks of mis-selling. In practice, there is a real possibility that the increased compliance costs, particularly for intermediaries, would reduce consumers' access to these valuable benefits and hence do little to help the Government reduce future spending on State welfare benefits.
