Regulations in line with the European Insurance Mediation Directive will place yet more cost burdens on the industry, says Debbie St Cyr
HM Treasury's decision to place the regulation of insurance intermediaries under the Financial Services Authority (FSA) comes shortly after political agreement was reached on the European Insurance Mediation Directive. The Directive applies to all insurance intermediaries and to most types of insurance contracts, including general insurance and life pure protection policies. Exceptions are warranty, travel and general insurance 'large risks' such as marine and aviation insurance.
To conform with the Directive, the FSA will need to register all insurance intermediaries individually. It is hoped that investment business advisers will be 'grandfathered' into the new regime as part of their current permissions. The FSA will also need to write rules and guidance on training and competence, terms of business letters, status disclosure and suitability letters which include fact-finds and needs analysis.
The Directive states that suitability letters can be modulated depending on the complexities of the product. This is an important concession, as the FSA needs to ensure that the rules and guidance set for both general insurance and life products are appropriate to the level of potential consumer detriment. After all, how sensible would a fact-find, needs analysis document and a suitability letter be for a motor insurance policy?
The timetable set within the Directive is that all rules and guidance should be in place by the end of 2003. The Treasury is, therefore, proposing to issue shortly a timetable for implementation of its announcement. The timetable is likely to be tight as the FSA will need to consult on both the high level and detailed rules and guidance and provide sufficient time for implementation.
Although the timetable will provide the industry with a framework for change, it will need to be considered alongside other reviews, such as, polarisation, the Sandler report, status disclosure and the Tiner Project. In the past 12 months, a number of intermediaries have been arranging life protection policies that fall under the ABI Life (non-investment) Selling Code of Practice, rather than the FSA. The introduction of statutory regulation, even if suitability letters are restricted to insurance products with an investment element, will add to the cost of running such sales forces in an ever-tightening cost environment.
The distribution of general insurance products is currently different from both investment products and life products.
However, there are similarities between general insurance and life. Research we have conducted shows that consumers draw little, if any, distinction between them and that a proposition bringing together a range of insurance products has appeal across all socio-economic groups.
The combination of statutory regulation for general insurance and life products, together with the potential changes to the polarisation regime, will have a fundamental impact on the distribution map of insurance and investment products.
This presents the industry with the opportunity to design a regime based on consumer perceptions rather than the traditional insurance boundaries and to eliminate a number of areas where dual regulation has constrained sensible customer propositions.
