FSA Insurance Regulation to be More ‘Principles-based’

In an interim report the UK’s Financial Services Authority acknowledged that “consumer experiences and risk of detriment vary substantially across the various markets for general insurance products.” Therefore it has decided “to consider a differentiated and more principles-based approach to insurance conduct of business (ICOB) regulation.”

The decision follows a revue conducted by Britain’s financial regulator, which “focussed on how effectively general insurance markets are working for retail consumers.” It determined that “for general insurance products such as household or motor policies,” the markets “work reasonably well in the interests of consumers,” and “most consumers do not rely on disclosure documents from firms, which are prescribed by ICOB rules, when making purchasing decisions.”

As a result the FSA said it is “looking at removing most of the ICOB requirements for firms that go beyond minimum EU Directive requirements. The essential safeguards to protect consumers would be retained, including the Principles for Businesses.”

The FSA found, however that “personal protection products, such as payment protection and critical illness,” continue to benefit from the existing regulations. A “firms’ selling practices has an important role in reducing the risk of consumer detriment for those buying” these types of products. The FSA noted that they are “usually second or tertiary purchases and consumers lack confidence and experience when buying them.

“Reflecting the greater risks with personal protection products and their sale,” the FSA said it “is also considering a small number of measures to improve selling practices of protection products and to enable customers to receive better information about the nature of the sale and the product.”

Chief Executive John Tiner commented: “The work so far confirms our belief that the risk of consumer detriment varies according to the type of insurance product purchased. There is now a strong case for moving to a differentiated regulatory regime, expressed in a more principles-based way, where the focus is on outcomes for consumers rather than processes within firms. Our insurance rules will be more risk-based and proportionate while continuing to meet our consumer protection objective”.

The FSA indicated that its “ideas for rebalancing its general insurance regime are at an early stage and it will publish a Consultation Paper on possible rule changes in June 2007. Any rule changes are likely to be made in December 2007.”

Topics Legislation