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Full disclosure? Tell us about it

Continuing our overview of CP160 on insurance selling from last week, we pick up at Chapter 7 and look at the matter of status disclosure.

The FSA regards this disclosure as a very important matter and is adamant that customers should receive such information at the initial point of contact (not at the conclusion of a contract) as it may influence the customer&#39s decision about whether to use the intermediary firm (see box for the information that has to be disclosed about the status of an intermediary).

The Key Facts logo is a brand which the FSA intends to promote widely, and in all likelihood will be compulsory on all initial status disclosure documents. The rest of the contents are too complex to cover in this overview, but will form the subject of a special article at a later date.

The disclosure of information on the intermediary&#39s status also applies to the other areas of mortgages and investments, so the FSA has had the sense to think about a combined form for firms which are active in more than one of these areas. Full details will be published in due course following the results of consumer research.

Mention is made of introducers, and while they are not required to produce a full status disclosure, they must provide some information including their name and address. As with full disclosure, this must be on a durable medium, that is, something tangible the customer can keep in their possession, not just verbal spiel.

Moving on, the FSA talks about the standards for advising and selling. As we saw last week, advice is reduced to the level of recommending a product that is &#39adequate&#39 to meet the customer&#39s needs.

Quite admirably, the FSA then takes the trouble to explain why this is a radically different standard of advice compared to both the investment and mortgage markets, where a firm providing advice must recommend the &#39most suitable product&#39.

Listen carefully; it is because, if the &#39most suitable insurance product&#39 was to be recommended, then &#39the costs are likely to outweigh the benefits&#39.

I think the FSA is skating on thin ice here – if someone took it to task on this inconsistent approach I suspect it would be hard-pressed to prove the point.

Whether the sale is advised or non-advised, there is a requirement to provide a “demands and needs statement and a suitability (reasons why) statement”. I would have thought this should be prescribed in detail, but the FSA restricts itself to providing guidelines on the format of the statement.

The requirements of the FSA&#39s Training and Competence sourcebook will generally apply to the selling of insurance. For all advised sales, and also for the non-advised sale of higher risk products, the FSA is consulting on whether it may be necessary for the broker to pass an approved examination, but it does acknowledge that the precise requirements of such an examination are unlikely to be determined “much before” October 2004 and hence they are unlikely to come into effect until 2005 at the earliest – after regulation kicks in.

On the subject of product disclosure, the FSA explains why it will only regulate a limited proportion of financial promotions, but will be keeping a close eye on all advertising, direct mail etc and will apply its acid test of “Is the promotion clear, fair and not misleading?”. If not, you can expect to hear from them.

Before there is any commitment by your client, and before they fill in an application, the product disclosure information must be communicated to them (see box). Unbelievable but true, the FSA then goes on to say that you can, if you wish, provide this information orally (except for the higher risk products where it must be in writing). So simply telling your customers this detailed information is supposed to be enough for them to absorb it so they can use it to help them shop around. Some hope. However, if the client did not receive the information in writing at the pre-commitment stage, then it must be provided in writing, post-application. At this latter stage it is unclear whether the information is to be provided by the broker or the insurance company. The FSA is considering whether the Key Facts logo should be used on the document.

Moving onto the fair treatment of customers, the broker is not obliged to disclose the amount of commission he receives, unless asked. The FSA explains why it believes commission disclosure may not be necessary in the insurance market compared to the investment market.

The FSA intends to ban unfair inducements offered by the insurance companies to intermediaries, and as part of the consultation process asks for feedback on particular types of inducements. My input would be that I don&#39t play golf, so you can ban that, but leave the rugby invites alone!

On the matter of excessive charges to customers, the FSA rules already prevent this for investment business, it has proposed a similar rule for mortgages, and is now inviting feedback for insurance. How can anyone possibly disagree with such a rule?

The FSA proposals for claims handling will not be of interest to most brokers, nor its high level approach to cost benefit analysis. That leaves us with the final section on regulatory processes and fees.

The FSA reaffirms its intention to give due credit in the application process to firms of good standing registered with voluntary regulatory organisations such as the GISC and MCCB.

On the topic of FSA fees to be charged to brokers, the FSA will start consulting on these in the first half of 2003. Watch this space.

Upfront with the information

•Use of the FSA&#39s &#39key facts&#39 logo

•Your firm&#39s name and address

•Brief description of the FSA

•Which insurance companies you deal with

•Which service you provide to the customer

•What the customer will need to pay (if fee is payable)

•Are you directly regulated by the FSA, or Appointed?

•Representative of which authorised firm?

•How the customer can make a complaint

•Ownership of the firm (over 10% shareholdings)

Pre-commitment product disclosure

•Name of the insurer

•Main policy details including cover and duration

•Excesses, significant exclusions and limitations

•Premium, cancellation charges, payment options

Whether insurance is optional or included in another product

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