Prior to this speech, the FSA had already begun to look closely at how bank customers could end up leaving a branch having purchased more financial products than they had originally intended; sometimes even products they had no use for.
On 27 July 2012 the FSA published Consultation Paper 12/17 on packaged bank accounts. One in five adults in the UK has a packaged bank account, broadly defined as a retail bank account (typically a current account) that comes bundled with other services: these can be anything from overdrafts to free music downloads or VIP airport lounge access.
It is the packaging of insurance polices with current accounts that FSA CP12/17 is concerned. The bundling of travel insurance policies with accounts sold to customers who would be ineligible to claim under them is presented as a typical complaint, although CP12/17 is not limited to travel insurance.
CP12/17 makes changes to the Insurance Conduct of Business Sourcebook (‘ICOBS’) which were originally proposed in CP11/20 in October 2011. These changes aim to provide the same level of consumer protection to the sale of insurance policies with packaged bank accounts as currently exists for the sale of insurance policies on their own.
The changes to ICOBS are summarised below.
Changes to the Insurance Conduct of Business Sourcebook (‘ICOBS’)
Five new rules are added to ICOBS, all of which will come into force on 31 March 2013:
- The firm arranging the policy must take reasonable steps to establish whether or not a customer is eligible to claim each of the benefits from an insurance policy (or policies) included with a packaged bank account. The customer must be informed of which benefits he is and is not eligible for. (5.1.3.A.)
- A record must be kept of the eligibility assessment. (5.1.3.B.)
- During the term of a policy, the firm must send the customer an annual eligibility statement, reminding him of the qualifying requirements for each of the policy benefits, and recommending that he checks himself whether or not he is still eligible. (5.1.3.C.)
- Although the majority of sales are on a non-advised basis, where a firm does give advice on the policies included with a packaged bank account, it must establish the customer’s needs and demands, take reasonable steps to establish the suitability of the packaged policies, inform the customer if any of his needs or demands are not met, and explain to the customer the reasons behind their recommendation. (5.3.2.A.)
- A record must be kept of this suitability assessment, the recommendation given, and the reasons for the recommendation. (5.3.2.B.)
- In addition, previous rules for selling or advising on payment protection insurance (5.1.1-3, 5.3.2) will no longer apply to packaged bank accounts, as these are now covered by the specific provisions above.
Two further issues are opened to consultation:
- Although the requirement to send customers an annual eligibility statement has now been established by a rule (5.1.3.C., see above), the FSA is consulting on the precise content and distribution of these statements.
- The FSA are also consulting on whether to exclude packaged bank accounts from ICOBS 6.1.13R, which rule currently requires that a consumer buying an insurance policy in connection with other goods or services should be informed of the price of the insurance premium independently of the overall cost. Although the FSA reiterates that this rule does still apply to packaged bank accounts for the present, they concede that it “may not be meaningful” and should be switched off for these accounts.
The FSA considered responses to CP11/20 on the question of how to obtain greater transparency in the sector that would help consumers shop around. Respondents differed on how best to achieve this aim, however, so the FSA have decided to ‘wait and see’ rather than proposing any immediate draft legislation, although they remain “concerned” about the lack of transparency.
The FSA also note that the proposed EU Insurance Mediation Directive (‘IMD II’) may have a substantial impact on the packaged bank account sector, although this Directive is unlikely to take effect before 2014. Rules on “tying” in IMD II may ultimately prohibit firms from selling packaged bank accounts in their present form.
The deadline for responses to the consultation is 29 October 2012. The outcome of this consultation, with the final rules, will be announced in December 2012. Changes to ICOBS will take effect from 31 March 2013.