FSA publishes new Insurance: Conduct of Business sourcebook

The Financial Services Authority ("FSA") published a new Insurance: Conduct of Business sourcebook (ICOBS) on 18 December 2007 and the new rules came into effect on 6 January 2008.

The new standards differentiate between protection products (which includes critical illness cover, income protection and term assurance) and general insurance products which are viewed as being of lower risk. That category includes household, motor, pet and private medical insurance.

The FSA believes that customers are on the whole being treated well by the general insurance market. As a result some of the detailed rules in this area have been replaced by more high-level standards, in accordance with the FSA’s stated aim of "principles-based regulation". This approach allows firms some flexibility over how they comply with the regulatory standards. The FSA is nonetheless keen to emphasise that detailed provisions have remained in place where necessary, whether for consumer protection or to ensure compliance with EU Directives.

In contrast, the market in protection products, where the FSA believes there is continuing consumer detriment, has been specifically targeted by the new standards. The recent high-profile case of HFC Bank related to findings identified by the FSA in relation to HFC’s procedures for dealing with its customers and other systems and controls relating to sales of payment protection insurance. The FSA hopes that the rules will improve selling standards for protection products. For example, the new standards include a requirement (ICOBS 6.4) intended to ensure better oral disclosure of the main characteristics of policies. The new rule is supposed to help consumers make better informed purchasing decisions.

Furthermore, the existing cancellation period for protection policies of 14 days has been extended to 30 days (ICOBS 7.1). The 30 day cancellation period only applied previously where there was a life assurance element to the policy. Another new rule states that firms must now take reasonable steps to ensure that customers would be eligible to claim benefits under the policy (ICOBS 5.1). For payment protection products, the new rule states that these "reasonable steps" are likely to include checking that the customer meets any qualifying requirements for different parts of the policy.

Firms have a six month transitional period for implementation, and must meet the new requirements by 6 July 2008.