FCA: New rules for add-ons
Published 13 May 2015
In March the FCA published its consultation on new rules for add-ons. This follows the FCA's General Insurance Add-Ons Market Study which found that competition in add-on markets does not always work in the interests of consumers. The FCA found that selling products as an add-on has an adverse impact on consumer behaviours and decision-making and that the add-on channel provides the primary product provider with a clear point of sale advantage that can restrict choice and competition for consumers. It was estimated that customers overpay for add-on products by around £108m to £200m a year.
The final report for the Add-Ons Market Study (published in July 2014) proposed a number of remedies. The March consultation proposes rules and guidance in relation to two of these remedies:
- banning opt-out selling for all add-ons (not just general insurance) when sold alongside a regulated product, and;
- improving product information provision in relation to general insurance add-ons.
The FCA has already consulted on the proposed remedy for GAP insurance (see Guaranteed Asset Protection insurance: a competition remedy CP14/29). The fourth proposed remedy relates to introducing a value for money measure in general insurance markets. The FCA says it remains committed to this. Given the complexity, the FCA is continuing to discuss this with the industry and plans to publish a discussion paper in Q2 of this year considering a range of options, including requiring firms to publish claims ratios.
Firms that currently sell add-ons on an opt-out basis are likely to lose revenue (the FCA expects this to be equivalent to the expected reduction in overconsumption of £9-13 million per year).
Ban on opt-out selling
The FCA consultation proposes a ban on opt-out selling. An opt-out sale is any sale where the customer has to override a default setting that pre-selects a purchase for them, for example pre-ticked boxes in an online transaction.
The FCA's concern is that opt-out selling does not enable consumers to make active and informed decisions. The FCA refers to its thematic review into motor legal expenses insurance which found that successful sales rates achieved when MLEI was sold on an opt-out basis could reach 80%, as compared to 40% when the product was sold on an opt-in basis.
Although the FCA only identified concerns with opt-out selling in the general insurance market, the new rules will apply to any add-on product sold alongside a financial services product (and are not restricted to general insurance). The FCA said this is to guard against the emergence of opt-out selling in other sectors in the future. The FCA will be keen to hail this as evidence of it being a forward-looking regulator, something it has wanted to emphasise since it was set up in 2013.
The FCA also wanted to extend the protection granted by the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (which implemented the Consumer Rights Directive). The Regulations already ban opt-out selling of anything which would commit the customer to additional payments under a contract. They do not apply where the main product is a financial product, however they do generally apply to financial add-ons. So the current situation (before the new FCA rules are implemented) is that opt-out selling is banned for, say, travel insurance sold with plane tickets but is permitted where the primary product is a regulated product.
What is an "add-on"?
The term "add-on" is not defined and instead the rules refer to "an optional additional product". The add-on does not need to be a regulated product to be caught by the rules. However, the rules only apply to additional products for which a fee is payable.
In its consultation the FCA talks about "bundled products", i.e. two or more products sold together. If an insurer puts together a number of different products and the customer has no choice over the different components (for example a home insurance product where the customer must have both buildings and contents insurance from the same provider for a single price), this is described by the FCA as an unbreakable bundle and the new rules on add-ons will not apply. If, on the other hand, the customer can pick and choose which additional products to include or which providers to purchase from (described by the FCA as a breakable bundle), the ban on opt-out selling will apply.
The ban will apply to sales to commercial customers as well as consumers.
As well as changing sales processes going forwards, firms will need to consider how to deal with renewal of products sold prior to the rules coming into force. The FCA suggests firms should take "reasonable steps to obtain active and express consent" for the renewal of add-on products originally sold on an opt-out basis. It gives an example of sending a letter to customers at the next renewal date but it is difficult to see how this would constitute express consent where tacit renewal applied.
Insurers will need to satisfy themselves that the add-on has been actively selected at some point in the customer journey. This may involve working with price comparison websites and, for example, obtaining contractual commitments from them.
Appropriate and timely information
These proposals take the form of new non-Handbook guidance, rather than rules. In line with the new guidance firms should:
- introduce add-ons to customers earlier in the sales process, in particular the most common add-ons;
- help customers compare packages of primary product and add-ons (for example by giving a clear price for the whole package);
- display the annual price of add-ons (as well as monthly).
Whilst the most common add-ons (at least the top three) should be introduced early in the sales process, other less common add-ons can be introduced later. This is to avoid overloading the customer with too much information too early in the journey.
The proposed guidance also reminds firms that where add-ons are insurance contracts in their own right, the rules in ICOBS will apply and firms must provide information on the features, benefits, exclusions, terms and price.
The guidance will apply to general insurance add-ons and will not be restricted to price comparison websites. The guidance will apply to sales to commercial customers as well as consumers.
PCWs should have already improved the information they provide on add-ons following on from the FCA's thematic review into price comparison websites in the general insurance sector (TR14/11 published in July 2014). The FCA found that some PCWs had not taken reasonable steps to provide appropriate information about add-on policies, including the main features of the product, the price of the cover, the level of cover, and the main exclusions and limitations. However, the guidance that the FCA is now consulting on goes beyond the recommendations from TR14/11.
The consultation closes on 25 June. The FCA intends to publish a policy statement together with finalised rules and guidance in the second half of the year.
Insurers will need to redesign their sales processes for add-ons (including working with their brokers and price comparison websites).
Where add-on products are sold through brokers or other intermediaries, insurers will need to satisfy themselves that the product has been actively selected at some point in the customer journey.
Insurers will need to consider their approach to automatic renewal for products sold on an opt-out basis prior to the rule change.