Report on the Thematic Review of the Sales of General Insurance Add-on Products (December 2015)

Summary

This is a thematic review report published by the Guernsey Financial Services Commission examining how general insurance intermediary licensees and their authorised insurance representatives (AIRs) sell add-on products, such as motor legal expenses and breakdown cover, alongside primary insurance policies. It follows a February 2015 letter to licensees and on-site visits to four selected licensees in October 2015, assessing compliance with the Principles of Conduct of Finance Business, the Code of Conduct for Authorised Insurance Representatives, and the Insurance Intermediaries (Conduct of Business) Rules 2014.

• Fair dealing concerns: The review found evidence that add-on pricing sometimes reflected licensees' income needs rather than product quality, and that licensees rarely collected or used management information (e.g. claims data) to assess fair dealing.
• Disclosure failures: Licensees generally were not complying with Code disclosure requirements, including failing to disclose reliance on a single, sometimes related-party, insurer for majority of policies.
• Suitability assessment shortcomings: Most licensees were not collecting sufficient information to assess suitability of add-on products, and many sold add-ons on an opt-out or even mandatory bundled basis without suitability checks; online quote-and-buy processes were found unlikely to allow proper suitability assessment.
• Inadequate explanation of benefits and exclusions: Licensees explained key benefits and exclusions of add-ons only at a basic level and did not always display add-on premiums separately from the primary policy premium.
• Rules compliance gaps: Significant shortcomings were found in compliance monitoring programmes, training and competence schemes for AIRs, and in the recording and correct identification of complaints under Rule 8.3.1.

The Commission concludes that opt-out sales of add-ons and breakable bundles do not represent fair dealing and expects all general insurance intermediaries, not only those reviewed, to phase out such practices. The Commission will review and potentially revise the Code in 2016 in consultation with industry, but does not intend to revise the Rules, instead expecting licensees to rectify identified Rules deficiencies. Licensees are told not to change sales procedures further pending the Code review, other than addressing the opt out and breakable bundle practice.

Key obligations

• General insurance intermediary licensees and their AIRs must take steps to phase out the sale of add-on insurance policies on an opt-out basis or as part of a breakable bundle.
• Licensees must be able to demonstrate at all times that they are achieving fair dealing with customers in respect of all aspects of their dealings.
• Licensees and AIRs must comply with Code disclosure requirements (sections 3.2.1-3.2.3), including disclosing insurer relationships and any limitations on products/providers before advising or arranging a policy.
• Licensees and AIRs must obtain and record sufficient information about a client's circumstances and objectives to assess suitability of both primary and add-on insurance products (Code sections 4.1.1 and 4.1.2), and must not assume suitability on an opt-out or mandatory basis.
• AIRs must use best endeavours to explain principal terms, benefits and exclusions of recommended contracts of insurance and draw attention to conditions, warranties or exclusions that could affect a client's decision (Code section 5.1).
• Licensees' Boards must establish and maintain effective compliance monitoring policies and adequate systems of control to ensure AIRs and financial advisers comply with the relevant Codes (Rules 3.3.1 and 5.1.2).
• Licensees must create and implement a training and competency scheme for all AIRs and financial advisers appropriate to the nature and scale of their business, referring to the Commission's Guidance Note on Training and Competency (Rules 3.5.2 and 3.5.3).
• Licensees must ensure relevant employees receive comprehensive ongoing training, including on the Law and rules made under it (Rule 3.5.4).
• Licensees must maintain a register recording all complaints received, with sufficient detail to demonstrate how complaints have been or are being handled, applying the Rules' definition of a complaint (Rule 8.3.1).
• All licensees, not only those reviewed, must take appropriate steps to ensure full compliance with all sections of the Rules and must rectify any identified shortcomings.

Applies to

general insurance intermediary licensees, authorised insurance representatives (AIRs)

Deadlines

• 2016: The Commission will consult with industry in 2016 on the appropriateness of the Code of Conduct for Authorised Insurance Representatives and make revisions where necessary.
• April 2016: Reference date noted in the report by which the FCA will no longer permit opt-out sale of add-ons in the UK market (contextual, not a Guernsey deadline).