Britain’s financial watchdog has warned insurers about over-charging and selling inappropriate products as it tightens the rules on the way insurance is sold in the UK.
The warning comes separate from the PPI scandal, which has seen more than £34.2 billion compensation paid out to millions of people who were mis-sold PPI over the last three decades.
The main focus of the new warning is the country’s general insurance (GI) industry, selling products like motor and home insurance to travel cover.
Following a thematic review of the GI market, the Financial Conduct Authority (FCA) is so concerned about the state of the market that it has written to the chief executives of all the major insurance companies, warning that it will take action if it finds consumers and businesses are being harmed.
Significantly higher prices
The review revealed some consumers were being charged ‘significantly higher prices’ than the production and delivery costs of the product they were buying because of complicated distribution chains in which each section was paid separately.
They also warned of the ‘high risk’ of consumers being sold unsuitable policies at the point of sale of products like a new car or holiday.
Spokesman Jonathan Davidson said: “The widespread extent of these issues demonstrates a culture which pays insufficient regard to customer outcomes in some parts of the sector.”
The concern echoes the ban on lenders offering PPI policies at the point of sale because of the potential for mis-selling.
The regulator has signalled its intention to take action with two multi-million pound financial penalties.
Carphone Warehouse was fined £29 million for mis-selling mobile phone insurance and mail order company Express Gifts was ordered to set up a £12 million compensation fund for insurance which was mis-sold to 330,000 customers.
The FCA said poor manufacturing, sales and distribution approaches were rife in the sector with consumers paying high prices due to ‘potentially excessive levels’ of commission being taken by distributors.
In one example it found a car dealership selling insurance alongside new vehicle sales was taking 70% commission.
Issuing a warning that the regulator would not hesitate to use ‘the full range’ of its regulatory powers Mr Davidson said: “Through our recent work we have continued to see poor manufacturing, sales and distribution approaches leading to sales of low value and inappropriate products, unfair treatment of claims and services issues.
“The widespread extent of these issues demonstrates a culture which pays insufficient regard to customer outcomes in some parts of the general insurance sector.
“These potential harms are caused by firms not adequately considering the value of the products or services provided to customers, as well as failures in product design, weak oversight of the distribution chain, poorly designed distribution strategies and conflicts of interest caused by firms’ remuneration structures.”
The chief executive letter outlined six points the FCA expects insurers to consider for their future behaviour:
- All GI firms must act fairly, honestly and professionally in accordance with the best interests of customers.
- All GI firms should consider the value customers ultimately receive from their products and services.
- All GI firms should maintain appropriate systems and controls over the remuneration they receive.
- All GI manufacturers should have sufficient knowledge of the roles and remuneration of all entities in the distribution chains they use to be able to assess the impact they have on the value customers receive.
- All GI firms must maintain appropriate systems and controls (including the production and use of appropriate management information) over their GI products and services. This includes when delegating authority to another business.
- All GI distributors should consider the impact of their distribution strategy (including the distribution method and the level of remuneration they receive) on the overall value of the product for their customers.
Said Mr Davidson: “We expect all firms to review the contents of this letter, our full report and proposed guidance in their entirety.
“Where firms identify any gaps or shortcomings, we expect them to act promptly to address them to mitigate the risk of harm to customers.”
A spokesman for the Association of British Insurers said the FCA report was based on findings ‘in a limited range of products that comprised a tiny part of the general insurance market’.