FSA takes on insurance regulation

New rules come into force today to bring insurance under the regulation of the Financial Services Authority (FSA), taking over the job from the General Insurance Standards Council.

From now on, only firms that have been authorised by the FSA, or have applied for authorisation and are awaiting a decision, will be allowed to continue trading.

The way in which insurance policies are sold and advertised will be subject to strict guidelines. Insurers will be required, by law, to give consumers certain documents explaining details of the policy, provider and price in simple and clear terms.

Louise Hanson, head of campaigns at Which?, formerly the Consumers Association, said that the new regulations were good news for consumers in that they would give more right to redress should things go wrong, and added that the information documents were "a significant step in the right direction".

However, there are areas of concern. "Complex insurance like income protection, critical illness, payment protection and life insurance are now treated the same as simpler products like house and car insurance.

"This is a major concern, as it's much harder for people to choose the right product in these areas and there's a greater risk if they're sold the wrong policy," Ms Hanson said.

Which? is also worried that travel agents who sell insurance alongside a holiday will not be regulated by the FSA, so consumers who buy such policies would not be able to turn to the financial ombudsman if things went wrong.

"There are endemic problems with the process of selling travel insurance so it's disastrous that this, of all the areas, won't be regulated," said Ms Hanson.

"The onus has been placed on consumers to make the right choice, so it's essential that people take care to read everything carefully when buying insurance and ask themselves whether they're being offered a wide enough range of products to choose from, whether they need information or advice, and whether they're being given the level of service they want."

The financial services consumer panel, set up and funded by the FSA to champion the interests of consumers, was also concerned about omissions to the regulations. Firms still awaiting a final decision from the FSA are to be granted interim authorisation, which means that consumers who buy insurance through these companies will not be entitled to compensation if they lose money through the company going out of business.

Ann Foster, chairwoman of the Consumer Panel, said: "There are major gaps and inconsistencies in the new general insurance regulation, which will not be clear to individual consumers.

"Everyone needs to be aware that they will not get the full protection of FSA regulation when they buy through an interim authorised company or from a travel agent. The FSA must tell consumers to check all the details before they buy."

But the British Insurance Brokers' Association (Biba) welcomed the change, saying it is good news for the industry and consumers.

Biba chief executive Eric Galbraith said: "Biba has been actively involved in the lengthy consultation process undertaken by the FSA in formulating the rules that will apply in respect of broking activities.

"The FSA has taken a pragmatic approach and overall we are satisfied that the new regime will both protect consumers and be manageable for our members."

The FSA estimates that the changes will cost firms an average of ?2.80 per policy. A spokesman said: "This is a notional figure based on the cost of regulation and the number of policies, but it does not mean every policy will rise by this amount."

"Obviously some firms may choose to pass this on to customers, while others will absorb it themselves."

Nick White, head of personal finance at comparison website uSwitch.com, warned that the changes would push up the prices for consumers:

"Even though insurance regulation is obviously a good thing, and will help consumers in the long run, the increased cost of such regulation does mean that insurance providers and brokers will look for ways to pass on the cost instead of eroding the profits they make.

He said that in many cases consumers will end up paying for the extra costs, either through increased premiums or arrangement fees.

"Whilst the introduction of the 'initial disclosure document' and 'statements of price' means that some of these costs will be visible, it is of course virtually impossible to see what element of the premiums charged is due to the increased cost of regulation," Mr White said.

Meanwhile, some within the industry have expressed concern that many of the more than 9,000 firms authorised by the FSA have not yet put in place arrangements to make themselves compliant with the new rules.

A survey by information solutions company Docucorp found 92% of senior insurance managers were concerned that firms would not be ready, while 92% also thought the FSA had under-estimated the cost of implementing the new rules.