Insurance: Conduct of Business Rules - Playing by the rules

After three years of European directives, consultation papers, policy papers and endless debate, the Financial Services Authority regime has finally come into force.

The sheer size and complexity of the FSA Handbook of Rules and Guidance gives the new regulatory regime a totally different feel to those that have gone before.

Brokers and intermediaries have been used to 'point of sale' regulations for several years. But, the FSA's Insurance: Conduct of Business Rules have raised the bar in terms of the prescription of the content, timing and method of delivery of information at the new business, adjustment and renewal stages.

The ICOB Rules vary depending upon the type of customer and the sales medium involved. Customers are classified into 'retail' and 'commercial', where retail can be defined as an individual or non-Scottish partnership acting for purposes outside their business, trade or profession.

Complications arise where an individual or a non-Scottish partnership might purchase a single policy to cover both business and personal purposes.

In these cases, the ICOB Rules dictate that the customer is treated as a retail customer and the relevant disclosures apply.

The ICOB Rules comprise eight chapters and what follows is a brief analysis of the most important rules as far as intermediaries are concerned.

ICOB 4.2

The ICOB Rules require a prescribed suite of information concerning the firm and the services to be provided to the customer prior to the conclusion of the contract. This must be provided in a durable medium pre-sale - but where the sale is over the telephone or where the customer requests oral disclosure, the information can be given verbally. Where the information is given verbally pre-conclusion, it must be provided in a durable medium immediately post-conclusion.

The ICOB Rules do not prescribe how the information is presented. However, they do contain a template (the initial disclosure document), which incorporates the FSA's Key Facts logo. Where the intermediary wishes to use the Key Facts logo, the template must be replicated, using the headings and text in the order provided. The FSA will shortly be promoting the Key Facts logo to consumers in respect of the whole range of financial services and it is likely that, in time, the use of the prescribed IDD will be introduced. Intermediaries may therefore wish to consider its use sooner rather than later.

ICOB 4.3 and 4.4

While intermediaries will be used to providing status information, demands and needs statements are a new entity, born out of the Insurance Mediation Directive. It is becoming clear that the leading providers of intermediary software will have developed on-screen solutions in respect of the system-driven products, allowing intermediaries to print out the demands and needs statement (in addition to most of the other rule-required deliverables).

It should be remembered that a demands and needs statement must be given in respect of sales to retail and commercial customers, and also for both 'advised' and 'non-advised' sales.

For a non-advised sale, the statement must include confirmation that no personal recommendation has been made. Where a personal recommendation has been made, the ICOB Rules require that: the product must be suitable for the customer's demands and needs, at the time the personal recommendation is made; and the demands and needs statement must include an explanation of the reasons for personally recommending that product.

The software providers are likely to provide a free-text area to allow intermediaries to craft their own suitability statement.

ICOB 5.5.5

Intermediaries will be used to providing customers with certain product information pre-sale, but the ICOB Rules insist on the information being provided in a durable medium. The ICOB Rules obligate the insurer to produce the policy summary and for the intermediary to provide it to the customer.

ICOB 5.3.15-22

The ICOB Rules introduce a requirement for the customer to receive the renewal terms no less than 21 days prior to renewal. This will necessitate insurers instigating renewal-generation systems to get the renewal terms/papers to intermediaries in time for the intermediary to deliver in accordance with the ICOB Rule.

ICOB 6

The ICOB Rules introduce a right of cancellation for retail customers.

The cancellation period is 14 days in respect to general insurance contracts (30 days in respect to pure-protection contracts), and the period commences on the day the contract concludes or the day on which the full policy terms are received by the customer, whichever is the latter.

Intermediaries should be aware that the right to cancel being introduced is subtly different to the 'cooling-off' period allowable under the GISC rules, as it applies irrespective of whether the full information was given at the point of sale. However, unlike the GISC rule that provides for a full premium refund, the ICOB Rules do allow for a charge to be made for the cover given.

ICOB 2.3 and ICOB 4.6

The ICOB Rules on inducements came under the spotlight during the autumn due to the Spitzer allegations in the US. The ICOB Rules prohibit the giving, offering, soliciting or receiving of an inducement if it is likely to conflict to a material extent with the duty it owes to its customer.

Intermediaries need to ensure that they act with caution when offered or accepting an inducement. One way to demonstrate that caution might be to create an 'inducements register', which could be made available to the regulator, if they visit.

The only rule requirement in connection with the disclosure of commission relates to commercial customers, where commission earned by the firm, any affiliated person or firm must be disclosed if requested by the customer.

However, intermediaries should be additionally aware of their obligations under the Law of Agency to disclose, upon the request of the customer, their commissions plus other related earnings, such as profit shares and volume overriders.

This is just a brief synopsis of the most relevant ICOB Rules, but beauty is in the eye of the beholder and firms are encouraged to ensure that their procedures adequately cater for the risks they write.

KEY TO THE ICOB RULES

- ICOB 2.3 - Inducements

- ICOB 4.2 - Status disclosure

- ICOB 4.3 and 4.4 - Suitability and demands and needs statements

- ICOB 4.6 - Commission disclosure

- ICOB 5.5.5 - Policy summary

- ICOB 5.3.15-22 - Retail customer renewals

- ICOB 6 - Cancellation rights.