Management Clinic: Don't overlook expenses

This is one of these easily overlooked regulatory situations, but as with all your compliance matters, you need to make sure you get it right.

If not, and the FSA picks you up on it, it may well ask itself, what else is this firm not getting right, and you find that it is 'crawling all over you'.

The starting point is to understand that although you view the legal expenses policy as an 'add on', it is a separate contract of insurance in its own right. Consequently you have to treat it as such when advising your client of how you, as a firm, go about selecting appropriate covers to meet your clients' needs.

In the case of a dispute involving this policy (and not related to the car insurance policy itself), if the client wished to take a complaint to the Ombudsman, the information that the client has must be clear to the extent that he can identify that this is a separate contract of insurance.

The FSA has produced a guide to optional extras in which it gives the following guidance: that you must give the client clear information about the add on policy; you must make it clear that it is optional; you must separate the price from the main policy and any fees you may charge; and if you are advising on this policy you must assess the customer's suitability.

So, to look at a few practicalities: you need to make sure that the customer receives sufficient information about the policy and the cover it provides. You also must make sure that the motor policy does not include legal expenses as some motor insurance policies do because then you would be duplicating cover.

Your renewal or new business quotation must make it absolutely clear that this is an optional purchase. Long gone are the days when you could roll the premium into the motor one and invite the client to deduct the cost of the legal protection if he didn't want it.

In additon, make sure also that any policy fee is separately shown and following the recent ruling from the Treasury, that there is no IPT charged on the fee.

If you have opted to treat the sale of legal protection as 'advised', then the policy must have its own demands and needs statement. Likewise if non-advised, that must be made clear.

And finally, you must keep a separate 'client file' for this policy, even if it is only an electronic file and it should also be recorded as a separate new business sale.

If you follow the above, you will remain on the right side of the regulator in this area. Although it may appear to be a minor area of compliance, evidence that you have got that right sends a strong signal to the regulator that you are on top of compliance issues.

If you are in any doubt regarding implementation, speak to your compliance consultant.

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Source: PB – May 2010