UK: Insurance Law - ICOB – Are You Ready?

The Authorisation Requirement

As all "primary" insurance intermediaries and direct-selling insurers should be aware, firms which wish to undertake regulated activities in respect of the sale of general insurance after 14 January 2005 will need to be authorised by the FSA to do so. The extent to which the "secondary market" is aware of this fact and of its implications has a huge question mark against it – particularly given the extremely broad interpretation of the law concerning the boundaries of regulation which the FSA has adopted – but that is another story!

The regulated activities for which authorisation will be required include:

• dealing in general insurance contracts as agent;

• arranging (ie bringing about) deals in general insurance contracts;

• making arrangements with a view to transactions in general insurance contracts;

• assisting in the administration and performance of general insurance contracts;

• advising on general insurance contracts;

• agreeing to carry on any of the above activities.

Any person who carries on any of these activities in the United Kingdom by way of business after 14 January 2005 must either be exempt from the need for authorisation (for example, if the firm is an "appointed representative" of an authorised insurer or an authorised intermediary) or authorised by the FSA. Authorised firms will be required to comply in full with the FSA’s sourcebooks concerning Principles for Businesses (PRIN), Senior Management Arrangements, Systems and Controls (SYSC) and Threshold Conditions (COND). Individuals within authorised firms performing "significant influence functions" will need to be approved by the FSA as fit and proper to do so and firms will therefore be subject also to the FSA’s Statements of Principle and Code of Practice for Approved Persons (APER) and Fit and Proper Test for Approved Persons (FIT) sourcebooks. And authorised firms will be subject to regulations concerning financial safeguards, including requirements to maintain professional indemnity insurance and a prescribed minimum level of financial resources and to be a member of the Financial Services Compensation Scheme (rules providing for segregation of client money from monies belonging to the firm or to insurers for which the firm acts will also apply, although for a transitional 12 month period firms will be able to "co-mingle" insurers’ money and client money pending further review by the FSA of the practical implications of the segregation rules).

Following consultation during the course of last year the FSA published in January its final conduct business rules concerning the selling and administration of general insurance. The rules are to be contained in a new sourcebook within the FSA Handbook, entitled "Insurance: Conduct of Business" (ICOB).

The application of the rules depends upon whether a firm is dealing with a "retail customer" or a "commercial customer". A retail customer is defined as someone acting outside their trade, business or profession; anyone else is a commercial customer. (Where it is not clear whether a customer is retail or commercial, a firm must comply with the commercial customer rules).

The rules apply to intermediaries (including direct-selling insurers) and to insurers in their role as product providers. They apply only to intermediaries in contact with the customer and not those elsewhere in a distribution chain (although intermediaries elsewhere in a chain are likely to carry on regulated activities and therefore to require authorisation). They do not apply in respect of reinsurance contracts or so-called "large risks" (including marine and aviation, certain credit and suretyship risks and certain other risks where the policyholder exceeds certain thresholds relating to size) where the risk is located outside the EEA, and they apply only in a limited way to transactions involving commercial customers and large risks where the risk is located within the EEA.

ICOB 2 contains a variety of rules dealing principally with:

• communications (including a requirement on firms to communicate information to customers in a way that is clear, fair and not misleading);

• unfair inducements;

• reliance on others;

• exclusion of liability;

• application to electronic media;

• general provisions concerning "distance contracts";

• recordkeeping.

ICOB 3 concerns financial promotions (such as product brochures, advertising websites etc). The central requirement is to ensure that the financial promotion is clear, fair and not misleading. ICOB 3 contains guidance on what this means, plus (amongst other things) a requirement for a firm to carry out a "confirmation of compliance" exercise (by an individual with appropriate expertise) before a financial promotion is made. ICOB 3 does not apply in respect of financial promotions to commercial customers.

ICOB 4 contains rules dealing with:

• status disclosure (information which intermediaries must provide about themselves and their fees, mainly at the pre-contract stage although for telephone sales the rules are slightly different);

• advising and selling (including suitability rules applying when a firm makes a personal recommendation to buy a specific policy which require the firm to assess the customer’s demands and needs through obtaining and having regard to all relevant information about the customer, and rules requiring that a customer be provided with a "statement of demands and needs" confirming whether or not a contract has been personally recommended and containing the reasons for the personal recommendation if one has been made. Insurers who make a personal recommendation to a commercial customer do not need to provide a demands and needs statement if the customer gives its informed consent not to have one);

• excessive charges (covering intermediaries’ fees but not premiums);

• commission disclosure (requiring intermediaries dealing with commercial customers – but not retail customers – to disclose upon request their commission and any commission received by their affiliates);

• unsolicited services (concerning tacit renewal arrangements).

In general terms, insurers (in their role as product providers) must produce product disclosure information and intermediaries (including direct-selling insurers) must provide that information to their customers.

Product disclosure information required for retail customers encompasses (i) a policy summary (or key features document) containing information on various matters (including type of insurance and cover, significant features and benefits and significant and unusual exclusions); (ii) price information; (iii) certain information required by relevant European directives; (iv) information about cancellation; (v) information about the claims handling process; (vi) the policy document; and (vii) renewal information.

For commercial customers the requirements are rather less. Intermediaries must provide commercial customers only with (i) certain directive – required information, information on premium and fees and other information sufficient to enable the customer to make an informed decision about the contract pre-sale; (ii) the policy document "promptly" after conclusion of the contract; and (iii) renewal terms (or notification that the insurer does not intend to invite renewal) "in good time" before the policy expires.

ICOB 5 also contains rules concerning group policies sold to commercial customers, requiring that only the legal holder of the policy be provided with a policy summary and the policy document. The intermediary concerned must however advise the legal holder of the policy to provide a copy of the policy summary to each policyholder member and inform them that a copy of the policy document is available on request.

ICOB 6 applies only to insurers and their retail customers. It requires retail customers to be given a cancellation period of 14 days for general insurance contracts, starting from the day the contract is made or, if later, the day the customer receives the full policy documentation.

Insurers are responsible under ICOB 7 for the prompt and fair handling of claims (if claims handling is outsourced, the insurer retains responsibility for compliance with the rules). For claims made by retail customers, insurers must:

• handle claims fairly and promptly;

• give the customer reasonable guidance to help him make the claim;

• respond promptly to notification of a claim with information on how the claim will be handled;

• keep the customer reasonably informed about the progress of his claim;

• explain why a claim is being refused or why the amount offered was different from the amount claimed;

• settle the claim promptly once settlement terms have been agreed. For claims made by commercial customers, insurers must:

• handle claims fairly and promptly;

• keep the customer reasonably informed about the progress of the claim;

• settle the claim promptly once settlement terms have been agreed.

Some of the provisions of the ABI Statement of General Insurance Practice have been incorporated into ICOB 7, preventing insurers from refusing liability to retail customers on the grounds of:

• non-disclosure of a material fact that the customer could not reasonably be expected to disclose;

• misrepresentation, unless it was a deliberate or negligent misrepresentation of a material fact; or

• breach of a warranty or condition, where the circumstances of the loss are unconnected to the breach (unless fraud is involved). 

As far as intermediaries are concerned, ICOB 7 requires them to act with due care and skill when acting for a customer in relation to a claim. They are also required to avoid conflicts of interest when acting for a customer in relation to a claim and, if acting for the insurer in relation to a claim on a policy which the intermediary sold to the customer, the intermediary must inform the customer that he is acting on behalf of the insurer and not the customer at the point of the claim.

The stage is set and the clock is ticking. Insurers and intermediaries alike should now be advancing their preparations (including undertaking necessary enhancements to their systems and controls) for the new sale of general insurance regime which is now only a matter of months away. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.