Banks should check customers' entitlement to packaged account insurance, FSA says

The regulator has published a consultation document (38-page / 624KB PDF) in response to its concerns that it is "too easy" for banks to sell customers products that they do not understand or need.

"We want to make sure that packaged accounts are only being sold to customers who have actively decided it is the right product for them," said Sheila Nicoll, FSA director of policy.

Packaged accounts are current accounts bundled with a range of other products such as travel or mobile phone insurance and discounts on tickets for events, for a monthly fee. They can include preferential terms for other financial services, such as overdrafts or mortgages.

Monthly fees can range from £5 to £25 a month depending on the account, according to consumer watchdog Which?. The FSA estimates that one in five of the UK adult population has a packaged account.

Research published by Which? in August found that a third of people with packaged accounts did not use any of the additional benefits available to them.

The changes proposed by the FSA would require banks to take "reasonable steps" to establish whether a customer is eligible to claim under an insurance policy. This would include checking whether the customer meets the qualifying criteria to claim each of the benefits under each policy. Banks must also tell customers if they would be ineligible to claim.

Customers would also be issued with an annual statement prompting them to check whether any insurance policies continue to meet their needs if their circumstances have changed.

Advisers must also consider whether any insurance policy is suitable to meet the customer's demands and needs, and tell the customer if any of those needs are not met.

"Bundling many different products together creates a large amount of information for the consumer to assimilate and therefore an increased risk, at the point of sale, that consumers may not adequately understand whether each policy meets their needs," the consultation said.

"Around one in five of the UK's adult population now has a packaged bank account, so the impact of the new rules should not be underestimated," said Alexis Roberts, a financial services law expert with Pinsent Masons, the law firm behind Out-Law.com.

"There are interesting echoes here with themes that ran through the FSA's investigation into payment protection insurance. However, the sector's immediate concern is likely to be around the cost implications of the proposed rule changes, and the potential knock-on effect for insurer margins," he said.

The FSA is also asking for more feedback on how to improve the price transparency of packaged accounts.

Firms buy insurance policies wholesale and offer them at discounted rates in the overall package. This makes it difficult for customers to compare and contrast the costs of individual features of the package with standalone insurance products or other bank accounts, the regulator said.

"We're pleased that the FSA has investigated this and is proposing further action. People should only have a packaged account if they're absolutely certain that it will be cheaper for them and they'll use all of the separate benefits offered," said Which? executive director Richard Lloyd. "Banks have a responsibility to make packaged accounts more transparent by clearly explaining what each of the individual elements are worth, so customers can compare."