Out-Law News 2 min. read

FCA plans to ban 'opt-out' sales of add-on insurance products

UK financial services firms will be banned from using pre-ticked boxes and other methods to sell customers additional 'add-on' products when they are purchasing regulated financial products under plans published by the Financial Conduct Authority (FCA).

The new rules would apply to any add-on sales of regulated or unregulated products offered alongside financial products; for example payment protection products, legal expenses sold with home insurance or breakdown cover sold with motor insurance. The FCA is consulting on its proposals until 25 June. The proposals also introduce guidance for firms so that they can give consumers information about add-on products at the right time in the sales process.

In a report last year, the FCA found that consumers often ended up purchasing poor value, unnecessary add-on insurance products when these were selected for them by default. Insurance expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that many firms had already switched to an 'opt-in' mechanism for these sales as a result of the regulator's previous work.

"This change is in line with the FCA's previous approach to add-ons," he said.

"Many firms have already adopted as best practice the approach of using opt-ins only, anticipating the changes on which the FCA is now consulting. However for those firms that have not already made the change, as well as the changes required to sales processes to remove opt-outs, they may have to look again at their financial models to assess the impact," he said.

The proposals published by the FCA were prompted by a market study of the general insurance market, which was the first to be carried out under its new competition mandate. As part of that work, it reviewed the experiences of more than 1,000 consumers who had purchased add-on travel, gadget, guaranteed asset protection (GAP), home emergency and personal accident insurance cover. GAP products provide consumers with cover over the costs they could incur when replacing stolen or damaged items.

The FCA published its final report in July 2014. The report identified the FCA's concerns with both the way in which insurance add-ons are sold and with the advantages that businesses that sold insurance cover to consumers could accrue over rivals by selling additional products at the point of sale. It found that some consumers were paying a combined £180 million more than they could be when buying these products, and that failings in the sales mechanism and competition could mean that some consumers were buying cover that they did not need or that was inappropriate for them.

Christopher Woolard, the FCA's director of strategy and competition, said that consumers were not making an informed choice when they purchased products through "forgetting to un-tick a box at the end of a purchase".

"Our work shows that the opt-out model means too often consumers are buying a product when they have not been able to give any thought to whether or not they need it," he said. "We are all familiar with having to double-check whether or not we have accidentally agreed to buy an add-on insurance product when buying car insurance or tickets online, for example. These proposals will mean that consumers will be in a better position to decide what they want and consider the options available to them."

Guidance published as part the FCA's proposals encourages firms to introduce the most common add-on products to consumers earlier in the sales process, giving them more time to choose which products, if any, they need. It also recommends that firms supply consumers with the annual price of these products rather than relying on monthly figures, to make sure that they understand the overall price to be paid.

The FCA has already consulted on the introduction of a deferred opt-in period for customers purchasing add-on GAP insurance along with a car or car finance product, as well as improved information about shopping around. It intends to further consider the case for requiring providers to publish the 'claims ratio', or proportion of the retail price paid out to settle claims, as a measure of the value of these products later in 2015, it said.

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