UK: General Insurance Regulation - The Brave New World Of NEWICOB

Last Updated: 14 November 2007
Article by Ian Mason and Laura Cooke

The FSA's recently published Consultation Paper sets out proposals for a wholesale redrafting of the Insurance Conduct of Business Rules ("ICOB"). The impetus for these proposals is twofold:

  1. the FSA's review of the effectiveness of its conduct of business rules for the sale and administration of non-investment insurance products, the results of which were published earlier this year;1 and
  2. a move away from detailed rules to a more principles- and risk-based approach to regulation.

There are a number of key proposals set out in the Consultation Paper for redrafting ICOB (referred to as "NEWICOB").

Firstly, the FSA proposes to impose a "two-tier" form of regulation which differentiates between protection products (within which they include critical illness insurance, income protection insurance, term insurance and payment protection insurance ("PPI")) and what the FSA terms as "other" insurance products, namely private motor insurance, household insurance, health cash plans, personal accident insurance, private medical insurance, standalone travel insurance and pet insurance.

The justification for this differentiation is that FSA supervisory experience and consumer research indicate that the risks posed from the two categories are very different. In particular, the FSA found that there is a greater risk of consumer detriment in the sale of protection products as opposed to products falling into the "other" insurance category. This also appears to be reflected in the attitudes of retail consumers who, in the main, view protection insurance products as relatively complicated products and, in some cases, with higher risks attaching. By comparison, products in the "other" insurance category are seen as far simpler. As such, it seems disproportionate to burden both categories of general insurance with the same regulatory regime and, consequently, it is proposed that more detailed rules will apply to the sale of protection insurance products.

Secondly, it is proposed that general rules which apply to most regulated firms and products (such as those relating to inducements, reliance on others, exclusion of liability, excessive charges and financial promotions) be withdrawn in their entirety from ICOB and replaced by reliance on the FSA's 10 high-level Principles of Business or guidance on their application.

Similarly, the FSA proposes to replace detailed rules specific to ICOB with a high-level standard together with a limited number of detailed rules and guidance. This is primarily intended for pure protection contracts and PPI, where the FSA believes higher risks are posed to consumers. Additionally, the FSA has identified that suitability, product disclosure and claims handling will be areas where this approach will be adopted. In some areas, the FSA is prevented from deleting rules as they exist by virtue of EU Directives.

As ICOB has only been in place for little more than two years, it is likely that many firms will find these substantive changes (if introduced) irksome as internal processes and procedures will, yet again, have to be reviewed and amended. However, the process of review and amendment is likely to be different from that which firms experienced when the FSA assumed responsibility for general insurance regulation in January 2005. This is because the current proposals are derived in the main from high-level principles.

While a move to principles-based regulation arguably decreases the compliance burden on firms, at the same time it increases the burden on senior management who will ultimately be charged with the role of interpreting how high-level principles can and should be implemented within firms. In doing so, the FSA has stated that firms must look at the nature of the products sold, their customer types, the sales medium and sales process - i.e. a risk-based approach to implementation tailored to each firm's own business model. As such, there will not necessarily be conformity of implementation across firms.

The consultation period closed on 28 September 2007. Following a consideration of the responses, the FSA currently intends that the final version of the revised ICOB will be published in December 2007, for implementation by firms over a six-month transition period from 6 January 2008.

However, there is a possibility that this timetable will slip, due to other pending regulatory developments which may have to be factored into the final draft of NEWICOB, or shortly after its introduction. In particular, following a referral earlier this year by the Office of Fair Trading, the Competition Commission is currently considering whether there are features of the PPI market in the UK which have an adverse effect on competition. The Competition Commission is expected to publish its provisional findings in May 2008.

Moreover, the Treasury announced in June its intention to extend the scope of the FSA's regulatory jurisdiction to include travel insurance sold alongside a holiday or other related travel, and the Treasury consultation on this issue closed in September. If the current intention is confirmed, its implementation will necessitate further changes to the proposed NEWICOB. In addition, the FSA states it is aware of current proposals at EU level to rationalise disclosure requirements for insurance.

Finally, given the FSA's ongoing work on sales standards in the UK PPI market (the third phase in its study was published at the end of September), it is likely that there may be further amendments to the draft NEWICOB arising from the result of this work.

As such, no doubt the regulatory regime for the general insurance market will continue to evolve far and beyond the current proposals.


1. "ICOB Review Interim Report: Consumer Experiences and Outcomes in General Insurance Markets" published in March 2007 with accompanying research reports.

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.

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