FCA consultation paper CP26/22: simplifying the insurance rules - what firms need to know

The FCA proposes to remove certain disclosure requirements across ICOBS that are duplicative or do not materially improve customer understanding or support effective decision-making. Specific requirements proposed for removal include disclosure of a firm's postal address, disclosure of whether a firm is an insurance undertaking or intermediary (terms not well understood by consumers), and several conflict of interest disclosures, including whether an intermediary holds 10% or more of the voting rights or capital in an insurance undertaking. Firms should review their current disclosure documentation to understand which requirements will fall away and consider whether any voluntary disclosure of that information remains in customers' interests under the Consumer Duty.

The FCA proposes to change the disclosure rules so that disclosures no longer default to paper delivery. Firms will have flexibility to communicate through different channels where those channels support understanding and engagement, but the FCA does not intend to make customers paperless where that would be inappropriate. Consistent with the Consumer Duty, firms must consider customers' needs and characteristics of vulnerability when deciding how to communicate, and paper may remain the most effective method for some customers. Critically, firms will be expected to make the option of requesting paper format clear and easily accessible for consumers, and an example of poor practice cited is requiring a consumer to use a different contact method (such as by phone) to request paper documents when the product was purchased online.

The FCA proposes to remove the category of "advice" that does not amount to a personal recommendation, meaning a firm would only be subject to the advice rules if it is providing a personal recommendation for the insurance arrangements being sold. This will create a clearer boundary between advised and non-advised sales and limit additional rules to situations where the firm is providing advice as defined by the Regulated Activities Order. The FCA also proposes to remove the requirement for firms to disclose whether they are giving a personal recommendation or advice on the basis of a fair (and personal) analysis of the market, taking the view that this is not required to help customers understand the proposed arrangements. Firms providing services that currently straddle the categories should review their sales processes and client communications to ensure accurate classification under the simplified framework.

The FCA recognises that developments in AI may increasingly influence how firms design and deliver disclosures, including through more tailored or interactive communications, and notes that proposals to simplify and increase flexibility in disclosure format may enable greater use of such technologies. The FCA is interested in views on how these developments may affect consumer engagement with disclosures, and whether its proposals could amplify any benefits or risks in this area. Firms that are already piloting or deploying AI in customer communications should consider engaging with this aspect of the consultation.

The FCA considered GAP insurance as part of its wider simplification work in CP25/12 but is not proposing changes to existing GAP rules in this consultation, pending the collection of further annual Value Measures data to assess the impact of its 2024 market intervention. Firms active in the GAP insurance market should monitor the FCA's data-gathering exercise and be prepared to engage with further consultation in due course.

The FCA proposes to amend the territorial application of ICOBS and PROD 4 so that detailed insurance conduct requirements apply only where there is a clear UK connection, based on the customer's habitual residence and, where relevant, the location of the risk. ICOBS requirements would be disapplied in full where both the customer's habitual residence and the state of the risk are outside the UK, with the disapplication applying to both insurers and intermediaries throughout the distribution chain.

The FCA proposes that rule changes will come into force shortly after they are made, with a near-immediate implementation date so that firms can make use of added flexibilities as soon as possible; however, the changes to territorial scope would apply on a forward-looking basis only. Existing contracts will continue to be subject to the rules that applied when they were entered into. Firms should therefore map their live book of international business and assess how the new territorial test will apply to policies written from the implementation date.

The FCA's position is that detailed consumer protection requirements for business outside the UK should be determined by local regulators, but the Principles (other than the Consumer Duty) and other high-level requirements such as the SYSC rules continue to apply to business outside the UK. The FCA considers it appropriate for UK conduct requirements not to apply in the same way as they do for UK business, having regard to regulatory expectations in the customer's home jurisdiction and the continued application of high-level UK requirements such as PRIN, which requires firms to pay due regard to customers' interests and treat them fairly.

The FCA proposes to convert the euro-denominated minimum limits of indemnity for insurance intermediaries into sterling to remove the dependency on GBP/EUR exchange rate movements and align the denomination with the currency in which most UK firms transact and hold PII policies. Under the proposed sterling equivalents, firms carrying on insurance distribution activity would be required to hold a minimum of £1,110,000 for a single claim and £1,650,000 in aggregate (compared to the current €1,300,380 and €1,924,560 respectively), and firms carrying on MCD article 3(1)(b) credit intermediation activity would be required to hold £390,000 per single claim and £640,000 in aggregate (compared to €460,000 and €750,000).

Firms that hold policies at the implementation date arranged on the basis of euro limits may rely on their existing cover without needing to check the amount against the revised rule until the next renewal or extension of their policy following the effective date, subject to a longstop of 12 months from the date the instrument comes into force. Firms holding PII policies denominated in currencies other than sterling will retain the equivalence check at policy inception and at each renewal, but will compare their cover against a fixed sterling amount rather than a euro amount.