Guidance on sale of optional extras and add-ons

Background

On 1 April 2016 the FCA introduced new rules and guidance banning the opt-out selling of optional additional general insurance products for which a charge is, or may become, payable. From this date, customers must ‘actively elect’ to purchase optional additional products, whether they are consumers or commercial customers.

The new rules and guidance are set out in Policy Statement PS15/22 and their main impact on MGAs is set out in this guidance note.

What is an optional additional product?
In PS15/22, published in September 2015, the FCA stated that:

The definition of an optional additional product includes any type of good, service or right obtained in connection with, or alongside, a primary product – whether it is financial in nature or not. It is our view that “optional extras”, such as separate baggage cover on a travel policy, or accidental damage on a home insurance policy are optional additional products − these are insurance products purchased in connection with the primary product and customers can be defaulted into the purchase without their knowledge. As such, there is potential for harm to occur. The definition does not include setting an excess or sum-insured – these are not additional products that the customer may obtain in connection to the primary product.

The following definition was then given in the FCA’s new rules, at ICOBS 6A.2:

An optional additional product is a good, service or right of any description, whether or not financial in nature, that a customer may obtain (or not, as the case may be) at his or her election in connection with or alongside a non-investment insurance contract.

Following representations made to the FCA by various market participants and trade bodies, the regulator issued a clarifying document on 31 March 2016: PS 15/22: Our expectations and case studies. This document distinguishes between ‘optional extras’ and ‘add-ons’, as follows:

‘Optional extras’ refer to cover options or extensions of cover within a policy e.g. accidental damage, baggage cover, personal possessions cover etc, when they are not separate policies.

‘Add-ons’ refers to policies or optional extras sold in connection with, or alongside, a primary product.

However, it should be noted that both ‘optional extras’ and ‘add-ons’ fall within the definition of optional additional products, as set out in the new ICOBS rules.

How do the new rules affect the sale of ‘optional extras’?
Case Study 1 in the FCA’s clarification document, referenced above, provides an example of a home insurance product that is sold on-line. The FCA suggests that, if a customer’s need for accidental damage cover is established as part of a firm’s process for determining a customer’s demands and needs and the customer is in a position to make an informed decision to purchase this optional extra, then the firm is unlikely to have breached its ban on opt-out selling. With this clarification, it seems safe to conclude that any cover options or extensions in cover that do not involve the sale of a separate policy do not contravene the new rules provided that:

For non-advised sales – the customer positively opts into purchase of the optional extra. This may be achieved, for example, by providing the customer with a high-level description of the cover with the customer then ticking a box on an on-line or paper application form to indicate that they wish it to be included in their policy.

For advised sales – the firm selling the product can demonstrate that its process for establishing the customer’s demands and needs (e.g. fact-finding) has identified a need for the optional extra concerned before a quote is provided. The statement of demands and needs provided with the quote would, therefore, need to reflect the customer’s need for any such optional extras and the associated personal recommendation would need to reflect how the recommended policy and the recommended optional extras meet the customer’s demands and needs.

Whether the sale is ‘advised’ or ‘non-advised’, in the above circumstances there would be no requirement for the quotations provided to the customer to separately identify the cost of the optional extras. However, in its March 2016 clarifying document, the FCA stated (in Case Study 4) that it considered giving price disclosure on optional extras to represent good practice as it could help customers make better informed decisions. It also added this comment:

If it is not possible, or proportionate, for firms to provide separate prices for optional extras, they should think about other ways to ensure they give their customers enough information to make an informed decision.

How do the new Rules affect the sale of ‘add-ons’?
Where a separate policy is offered alongside a primary policy, the new Rules and Guidance make it clear that, from 1 April 2016, customers must actively elect to buy the ‘add-on’. They must also be provided with sufficient product information in good time and in comprehensible form to make an informed purchase decision. This would usually mean customers being provided with a Policy Summary or an equivalent document, as well as information about the cost of the ‘add-on’.

Furthermore, the FCA expects firms which sell add-ons to have reviewed their customer sales journeys by 30 September 2016, making appropriate changes to that journey whenever necessary. This means that firms should consider the stage at which the add-on product information is presented to the customer. The FCA has found that providing information late in the sales process, for example after the sale of the primary product, could impact the customer’s ability to make an informed buying decision. 

The FCA repeatedly mentions the need for an ‘active election’. What does this mean?
It means an affirmation from the customer that they would like to purchase the optional additional product. An omission or failure to receive an affirmation would not be treated as an active election.

What about the renewal of add-on products a customer might already have?
Special (transitional) arrangements apply to the renewal of add-on products sold prior to 1 April 2016.

In PS15/22, the FCA said:

We have added transitional rules which give firms the option to either obtain an active election from their customers, or take reasonable steps to inform their customers that the renewal of their add-on product is optional, that they may elect not to renew the product and also the effect, if any, of the non-renewal on the primary product. In line with our principles for business, we are also asking firms not to make it unduly difficult for customers to elect not to renew these add-ons.

So, the FCA has given a useful element of flexibility for the renewal of add-ons sold to customers before 1 April 2016. But note that the new rules include a further provision which requires the terms of the product to be substantially the same at renewal as those which applied at the initial purchase stage, otherwise an active election must be sought from the customer.

For add-on products sold in accordance with the new rules on or after 1 April 2016, there is no need for firms to seek a further active election from the customer to renew the product in subsequent periods, again as long as the terms of the product remain substantially the same.

How are unbreakable bundles treated? Are the rules any different?
Special features which are built into a policy and cannot be removed, or a combination of policies that can only be purchased as a package and not as individual policies, are both considered by the FCA to be unbreakable bundles. Unbreakable bundles are not affected by the new rules and guidance, unless the bundle is itself sold as an add-on product. However, under FCA product disclosure rules, customers will need to be made fully aware of the contents of the bundle so that they are able to make an informed purchase decision.

Take, for example, a household policy. An MGA could choose to offer two different products to its brokers: one might be a ‘Silver’ household policy, without accidental damage, and the other a ‘Gold’  policy, including accidental damage. The Gold policy would be considered to be an unbreakable bundle, which brokers could sell to their customers on either a non-advised or advised basis, without having to comply with the new Rules and Guidance introduced on 1 April 2016. Brokers selling on an advised basis could, therefore, choose to recommend the policy variant that best meets the identified needs of each customer. Brokers selling on a non-advised basis could offer both the Gold and Silver products leaving it to the customer to decide which product best suits their needs.

Where does all this leave MGAs?
Where an MGA is distributing optional additional products through brokers, it is the broker’s responsibility for point of sale compliance with the new rules. The FCA does, however, expect MGAs to have oversight of their distribution channels. The degree of oversight expected will vary according to the role that the MGA plays in relation to the product. For example, in cases where an MGA acts as the designer of an add-on product, the FCA would expect it to take responsibility for the selection of distribution channels, the information that is provided to distributors and customers and post-sale customer outcomes for that product in relation to claims and complaints.

More information about the FCA’s expectations of MGAs can be found in its Thematic Review TR15/7: Delegated authority: Outsourcing in the general insurance market and The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD).

This paper is intended only as a high-level summary of the FCA’s position on optional additional products as at the date of its publication. Firms are advised to seek their own professional advice in connection with any issues raised in this paper which could affect their businesses. They should also be aware that matters relating to UK insurance regulation are subject to change.