COMMENT
Good News For 35 Million Customers!

In the fifteen years before I joined the Fool, I worked for a string of insurance companies, both big names and niche players. During this long trial by ordeal, I became increasingly disillusioned with the companies I worked for and their sharp practices, which often bordered on blatant mis-selling.

Towards the end of this stage of my life, I attended a party to celebrate the retirement of a Very Important Person in UK insurance. At this lavish bash, I met three bigwigs from the Financial Services Authority (FSA), the financial watchdog, one of whom is now the FSA's chief executive. During our conversation, I urged these regulators to take a closer look at the regulation of payment protection insurance, which I believe to be widely mis-sold.

At that time, the FSA had its hands full with widespread mis-selling of mortgage endowments and personal pensions. However, roughly three or four years on, it has decided to go the whole hog and end industry self-regulation of the sale of general insurance.

Under the soon-to-be-replaced regime, absolutely anyone could set themselves up as an adviser selling general insurance products – without any special training or licence. However, large and reputable companies would join the General Insurance Standards Council. This trade body has a code of practice for members to adhere to, but it is a toothless watchdog with limited powers.

However, from next Friday, 14 January, all general insurance products sold to individuals (not businesses) will be overseen by the beady eye of the FSA. The protection products that will fall under this tough new regime include:

• Motor;
• Home (buildings and contents);
• Travel (but, crazily, not policies sold by travel agents and tour operators, which are the very worst offenders!);
• Payment protection insurance (which is sold alongside mortgages, loans, credit and store cards and other finance agreements);
• Life insurance and mortgage protection (pure protection products – policies with any investment element are already FSA-regulated);
• Income protection (long-term sickness cover);
• Critical illness (protection against heart attack, cancer, stroke and other major illnesses or injuries);
• Health (private medical insurance, dental and similar plans);
• Personal accident;
• Breakdown; and
• Pet insurance.

Companies marketing these products must apply to the FSA to be authorised to conduct general insurance business, or become an appointed representative of an authorised company. The FSA will monitor various aspects of firms' conduct, including marketing, product literature, sales practices, staff competence and training. If companies don't meet the new standards or break the rules, the FSA can levy large fines to bring offenders in line.

Although tighter regulation will mean greater costs for firms, it should stamp out some of the shadier practices of the insurance industry, which is often guilty of selling inappropriate policies to its customers. It's about time that these firms were brought to order, as happened last Halloween in the mortgage market. Ultimately, it will benefit the industry too, as better regulation will reduce the massive bills it would eventually face for mis-selling products.

So, if you're planning to buy any protection policies, you could wait until next Friday, in order to benefit from the extra protection that FSA regulation will provide. However, you may find that premiums will start to creep up as businesses pass on their extra regulatory costs to their customers, so the choice is yours!

I expect insurers and other firms to preserve their profit margins at all costs. Hence, my personal view is that insurers will use the arrival of FSA regulation to bump up their premiums, as they did when Insurance Premium Tax was introduced in October 1994. No surprise there, then!

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