---

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2007

rose to move, That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2007. The noble Lord said: I start by setting out the purpose of this order. At present, the Financial Services Authority—the FSA—is responsible for regulating the sale of general insurance products, including travel insurance sold by insurers and insurance brokers. However, the sale of travel insurance products sold as a package alongside a holiday, which I will call ““connected travel insurance””, was exempted from regulation when the Government implemented the EU’s insurance mediation directive in 2002. Although this decision was based on a desire to control the regulatory burden, the Government were aware of concerns with this market and were committed to review that position in due course. Since then, there has been continuing concern that the unregulated position of connected travel insurance may mean that standards are lower, putting consumers at risk. Moreover, consumers have less protection and redress when buying insurance from an unregulated supplier. In 2006, therefore, the Government launched a review into this issue and called for evidence. Last June, they announced their intention to extend the scope of FSA regulation to include the selling of connected travel insurance and published draft legislation and a consultation document. In December, they published a summary of the responses to that consultation and confirmed that regulation would be extended to connected travel insurance. The order before us puts that decision into effect by amending Article 72B of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to limit the exemption set out in that article. The order will mean that the exemption from FSA regulation no longer applies to the greater part of connected travel insurance. The exemption will, however, still continue to apply to insurance linked to an event where the travel is provided by the organiser of that event and to the hire of a vehicle that does not provide sleeping accommodation—car hire is an obvious example. The Government are retaining these exemptions because they have not been made aware of any concerns relating to the sale of insurance in those markets. I will now explain the reasoning behind the decision to limit this exemption and the reasons why I hope that the Committee will support this order. Travel insurance is an important product that offers both financial protection and peace of mind. However, it is not a comprehensive product. It is important that consumers understand under which circumstances they will and will not be covered. Travel insurance is also a relatively complex insurance product, which often provides medical, emergency, repatriation and liability cover. As I said, in recent years there have been growing concerns from consumer groups and sections of the industry that the market is not working as well as it could. In 2006, a Which? survey found that only 35 per cent of 26 travel agents surveyed asked medical questions, only 19 per cent explained what the policy covered and no explanations were given of what the policy did not cover. In all cases, the disclosure standards of regulated banks and insurers selling the same product were far higher. Research commissioned by the British Insurance Brokers Association also found consistently higher standards of disclosure by regulated companies. Promoting and ultimately requiring higher standards of disclosure across the board is an important reason to regulate. Not only should customers know what they are and are not buying, but one of the features of insurance law is that a policy can be voided if the customer has made incorrect or simply insufficient disclosures. Regulation is designed to reduce the risks of that happening. Perhaps even more important, if incorrect or insufficient disclosures occur under a regulated sale, consumers will have far greater options for redress and compensation than might otherwise be available. The Financial Ombudsman Service and the Financial Services Compensation Scheme provide a comprehensive dispute resolution service covering regulated companies with an upper compensatory limit of £100,000. This order, therefore, not only makes it less likely that things will go wrong but ensures that, if they do, customers are better protected. Protecting customers is the most important reason for the Government’s decision to regulate, although there are others. Regulation will establish a level playing field for all insurance providers. Currently, I am sure that most consumers would find it bizarre that travel insurance is regulated when they buy it from insurance experts but not when they buy it from firms that specialise in travel. However, we do not take decisions to regulate lightly. The decision has been carefully consulted on through the call for evidence in 2006 and the consultation document published in June 2007, to which the majority of responses called for regulation. The FSA published a consultation paper in December last year, which deals with the detailed issues of implementation. The Treasury Select Committee has also recommended FSA regulation. It said: "““We see merit in the introduction of a coherent and unified system of statutory regulation for the travel insurance market and we believe that the FSA is best-placed to deliver such a system””." Throughout the process, the concerns that I know exist in the connected travel insurance industry have been considered, but let me explain why we have decided to regulate. First, I know that some will say that there is not a problem to address, or that, if there is, regulation will not resolve it. The Government believe that the evidence suggests that there is a problem to address and that FSA-regulated firms do a better job in product disclosure and navigating the consumer through the sales process. As I said, regulation would also make a difference by providing better rights to redress. Secondly, it has been argued that regulation is disproportionate and would be burdensome for the travel industry—something that we consider carefully. The Government believe that the benefits of this change outweigh the costs and that this is therefore proportionate. Although only a small percentage of travel insurance policies are claimed on—about 4 per cent—it is vital that when claims do arise, often when the consumer is stranded in a foreign country, consumers know what their level of cover is, that their claim will not be denied and that they will have proper compensation if things go wrong. The details of the cost-benefit calculation are set out in the regulatory impact assessment published last month alongside the summary of responses to the June 2007 consultation, and the FSA is currently consulting to ensure that its regime is proportionate and risk-based. It is also important to remember that travel companies will not have to become regulated if they choose not to do so. They can instead become an appointed representative, with a regulated firm responsible for them; an introducer appointed representative, which allows them to direct customers to an authorised seller; or an unauthorised introducer. The final argument sometimes used against regulation is that travel firms will simply stop offering insurance and that consumers will therefore not buy it at all. It is certainly important that we do not discourage people from taking out the appropriate insurance, but this argument may be misleading for two reasons. First, travel insurance is a highly competitive market, with many easily accessible consumer outlets, including banks, post offices, brokers and internet and phone sales. Over the past few years, more and more consumers have been taking advantage of these extensive outlets. Secondly, as I have outlined, even if travel companies choose not to offer insurance themselves, they will still be able to direct their customers to regulated providers; in fact, they are required to advise consumers on the availability of travel insurance under the existing package travel regulations. In conclusion, this decision has been taken after comprehensive consultation and careful consideration. We are committed to regulating only where necessary and only where the benefits outweigh the costs. In this case, they do. The current FSA consultation should also ensure that regulation is brought in in a proportionate and risk-based way. As I have said, the order will improve consumer protection. It will make mis-selling less likely, increase standards of vital disclosures and provide better routes for redress and compensation. It will also level the regulatory playing field across this competitive sector. I therefore hope that noble Lords will agree to this important change and support the order. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2007. 6th Report from the Statutory Instruments Committee.—(Lord Davies of Oldham.)