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

I declare an interest as the chairman and chief executive of an insurance broking organisation. I have been a director of the British Insurance Brokers Association and previously was a regional chairman. I welcome the order and I strongly support the regulation of travel firms that sell travel insurance in connection with a travel product. I should like to set the scene by highlighting some salient statistics about the travel insurance market, with which, no doubt, Members of the Committee are familiar. First, in 2006, 21 million travel insurance policies were purchased, making a total premium income of £670 million. Secondly, it is believed that only 66 per cent of people buy travel insurance when they go away. Finally, it seems hard to obtain an accurate picture of the number or value of policies bought from travel firms, because the figures are different, depending on which organisation is quoting the figures. The Association of British Travel Agents believes that the travel industry’s share of the travel insurance market is about 25 per cent. I support this amendment to the Financial Services and Markets Act 2000 for many reasons. I shall briefly outline what I believe to be the main arguments in its favour. The Financial Services Authority has four statutory objectives, one of which is consumer protection and securing the appropriate degree of protection for consumers. The existing regulatory system for the insurance industry excludes travel insurance sold by travel agents and tour operators. Therefore, it does not provide protection to all consumers. The fact that consumers are given varying levels of protection depending on where they choose to buy the insurance is unsatisfactory. To allow the FSA to achieve its aim of protecting consumers, the sale of connected travel insurance must be brought within the scope of FSA regulation. Currently, unregulated travel agents and tour operators are not obliged to outline the cover, terms, conditions and exclusions of the policies being sold. In December 2006, the British Insurance Brokers Association commissioned research, the results of which are startling. For example, 72 per cent of consumers buying travel insurance from a travel agent were not advised whether their policy included terrorism cover. Consumers buying products that they do not fully understand could result in consumer detriment, which is evidenced by customers making claims on their policies unaware that cover is not in place for the incident or loss in question. It is also vital that consumers are made aware of how to make a claim under the policy, as this can vary depending on the section of the policy to which the claim relates. There is no obligation for travel firms to highlight this, which may be detrimental at present. Bringing travel firms into the existing regulatory environment would compel them to abide by the FSA’s insurance conduct of business rules. Those rules ensure that customers are provided with such information to allow them to make an informed decision when buying insurance; the rules outline what information must be disclosed to a client as part of the sales process. That will result in consumers making educated decisions and reduce the risk of consumer detriment. Consumers must also be made aware that travel insurance is specifically designed for short periods and particular scenarios and is not to be seen as an alternative for private medical cover, home insurance or personal accident insurance. Full FSA regulation of travel agents and tour operators will give consumers who buy travel insurance from one of those firms access to the Financial Ombudsman Service, an independent dispute resolution service. Furthermore, consumers will have access to the Financial Services Compensation Scheme, which protects consumers in the event of an insurance company being unable to meet its financial responsibility to clients. Allowing customers recourse to both the FOS and the FSCS is, in my opinion, an important protection mechanism. I also point out that creating protection for people buying travel insurance from a travel firm will serve to enhance the reputation of travel insurance policies over time. In return, it is hoped that that will help to increase the number of people who purchase this important form of insurance. It is also important that such regulation of an industry does not create a competitive disadvantage for any group of businesses. The system in place at the moment clearly does not achieve that. Travel firms selling travel insurance have a clear advantage over insurance intermediaries and brokers selling the same products. Travel firms do not have any compliance costs, whereas brokers and intermediaries do. The proposal before us will address that imbalance and ensure that all firms operate on a level playing field. Throughout the discussions on the regulation of travel firms, significant time has been devoted to the cost of compliance for those businesses. It is worth noting that many travel firms receive in excess of 25 per cent commission on each policy that they sell. In the light of that, I believe that the costs associated with regulation will not have a significant impact on those firms and, as such, cannot be used as a reason not to regulate travel agents and tour operators. Several options are available to travel firms that do not wish to become directly authorised by the FSA. They can form relationships with existing regulatory firms by becoming appointed representatives, introducer appointed representatives or simple introducers. Each of those options would reduce the compliance costs involved with regulation while still ensuring that the standards remain high. In light of the reasons that I have outlined before the Committee, I support the order in its current form and wish to see it adopted.