FSA to regulate all travel insurance

The Economic Secretary to the Treasury, Ed Balls, today announced that the Government intends to give the Financial Services Authority (FSA) the responsibility for regulating the selling of travel insurance sold along with a holiday.

The FSA at present only regulate travel insurance sold on a stand-alone basis.

Ed Balls, Economic Secretary said: "Twenty million people are buying travel insurance each year, and some are putting themselves and their families at risk by buying travel insurance that may not cover their needs. This happens as consumers have a 'knowledge gap' when buying travel insurance, as they often do not understand what they are buying or what it covers.

"Evidence shows that companies regulated by the FSA are better at getting consumers to make an informed choice because they are better at explaining the key features and exclusions of the product and guiding the customer through the sales process.

"I have therefore decided to make all travel insurance policies sold in the UK to be done through FSA regulated companies. This will come into effect from January 2009, following a further period of consultation. Consumers in the future buying travel insurance sold alongside their holiday will get the same core regulatory protection and rights as consumers buying stand-alone travel insurance do now."

The FSA will implement this change in principles-based and proportionate way, minimising the burden on those travel firms that do become FSA authorised.

Travel firms that decide not to seek FSA authorisation will be able to sell travel insurance through an appointed representatives route i.e. the travel firm will be able to sell travel insurance on behalf of a FSA regulated company. There are additional options available to travel firms that may allow them to provide information on insurance for remuneration and, as part of our consultation, we are seeking views on whether these freedoms offer travel firms a viable alternative to continue offering insurance services to their customers.

The Treasury will implement the new structure in a transitional way, giving the FSA and the industry time to adapt to the new regulatory environment. It has also exempted from regulation the selling of certain types of insurance by certain sectors, for example, certain additional insurances sold by car hire firms, where the evidence shows that the risk of consumer detriment is low.

Consumers have a 'knowledge gap' in understanding travel insurance as a product and the cover it provides. Evidence shows consumers make less informed choices when purchasing travel insurance than other insurance products because:

although the travel insurance market is highly competitive, policies tend to be more complicated that a simple household or motor policy,

as a secondary purchase, consumers are less likely to be focussed on the details of their insurance policy than through a direct sale, and

the majority of consumers only really seem to consider price, not the details of the policy, in deciding which policy to purchase.

Evidence shows FSA regulated firms selling travel insurance are better at providing consumers with product information and guiding them through the sales process.

The decision means that consumers of travel insurance sold along with a holiday will be protected by a core baseline of statutory protection provided by FSA regulation.

These protections include a requirement on firms to abide by the FSA's high-level principles, including requirements to conduct their business with due skill, care and diligence and to treat customers fairly. Consumers will also have access to the Financial Ombudsman Service if things go wrong.

The Treasury announced that it would conduct an investigation into the selling of travel insurance sold along with a holiday or related travel, amid concerns from consumer groups and sections of the industry that the market was not working correctly. This fulfilled a Treasury commitment to review this issue.

The Treasury Select Committee produced a report which it submitted to the Treasury's travel insurance review call for evidence that stated travel insurance sold along with a holiday should be regulated by the FSA, as long as it can be done in a proportionate way.

The Treasury is today publishing a summary of responses document that highlights the key arguments put forward by respondents to the call for evidence along with draft legislation and a partial Regulatory Impact Assessment. This document also contains a consultation on its decision, including on the draft legislation and any transitional measures that might be necessary.

The TSC report also called for the Government to work with the FSA and the insurance industry to produce policies that are better summarised in plain English. The Treasury is taking forward this work with the Association of British Insurers and FSA in order to develop a better understanding of what the issues are around consumers' understanding of travel insurance policies and to look at whether industry guidance could help improve the quality of disclosure and better signpost consumers through what is a relatively complex insurance policy.