Bank account insurance rule changes – the lawyers' view

The FSA has published its final plans to restrict the way insurance is sold by banks and building societies as part of packaged accounts.

The regulator ordered an overhaul of bundled bank accounts in 2011 because it was concerned that consumers were being sold insurance that they did not understand or need.

The final version of the plans were published last week but will be rolled out in March, giving the industry little time to prepare. While the changes will mainly affect banks, insurers also need to be wary of some of the proposals.

The FSA’s new rules will make banks and building societies check if customers can claim on insurance cover before selling them a packaged bank account. The FSA also wants account suppliers to send customers a separate yearly statement to show if they are still eligible for insurance bundled into packaged accounts.

In addition, the regulator is demanding that banks alert customers if they have become too old to claim on bundled travel insurance, or if they will reach the age limit that year.

The good news for insurers is that the FSA has given overall approval to the way insurance is bundled in packaged accounts, according to Pinsent Masons partner Alexis Roberts.

He said: “I think it’s widely accepted, including by the FSA, that these are good products. They meet a customer need and that will continue.”

But as bank customers gain greater understanding of bundled policies, insurers should expect more claims, Roberts said.

He added: “That will be a good thing from a consumer protection perspective, but I guess it is less likely to be welcomed by distributors and insurers, and may ultimately lead to an increase in premium.”

Insurers could see banks seeking less restricted policies to bundle with accounts, according to DAC Beachcroft partner Matthew Rutter. The reason is that the FSA will want banks to spend more time judging how suitable the insurance elements of packaged accounts are for the individual. Therefore a policy with wide cover will be easier to sell.

Rutter said: “We may see some renegotiation of distribution agreements between insurers and banks, banks trying to respecify some products to make them easier to sell or even to improve the cover.

“They may be demanding the impossible, but there will be a tension between something that is easy to sell in compliance with the rules, which would point towards something with relatively few exclusions and standard cover, and the desire to keep the cost down to a fairly small monthly charge.”

Rutter said another problem is that banks sell insurance as agents, and insurers could be liable if bank staff make mistakes when selling their products.

He said: “They need to think about whether these bank staff are complying, or have checks in place to make sure the bank staff are complying with the rules.”

A recent report by the Financial Ombudsman Service (FOS) reinforced the need for an overhaul of how banks sell packaged accounts.

The watchdog said it gets a “significant number” of complaints about this kind of insurance, with most focused on mobile phone and travel cover. The FOS said the problems tend to arise when customers try to claim and find that their policy provided only limited cover.