FCA gives firms a year to overhaul motor legal expenses sales

The Financial Conduct Authority (FCA) has given firms that sell motor legal expenses insurance one year to stop bundling policies into other products and improve how they are explained - or face tough action.

The warning comes in the FCA’s second major publication on insurance since it was split off from the FSA, and the watchdog said it “characterises the type of work we are doing with the general insurance industry and its customers”.

In the motor legal expenses insurance (MLEI) thematic review, the regulator said that financial firms had to “re-evaluate their approach” to MLEI to make sure they treated their customers properly.

While the FCA said that MLEI was useful, it also said the product was complex and that consumers did not always understand it. The regulator placed the onus on firms to fully explain the product to customers and make sure the cover levels were suitable.

The regulator said that MLEI was normally sold for £25-£30 a policy, with a common profit margin of £17-£21. However, the FCA added that some firms lost money on the product.

The FCA also warned that any firms bundling MLEI in with other policies should stop, as it was unfair to customers.

It also fired a warning shot to the 58% of firms that sell MLEI on an opt-out basis. “It is hard to see opt-out selling of MLEI as consistent with good consumer protection,” the report said.

The FCA said it would revisit the MLEI market in one year’s time to assess how firms had improved their sales process. “At that time, firms that have not amended their business practices will stand out and are likely to face further regulatory action.”

The FCA’s findings on MLEI will be rolled into a wider review of general insurance add-ons, announced last December.

The ABI’s head of motor insurance, James Dalton said: “As an industry we are committed to improving our offering to consumers, so the FCA’s recommendations to improve the clarity of the wording of some MLEI policies comes as a useful reminder that we still have some work to do.

“As recognised in their report, insurers have already started to make the changes the Thematic Review has recommended to ensure consumers continue to get real value from MLEI and understand the product.”