Why the FCA's add-on probe is a game-changer

Make no mistake, the potential slew of regulation coming next year could change the face of the UK insurance industry.

The latest regulatory probe, as revealed by Insurance Times, is the Financial Conduct Authority’s investigation into add-ons.

This probe could result in significant changes for personal lines brokers and private motor insurers.

The high margin, low cost products sold as add-ons, such as breakdown assistance, key insurance and legal expenses, are under threat. These can count for considerable revenue. Admiral, for example, makes half its profits from ancillary income, although it should be noted that the Cardiff-based insurer’s staff handling of customers is regarded as one of the best in the industry. Personal lines brokers Swinton and Budget also earn significant sums from add-ons.

If brokers and insurers have not already started reviewing their policies and customer handling of add-ons, they should. The FCA, which will replace the FSA next year, has beefed up powers that enable it to temporarily ban products that it suspects could be mis-sold. This a significant departure from the old regime, which had first to gather evidence and conduct an analysis, before taking action.

The bottom line is that insurers and brokers will have to prove to the regulator that their products are easily understandable, sold correctly and have some value. This is going to be tricky for some personal lines brokers that make profit margins of 80% on some products thanks to a ruthless target-driven sales culture.

However, many brokers sell these products appropriately, and they should be safe from the prying eyes of the regulator. The ground is moving underneath the feet of personal lines brokers, and those that stand still run the risk of falling into the clutches of the regulator.