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Insurance is sold in the UK through a number of different channels. Consumers may obtain a quote and apply for life insurance over the internet or by telephoning the insurance provider. They may also find the right insurance policy through intermediaries such as agents or brokers. Increasingly, banks and insurance companies are coming together to provide insurance products through the local branches of a bank. The sale of life insurance in the UK through intermediaries is regulated by the Financial Services Authority (FSA), and regulation is being tightened in the insurance market to ensure that independent financial advisers are suitably qualified and to ensure that the rights of consumers are protected.
In a bancassurance arrangement, an arrangement is made between a bank and an insurance company to enable products of the insurance company to be sold through branches of the bank. This enables the insurance company to cut down on its sales force and take advantage of the network of bank branches as sales outlets. For the bank, this arrangement has advantages because the insurance products may be sold to customers at the same time as the bank's other products, ensuring a complete service to the customer and enabling the sale to be made as a package. For example, a mortgage offered by the bank to a customer could be sold with life assurance that is suitable for that customer's situation. The commission relating to the sales would be shared between the insurance company and the bank.
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Regulation of the Insurance Market
Developments in the regulation of life insurance distribution aim at providing protection for consumers, who have sometimes suffered as a consequence of miss-selling of insurance policies. Consumer protection will be strengthened by more regulation in respect of the qualifications of financial advisers and the way in which insurance sales are made. As part of the development of the internal market within the EU, measures have already been taken to create the conditions for a functioning internal market.
The EU Insurance Mediation Directive 2002/92/EC was transposed into UK law on 14 December 2005. The objectives of the directive were to:
- establish an internal market for insurance mediation;
- provide for a regulatory framework;
- ensure a high level of professionalism of insurance intermediaries; and
- guarantee a high level of protection to customers.
Persons dealing with insurance transactions, those who offer advisory services and those who assist in the management or execution of insurance transactions in the event of a claim are all considered to be intermediaries under the directive.
Depolarization regulations which became effective in the UK in 2004 aimed at increasing the range of products available to consumers as well as making it easier for them to see the actual cost of advice. Depolarization made it possible for distribution channels to offer advice from the whole of the market, from a limited number of providers, or from a single provider. The FSA expected this to result in more choice for consumers. Tied advisers, who previously only offered advice on the products of a single provider, would be able if they wished to expand their range of products.
Advisers must provide the customers with documents relating to the insurance services provided and the cost of those services. These documents give consumers much clearer information earlier in the sales process about the type of advice and level of service being provided by the adviser. Consumers are also given a “menu" of commission rates, providing a benchmark showing the average cost of advice. Additionally under the rules those advisers who want to call themselves independent must offer consumers the option to pay for advice by a fee.
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Retail Distribution Review (RDR)
The Retail Distribution Review (RDR) of the Financial Services Authority (FSA) is due to be implemented at the end of 2012. The RDR will ensure that independent financial advisers must be adequately qualified before they may operate as independent advisers. Following the implementation of the RDR those who are qualified as independent financial advisers may continue to offer products from the whole market while there will be another category of sales advisers engaged to sell products from just a few insurance providers or from a single provider. Product providers will no longer be able to pay commission to financial advisers. The consequence of the changes should be that people looking for financial advice may be confident that they are receiving the best advice matched to their particular circumstances and that this advice is being given by an independent financial adviser.
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The Financial Services Authority in the UK has drawn up a code on the conduct of business and financial advisers are required to keep to this code. Under the provisions of the code, insurance providers must make adequate disclosures about their products, give suitable investment advice and inform consumers of their right to cancel the policy. The need for greater consumer protection has been highlighted by well publicized scandals over the miss-selling of payment protection insurance.
Generally a consumer who has a complaint against an insurance provider should first address the complaint to the provider and look for a settlement. If this is not possible, a consumer in the UK may address the complaint to the Financial Ombudsman Service which investigates complaints into aspects of any regulated financial services. Decisions of the financial ombudsman are binding on financial services providers. Any complaints in connection with investments in occupational or personal pension schemes may be addressed to the Pensions Ombudsman.
UK Life Insurance Distribution (A Complete On-line Guide)
This is "series linked article" introducing the reader to the complexities of the UK life insurance distribution market. The first four articles are published in February 2010 and the remaining articles on this subject will be published in March 2010.