Option 3: FSA statutory regulation
33. Much of the evidence we received favoured extending
statutory regulation to the bundled travel insurance market. Two
arguments were common: regulation would create a level playing
field; and consumers of travel insurance would be better protected
under a statutory regulation regime.
Mr Phillips stated that the central benefits of regulation under
the FSA would stem from "principles-based regulation and
treating customers fairly".
Mr Brehany personally supported regulation on the basis that it
would lead to greater clarity and transparency for consumers.
34. The submission from Norwich Union supported both
arguments. Norwich Union recommended that bundled travel insurance
products be FSA-regulated in order to "strengthen consumer
protection and consistency across the insurance industry".
35. However, evidence from the insurance industry
was not unanimous. For instance, the ABI was against FSA regulation.
It considered that the best model for regulation of travel insurance
would ensure that "protection is afforded to customers where
travel insurance is sold as part of a package", but would
involve a regime similar to that applying in the extended warranties
sector for electrical goods rather than FSA regulation.
36. The travel industry was also concerned at the
prospect of regulation by the FSA. Mr Monk of ABTA argued that
regulation had the potential to distort the market: while compliance
costs might not prove such an issue for larger companies, "for
a small family company that has maybe three employees
cost and fees would be a serious issue."
ABTA felt that this was particularly the case given "low
average net profit margins at only 1%".
37. In addition to concerns about the potentially
adverse effect on the market, witnesses also expressed concern
about the degree to which an extension of the FSA's remit to cover
travel insurance might adversely affect the FSA. We have previously
discussed with Sir Callum McCarthy, Chairman of the FSA, his concerns
about the extension of the FSA's remit into new areas.
Subsequently, Sir Callum has repeated his view that the regulatory
focus of the FSA might be weakened by extension of oversight into
new sectors. The
ABI argued in evidence that the inclusion of travel agents within
the scope of the FSA regulation would prove a significant extra
burden for the FSA, and that local authority trading standards
departments might be better placed to perform this regulatory
38. The Economic Secretary to the Treasury agreed
that "we must not overload the FSA", acknowledging that
the FSA was already required to oversee a wide range of activities,
and accepted that there was a "tension between breadth and
the desire to have unified regulation".
He acknowledged, however, that some of the issues that had to
be considered were "much more difficult" when attempting
differential regulation of what was essentially the same product
sold through different and differently regulated routes as was
the case in the travel insurance market.
In conclusion, the Economic Secretary to the Treasury stated that,
if the Government did decide to regulate the bundled travel insurance
market, then there was a "real question as to whether you
would want to try to invent a new regulator as opposed to drawing
on the experience of the regulator we already have".