Select Committee on Treasury Fourth Report

4  Proposals for reform

The Treasury's consultation and the three options

27. In its call for evidence on bundled travel insurance in November 2006, the Treasury provided three distinct options concerning the potential future regulatory framework for such products:
Option 1: No regulation, in other words maintaining the status quo. Providers of bundled travel insurance would continue to operate in a trading environment without any specific statutory requirement to face regulation.

Option 2: Strengthened industry self-regulation. Under this model, current voluntary industry codes (such as ABTA's Code of Conduct) would be enhanced to meet certain standards to ensure improved consumer protection. Providers of travel insurance would then either have to comply with the code or secure FSA authorisation to continue to sell bundled products.

Option 3: Full FSA conduct of business regulation on similar criteria to those required for providers of general insurance products.[46]

Option 1: No regulation for bundled products, or the status quo

28. Under the first option, companies would not have to act in accordance with any statutory obligation, but might choose voluntary compliance with a code of conduct. The ABTA Code of Conduct is one current example. The stated primary aims of this Code are to ensure that the public receives the best possible service from members; and to maintain and enhance the reputation of, standing and good name of the Association and its Members.[47] ABTA's representative noted that, to this end, staff involved in sales or advice had to pass an appropriate City and Guilds accredited examination. ABTA had also contacted its members and subsequently fined a minority (16) who had not announced their intention to comply with the examination requirement.[48] Data from ABTA show that 427 files were referred to their Legal Department for investigation under the Code of Conduct; following investigation, ABTA issued 30 fixed penalty notices in 2005-06.[49]

29. Mr Brehany did not consider that ABTA's Code of Conduct had been of any value in preventing the mis-selling of bundled travel insurance and characterised it as a "toothless tiger".[50] Mr Monk denied this, and noted that ABTA's Code of Conduct Committee had "levied fines of over £62,000" in 2005-06, and that in the past, ABTA members had received fines of "six digits" for serious breaches of the Code.[51] He also told us that, although ABTA did not favour expelling members, three or four expulsions had occurred during the past 12 years.[52]

30. ABTA withdrew from the OFT Consumer Codes Approval Scheme (CCAS) on 1 September 2006, because the organisation could not offer "an unconditional open-ended guarantee that payments made to … [ABTA] Members are fully protected." Ms Paula Macfarlane, ABTA's Legal Adviser, added that the reason for withdrawal "was not really to do with the Code and how it operates", but rather due to a "small point about financial protection".[53] The OFT indicated its disappointment with ABTA's decision to withdraw, noting that while the OFT "has no reason to believe that ABTA's code is not effective other than that it no longer complies with the CCAS criterion on protection of prepayments", the OFT did "consider this issue [of financial protection] to be significant".[54]

Option 2: Strengthened industry self-regulation

31. The second option proposed by the Treasury was for strengthened industry self-regulation. ABI supported an alternative form of regulation similar to that which applied under the Supply of Extended Warranties on Domestic Electrical Goods Order 2005 (the Extended Warranties Order). The ABI described warranty-style regulation as involving:

an industry code of practice (similar to those already in operation); industry training standards to ensure good sales practice; and an extension of the remit of the Financial Ombudsman Service to cover packaged travel insurance sales, allowing customer disputes over sales to be addressed independently.[55]

32. Mr Alan Williams, Director, Markets and Projects—Services, in the OFT, was circumspect when asked to consider the Extended Warranties Order as a model for future regulation of the bundled travel insurance market. He stated that the OFT could not draw any conclusion on the appropriateness of such a model before its study on the effectiveness of the Extended Warranties Order reported in late 2007 or in 2008.[56] Mr Adam Phillips, Vice-Chair of the Financial Services Consumer Panel, was sceptical about the transferability of the regulatory model of the Extended Warranties Order to the bundled travel insurance sector. For Mr Phillips, an extended warranty was "quite a simple product", whereas travel insurance was a more complex product. He considered that this meant that the extended warranties model "could not be applied in travel insurance with effect".[57]

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.[58] Mr Phillips stated that the central benefits of regulation under the FSA would stem from "principles-based regulation and treating customers fairly".[59] Mr Brehany personally supported regulation on the basis that it would lead to greater clarity and transparency for consumers.[60]

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".[61]

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.[62]

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… compliance cost and fees would be a serious issue."[63] ABTA felt that this was particularly the case given "low average net profit margins at only 1%".[64]

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.[65] Subsequently, Sir Callum has repeated his view that the regulatory focus of the FSA might be weakened by extension of oversight into new sectors.[66] 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 task..[67]

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".[68] 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.[69] 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".[70]

46   Travel insurance review: Call for evidence, para 3.25 Back

47   Code of Conduct, ABTA, 1 September 2006, p 1 Back

48   Q 60  Back

49   Report on the Code of Conduct of British Travel Agents 2005-06 Back

50   Q 7 Back

51   Qq 62, 64 Back

52   Q 64 Back

53   Qq 147-148  Back

54   Ev 77  Back

55   Ev 32  Back

56   Q 122  Back

57   Q 20  Back

58   Ev 51  Back

59   Q 13  Back

60   Q 15  Back

61   Ev 36  Back

62   Ev 32 Back

63   Q 75 Back

64   Q 69 Back

65   Treasury Committee, Oral and Written Evidence, The Financial Services Authority, HC (2005-06) 655-i, Q 2 Back

66   Sir Callum McCarthy, Speech to the Smith Institute, 21 June 2006 Back

67   Ev 32 Back

68   Q 154 Back

69   Q 152  Back

70   Q 155 Back

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Prepared 25 February 2007