Business, Innovation and SkillsWritten evidence submitted by the Association of British Insurers
The ABI
The ABI is the voice of insurance, representing the general insurance, investment and long-term savings industry. It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK.
Summary
1. We support the rationale for a Consumer Rights Bill that consolidates, clarifies and modernises consumer law by providing a “de minimis” standard. Empowered and engaged consumers are vital for competitive and thriving markets. However, there is a delicate balance between ensuring that consumers have appropriate protections and ensuring that unintended complexities are not created, especially for sectors with extensive sectoral rules and regulations.
2. Financial Services is one of a number of heavily regulated industries that has existing consumer protections and redress schemes that in many cases exceed the standards as set out by the draft Bill. The ABI is keen to ensure that the Bill does not inadvertently lead to duplicate or conflicting regulation for businesses and confusion and uncertainty for consumers as to the rights afforded to them. The best way to do this is ensure individual clauses are clear and unambiguous and the draft Bill contains robust provisions that highlight the primacy of sector specific rules and regulation.
3. The ABI supports the standard for services as written in the draft Bill. We believe it provides clear and robust protection for consumers when they purchase services. We do not believe that the “satisfactory quality” standard, which is used for goods, would be either appropriate or indeed helpful for services. This Bill is intended to create a “de minimis” standard that is not contrary to existing sector specific legislation. Financial Services regulation has been specifically tailored to ensure relevant and robust protection for consumers of financial services and adopting a new “satisfactory quality” standard could potentially contradict and confuse these established standards due to the uncertainty and subjectivity of this test.
4. As the implications of changing this test are uncertainty and subjectivity for both consumers and providers, it is hard to accurately predict the impact it would have. For consumers, we believe this standard would increase uncertainty and lead to further disputes that may lead to litigation as the only way to clarify this new standard. Due to prudential regulatory requirements and the need for insurers to be risk averse to protect consumers, it is possible that this uncertainty could lead to higher costs through increased premiums, further restricted cover and reduced numbers of providers in the market.
5. The ABI also has a number of concerns about remedies, unfair contract terms and private actions, and would suggest revisions to these clauses. The draft Bill and guidance notes are also silent on the role and requirements of sectoral regulators. We suggest this should be explored further to ensure greater clarity for providers and consumers.
“Reasonable Care and Skill” versus “Satisfactory Quality”
6. The ABI understands that questions have been raised as to why goods and services have different standards of care. Whilst a single standard for all goods and services may seem attractive in theory, the practicalities are a very different matter. We urge both BIS and the Committee to retain the reasonable care and skill standard that is currently used. A key aim of the Bill is to provide consistency and clarity. Moving away from a well-established standard recognised by consumers and sectoral regulators and is also found in other pieces of major cross cutting legislation, such as the Companies Act 2006, could reduce clarity and risk further inconsistency of application. We understand from conversations with the Law Society reveal that this standard has been subject to very few litigious actions, highlighting that both consumers and providers understand this standard.
7. Holding goods and services to a uniform measure of standards is incredibly difficult; services often have a wider range of customer needs and expectations and are more prone to unpredictable external factors impacting upon the service. Many services do not have a tangible standalone product, which can also add to the difficulty in making an assessment as to whether they are of “satisfactory” quality or not. This will lead to more subjectivity and therefore different interpretations as to what “satisfactory” means and how it applies across the services landscape.
8. Other nations that use the “satisfactory quality” test, such as New Zealand and Australia often revert to looking at the care and skill used by professionals, and so it would seem that the existing “reasonable care and skill test” offers comparable robust consumer protection that would not be increased or improved by changing the standard. In fact, it seems the main change would be to confuse all parties as to the rights and responsibilities afforded.
9. The factors outlined in the Bill as considerations to assess if a service is satisfactory further serve to highlight the complexities of applying this standard. One example is the use of pricing. Insurance can provide a wide array of coverage and the price paid will vary depending on the cover required and the risk presented. The more extensive the cover, the higher the premium. Conversely, the more limited the cover, the lower the premium. If pricing will be reviewed for “satisfaction”, this could imply that certain levels of cover are not satisfactory and so should not be offered, thus reducing choice for consumers.
10. As mentioned in the summary, it is impossible to forsee the implications of a “satisfactory quality” test for services due to the potential subjectivity and uncertainty as to how this test will be applied. The Prudential Regulatory Authority (PRA) has stringent requirements as to capital reserves firms need to cover all potential liabilities. This means insurers have to be risk averse and consider the worst case scenario as standard to ensure all liabilities have been calculated and can be met. Taking this into account, there is a concern that providers may be held to unachievable standards and could be liable for service failures out of their control, such as economic or market changes, or changes in individuals’ circumstances. For example, a consumer may believe their pension policy was not satisfactory because the amount available at retirement is not what they expected or hoped. However, this could be due to circumstances out of the providers control, such as market and economic factors, the consumer not seeking advice on investment options or ignoring advice. It is understandable that the consumer will not be satisfied, but the reasons are not the fault of the pension provider.
11. To manage unrealistic consumer expectations, risk adverse providers may review consumer literature, adding more detailed and lengthy information as to what the contract will and will not cover and what can and cannot be achieved. If this were to come about, it would be to the significant detriment of consumer engagement and understanding, due to consumer reluctance to engage with long and complex literature as to purchases. There will also be a significant cost to business due to the need for legal advice and amending content etc.
12. Although insurance providers will try and mitigate this uncertainty through contract terms, this will not be fully achievable and may result in a rise in premiums or further restrictions to insurance contracts as insurers attempt to calculate the cost and likelihood of additional risks. It could also lead to a rise in the number of disputes between consumers and providers over exactly what “satisfactory” will mean across different sectors. If a body of case law is built up, it is likely that different sectors will have different interpretations, leading to the development of a range of standards, which would undermine the stated purpose.
13. This will not only affect individual consumers, but also businesses that purchase insurance to protect their customers and themselves against claims. This change may lead to an increase in professional indemnity and potentially, public liability and product liability insurance premiums. The impact could be wide-reaching, as it is not only regulated professions, such as financial services providers and legal professionals, but also all suppliers of services or goods that have a service attached—plumbers, electricians, car manufacturers, retailers. This could have a significant financial impact on all businesses, especially those who are self-employed or small enterprises, at a time when many are experiencing economic challenges.
14. The additional cost and complexity of these insurance policies could lead to providers exiting these markets, which would limit the number of providers, reducing opportunities to access competitively priced insurance. Less competition would result in significant costs to companies purchasing insurance, potentially leading to many having inadequate or no insurance and vulnerable to large damages claims.
Chapter 4—Services (as included in the Draft Bill)
15. As mentioned above, the ABI strongly believes the proportionate approach for assessing services is the standard of “reasonable care and skill” as outlined in the draft Bill. There are a number of points in this section of the Bill that should be clarified or strengthened to ensure the correct balance between offering consumers fair protections whilst avoiding any unintended consequences that lead to onerous and unnecessary burdens on businesses.
16. Clause 52 requires “Information about the trader or service to be binding”. The ABI understands that consumers are reliant on information given by the provider and so to some extent they should rely upon this if standards are not adhered to. However, if this is an absolute right, this could have the unintended consequence of stifling the provision of customer service. There may be examples where consumers pose a hypothetical question or ask a provider a question that cannot be answered with any certainty. If the provider gives an incorrect answer or an illustration used in marketing material or on a website does not apply to a consumer’s particular circumstances, there is the potential that it would give the consumer right to pursue the trader for a breach of contract. As providers often do not know what information a consumer will use when deciding whether to enter into a contract, the risks related to “going the extra mile” are likely to lead to providers relying strictly on prescriptive information.
17. Clause 52(2) implements Articles 5 and 6 of the Consumer Rights Directive. This Directive excludes a number of sectors, including financial services. However, this is not made clear either in the draft Bill or the explanatory notes. We believe this should be explicitly pointed out, preferably in the Bill, to clarify the rights and responsibilities for all parties.
18. Clause 55 ensures that provisions relating to services are subject to “any other enactment”. The explanatory notes refer to sector specific “legislation” and Clause 60 refers to a definition used in another act but does not elaborate. Whilst we fully support the inclusion of this clause, we believe “enactments” should not be limited to primary legislation, but should include governing principles and rules that come from regulation. The Financial Conduct Authority handbook sets out high level principles for business such as “treating customers fairly” as well as specific rules governing the conduct of financial services business eg Insurance Conduct of Business Sourcebook (ICOBS). There are also specific rules covering consumer complaints and redress (the Dispute Resolution rules (DISP)). We would welcome clarity by amending either clauses 55 and 60 or the explanatory notes to explicitly include all sector specific regulation as well as legislation.
19. Clauses 56–58 cover available remedies if statutory rights under a services contract are not met. Whilst the ABI supports the clarity on remedies, there is a concern that either repeat performance or a price reduction may not always be practicable or what consumers need. The legislation does recognise that repeat performance can be impossible, but this may also be the case with price reduction. The Financial Ombudsman Service, the independent body in charge of resolving consumer complaints against financial services providers, uses the standard of “putting the consumer in the position they would now be in—financially—if the business providing the financial service hadn’t got it wrong in the first place”. The ABI feels that this is a good standard to use as it does not prevent price reduction or repeat performance where appropriate, but also provides flexibility for businesses to provide other remedies in situations when the highlighted remedies are not applicable.
Unfair Contract Terms
20. BIS have implemented the Law Commissions’ Advice on Unfair Terms in Consumer Contracts. The ABI appreciates that the proposals are intended to bring clarity, but we have concerns as to how some clauses could be applied in practice, particularly in terms of how different regulatory bodies will interpret them and how they will interact with other sector specific legislation.
21. Clause 67 of the draft Bill exempts terms from being assessed for fairness if they are both “transparent” and “prominent”. A prominent term is described as one which is “brought to the consumer’s attention in a way the average consumer would be aware of it” and the only clarification provided by the explanatory notes is “the small print” is not prominent. Financial Services is an industry that is heavily criticised for confusing and overwhelming consumers with high volumes of information. Insurers are subject to increasing regulatory requirements to simplify pre-contractual disclosure and only provide key information to help avoid information overload and consumer disengagement (eg providers of certain investment products are required by EU law to provide key information on a document of not more than two pages). Adding an obligation to make terms “prominent” significantly increases the need for additional consumer information and so creates contradictory requirements from different regulators with no certainty for traders as to how to balance these requirements. We understand from conversations with the Financial Conduct Authority (FCA) that they also share concerns as to the difficulties of implementing this point in a manner that would lead to consumer protections and not cause significant problems for providers.
22. Similar issues occur for clause 71 when requiring providers to point out “especially onerous” terms to consumers. It is unclear whether this requirement is in addition to the transparency and prominent requirements of Clause 67, or indeed what the consequences of non-compliance might be Insurance contracts are necessarily detailed, and it is not always feasible to fully explain exclusions, for example, in the main initial communication with the customer. It is also unclear as to what might be considered an “onerous” condition, and to whom. Insurance providers would argue that conditions on consumers or exclusions are not onerous, but ensure that risks and costs are managed efficiently and effectively by both parties.
23. Due to overwhelming consumer preference, the majority of insurance contracts are now sold on the telephone, online or through third parties as this is convenient and time-efficient for consumers. The key contract terms are usually included in the policy summary document (as required by EU and UK regulation) that the consumer is encouraged to read. While we believe this would meet the transparency requirement it might not satisfy a narrow interpretation of the requirement of “prominence” or pointing out “especially onerous terms”. Many consumers already begrudge the time spent purchasing insurance, and the length of the documentation they receive. If this process is elongated due to the need to point out additional terms, many may not bother. Consumers are already taking less advice around their insurance needs and welfare provisions are being reduced, so this change could simply exacerbate the worrying trend of consumers having no safety net in place.
24. We do not support the “prominence” test in Clause 67, and we believe that the reference to “especially onerous terms” Clause 71(2) is unnecessary and confusing. Both of these requirements should be removed from the draft Bill. If these clauses were to remain, there should be requirements for relevant sectoral regulators to provide further guidance on what terms may be seen as onerous, what steps are required to fulfil the “prominent placement” or “particular attention” requirements and how these sit alongside existing domestic and European rules. This will allow providers to approach this in a uniform way providing certainty and encouraging consistent consumer protection.
Collective Actions for Competition Breaches
25. The ABI understands the rationale for including provisions in the draft Bill to allow collective actions for competition breaches. However, the ABI along with number of other industries do not believe the Government has made the case that the use of opt-out collective actions will empower consumers and make it easier for them to take action. There is a lack of sufficient safeguards in the Bill to prevent abuse of the opt-out system, as experienced in other jurisdictions. We would urge the Committee to scrutinise the arguments made by BIS in relation to this matter whilst considering concerns raised by other industry bodies.
19 August 2013