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This order, therefore, not only makes it less likely that things will go wrong but ensures that, if they do, customers are better protected. Protecting customers is the most important reason for the Government’s decision to regulate, although there are others. Regulation will establish a level playing field for all insurance providers. Currently, I am sure that most consumers would find it bizarre that travel insurance is regulated when they buy it from insurance experts but not when they buy it from firms that specialise in travel.

However, we do not take decisions to regulate lightly. The decision has been carefully consulted on through the call for evidence in 2006 and the consultation document published in June 2007, to which the majority of responses called for regulation. The FSA published a consultation paper in December last year, which deals with the detailed issues of implementation. The Treasury Select Committee has also recommended FSA regulation. It said:

Throughout the process, the concerns that I know exist in the connected travel insurance industry have been considered, but let me explain why we have decided to regulate. First, I know that some will say that there is not a problem to address, or that, if there is, regulation will not resolve it. The Government believe that the evidence suggests that there is a problem to address and that FSA-regulated firms do a better job in product disclosure and navigating the consumer through the sales process. As I said, regulation would also make a difference by providing better rights to redress.



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Secondly, it has been argued that regulation is disproportionate and would be burdensome for the travel industry—something that we consider carefully. The Government believe that the benefits of this change outweigh the costs and that this is therefore proportionate. Although only a small percentage of travel insurance policies are claimed on—about 4 per cent—it is vital that when claims do arise, often when the consumer is stranded in a foreign country, consumers know what their level of cover is, that their claim will not be denied and that they will have proper compensation if things go wrong.

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The details of the cost-benefit calculation are set out in the regulatory impact assessment published last month alongside the summary of responses to the June 2007 consultation, and the FSA is currently consulting to ensure that its regime is proportionate and risk-based. It is also important to remember that travel companies will not have to become regulated if they choose not to do so. They can instead become an appointed representative, with a regulated firm responsible for them; an introducer appointed representative, which allows them to direct customers to an authorised seller; or an unauthorised introducer.

The final argument sometimes used against regulation is that travel firms will simply stop offering insurance and that consumers will therefore not buy it at all. It is certainly important that we do not discourage people from taking out the appropriate insurance, but this argument may be misleading for two reasons. First, travel insurance is a highly competitive market, with many easily accessible consumer outlets, including banks, post offices, brokers and internet and phone sales. Over the past few years, more and more consumers have been taking advantage of these extensive outlets. Secondly, as I have outlined, even if travel companies choose not to offer insurance themselves, they will still be able to direct their customers to regulated providers; in fact, they are required to advise consumers on the availability of travel insurance under the existing package travel regulations.

In conclusion, this decision has been taken after comprehensive consultation and careful consideration. We are committed to regulating only where necessary and only where the benefits outweigh the costs. In this case, they do. The current FSA consultation should also ensure that regulation is brought in in a proportionate and risk-based way. As I have said, the order will improve consumer protection. It will make mis-selling less likely, increase standards of vital disclosures and provide better routes for redress and compensation. It will also level the regulatory playing field across this competitive sector. I therefore hope that noble Lords will agree to this important change and support the order. I beg to move.

Moved, That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2007. 6th Report from the Statutory Instruments Committee.—(Lord Davies of Oldham.)

Baroness Noakes: I thank the Minister for introducing the order, although I am surprised that

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the Government are pressing ahead with it. Even those on the extreme wing of the consumerist agenda could not claim that travel insurance is one of the great wrongs in society waiting to be righted by yet more regulation.

In 2003, after the Government consulted on the insurance mediation directive, they concluded that in the regulation of travel agents selling travel insurance there was insufficient evidence for gold-plating the directive and increasing the regulatory burden. At that stage, the Treasury found little evidence of consumer detriment and no evidence whatever of systematic actual consumer detriment. Somehow, however, three years later in 2006, the Government reached the view that there were,

The source of those concerns was not spelled out, but as is so often the case the Government’s action opened Pandora’s box, which led inexorably to more regulation.

The Treasury Select Committee in another place carried out its own inquiries. The summary of its report, issued in February last year, said:

However, that comment was aimed at the insurance industry overall, as the criticisms generally concerned consumer awareness of exclusions and the effects of pre-existing medical conditions. When the Select Committee considered the narrower area of bundle travel insurance, paragraph 19 of the detailed report said only that the committee had received “some evidence” of significant consumer detriment. Needless to say, in the Select Committee, the consumer groups were keen to press regulation as a solution, as were some organisations in the insurance industry, doubtless on the grounds that if they had to suffer regulation, others should as well. I fully expect my noble friend Lord Sheikh, who has much experience in the insurance industry, to tell us its view.

I cannot see anywhere in the Government’s papers or the Treasury Select Committee’s report any strong evidence to support the imposition of further regulation. We start from the principle that legislation should be considered only when other approaches have demonstrably failed. We have not seen any evidence of widespread failure of the current arrangements, although there are plenty of assertions about the extent of that failure. The Which? report cited by the Minister was based on a very small sample, and complaints levels within the travel industry are generally very low. Therefore, we cannot see the case for the heavy-handed regulatory response in this order.

Even the largely risible regulatory impact assessment does not make a case for regulation. The regulatory option is expected to impose one-off costs of up to £8.1 million and an annual cost of up to £5.1 million, and it is expected to yield benefits worth £173 million. The option of strengthened self-regulation will accrue 80 per cent of those benefits, up to £138 million, at a

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negligible one-off cost and a maximum annual cost of £1.5 million. I thought that the benefit calculations in the regulatory impact assessment were in cloud-cuckoo-land, but, if we take them at face value, the Government’s figures suggest that improved self-regulation is a no-brainer. On a best-estimate basis, the net present value of the net benefit of regulation compared with improved self-regulation is less than £3 million, which is well within the margins of error.

The Government’s regulatory solution will bear down heavily on small firms, which is the very thing that the Government keep promising that they will not do. Many travel agents and tour operators are very small businesses operating on slender margins. The vast majority of the members of the Association of British Travel Agents are small businesses. ABTA believes that regulation will drive many more companies out of providing travel insurance alongside travel products. That is what happened when ABTA’s self-regulatory mechanisms were sharpened up after 2002. The Minister hopes otherwise, but that is just hope. If fewer travel businesses sell travel insurance alongside travel products, that will tend to increase the number of people travelling without insurance—it is currently estimated that around 14 per cent of travellers do so—which is in direct conflict with the Government’s policy, as promoted by the Foreign Office, that those who travel abroad should have cover.

There is another reason to cast doubt on the Government’s judgment in bringing forward this order. The Treasury Select Committee in another place recommended that regulation be carried out by the Financial Services Authority if the Government were satisfied that the FSA could meet the requirements of consistency across the travel insurance market and of being principles-and-risk-based. The Government’s response was that they were so satisfied. However, the report and the response were written ahead of the Northern Rock debacle last summer. While we do not yet have a full picture of the precise failings of the FSA, it is clear that it did fail. How else can the FSA explain the lack of, or inadequate, monitoring of solvency? Anybody who visits the City will find views, often very strongly expressed, about the FSA’s other failings in banking supervision and its other activities. The FSA is not an organisation on top of its role and therefore able to expand its regulatory functions. It might be willing to do so, but that is not the point. The regulation of travel insurance is clearly not a top priority for any Government. At best, the FSA is overburdened; at worst, it needs a major overhaul. It borders on lunacy for the Government to pile on to such an organisation something that may be in the “nice to have” category of regulation but could not be placed any higher than that.

It is not too late for the Government to think again about the impact on the FSA. It is not too late for them to reconsider whether they have properly considered the impact on small firms. It is not too late to stop adding yet more examples of gold-plating to that long list of embellished EU directives. I hope that the Minister will say that the Government are prepared to think again.



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Lord Newby: Coming into this debate, I had assumed that we were talking about what was almost a tidying-up exercise and that there were no serious issues of argument in bringing connected travel insurance into the scope of the regulation alongside travel insurance. I was clearly far too naive and had underestimated the ability of the noble Baroness, Lady Noakes, to find fault with this order.

The noble Baroness and I agree that the aims of the regulatory regime are worth while, in that it is important that firms are fit and proper and properly resourced; that their staff are competent to undertake the business that they do; that consumers get clear, concise and consistent information about the products; and that if things go wrong consumers are able to seek redress. So far, so good—I suspect that all of us are of that view. The question is then what is the best way of ensuring that that is the case.

I was rather surprised to see in the regulatory impact assessment the estimate that currently 25 per cent of policies are mis-sold. That is a very high figure. If it is true—and the statement claims that the figure has been arrived at on the basis of evidence provided by ABTA, the British Insurance Brokers Association and Which?—this is a strong prima facie case for statutory regulation as provided for in the measure that we are discussing today. If we assume that the assumptions are correct, the potential benefits of the measure are significant. I would therefore be grateful if the Minister could reassure me, even if he is incapable of reassuring the noble Baroness, that these figures are robust; the whole case for regulation rests on that. If they are, the case for the order is made.

In my experience, insurance connected to travel is not properly taken into account by many vulnerable people who are buying a package with an insurance element attached. I am not thinking of myself; I am thinking of my mother and her friends, who go on coach tours around the UK. I know, because I fill in the forms for her, that travel insurance is attached. I am pretty sure that, by and large, that group of people is not spending a lot of time looking at the travel insurance small print. It is therefore important that they are reassured that that insurance is being sold properly, that they are not being overcharged and that it covers the things that they expect it to.

I am supportive of the principle of effective regulation. I am not opposed in principle to this being done via the FSA; that is what the FSA is there for. We have the FSA because self-regulation has frankly failed in many cases. This should be a small addition to the overall work of the FSA. I always share the noble Baroness’s concern when we are adding burdens to the FSA, because it is an overburdened body. However, we are doing so because we have found scandals in the selling of financial service products in area after area. That is why we have so much regulation in this area. It is not a question of the Government, any of the opposition parties or the FSA empire building for the sake of it. It is because consumers have been consistently misled across whole swathes of the population and across a whole raft of financial services products. Therefore, although I

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share some of the concerns that the noble Baroness has expressed about the robustness of the figures, I do not approach this order with the same degree of scepticism as she does.

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Lord Sheikh: I declare an interest as the chairman and chief executive of an insurance broking organisation. I have been a director of the British Insurance Brokers Association and previously was a regional chairman. I welcome the order and I strongly support the regulation of travel firms that sell travel insurance in connection with a travel product. I should like to set the scene by highlighting some salient statistics about the travel insurance market, with which, no doubt, Members of the Committee are familiar.

First, in 2006, 21 million travel insurance policies were purchased, making a total premium income of £670 million. Secondly, it is believed that only 66 per cent of people buy travel insurance when they go away. Finally, it seems hard to obtain an accurate picture of the number or value of policies bought from travel firms, because the figures are different, depending on which organisation is quoting the figures. The Association of British Travel Agents believes that the travel industry’s share of the travel insurance market is about 25 per cent.

I support this amendment to the Financial Services and Markets Act 2000 for many reasons. I shall briefly outline what I believe to be the main arguments in its favour. The Financial Services Authority has four statutory objectives, one of which is consumer protection and securing the appropriate degree of protection for consumers. The existing regulatory system for the insurance industry excludes travel insurance sold by travel agents and tour operators. Therefore, it does not provide protection to all consumers. The fact that consumers are given varying levels of protection depending on where they choose to buy the insurance is unsatisfactory. To allow the FSA to achieve its aim of protecting consumers, the sale of connected travel insurance must be brought within the scope of FSA regulation.

Currently, unregulated travel agents and tour operators are not obliged to outline the cover, terms, conditions and exclusions of the policies being sold. In December 2006, the British Insurance Brokers Association commissioned research, the results of which are startling. For example, 72 per cent of consumers buying travel insurance from a travel agent were not advised whether their policy included terrorism cover. Consumers buying products that they do not fully understand could result in consumer detriment, which is evidenced by customers making claims on their policies unaware that cover is not in place for the incident or loss in question. It is also vital that consumers are made aware of how to make a claim under the policy, as this can vary depending on the section of the policy to which the claim relates. There is no obligation for travel firms to highlight this, which may be detrimental at present.

Bringing travel firms into the existing regulatory environment would compel them to abide by the

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FSA’s insurance conduct of business rules. Those rules ensure that customers are provided with such information to allow them to make an informed decision when buying insurance; the rules outline what information must be disclosed to a client as part of the sales process. That will result in consumers making educated decisions and reduce the risk of consumer detriment. Consumers must also be made aware that travel insurance is specifically designed for short periods and particular scenarios and is not to be seen as an alternative for private medical cover, home insurance or personal accident insurance.

Full FSA regulation of travel agents and tour operators will give consumers who buy travel insurance from one of those firms access to the Financial Ombudsman Service, an independent dispute resolution service. Furthermore, consumers will have access to the Financial Services Compensation Scheme, which protects consumers in the event of an insurance company being unable to meet its financial responsibility to clients. Allowing customers recourse to both the FOS and the FSCS is, in my opinion, an important protection mechanism. I also point out that creating protection for people buying travel insurance from a travel firm will serve to enhance the reputation of travel insurance policies over time. In return, it is hoped that that will help to increase the number of people who purchase this important form of insurance.

It is also important that such regulation of an industry does not create a competitive disadvantage for any group of businesses. The system in place at the moment clearly does not achieve that. Travel firms selling travel insurance have a clear advantage over insurance intermediaries and brokers selling the same products. Travel firms do not have any compliance costs, whereas brokers and intermediaries do. The proposal before us will address that imbalance and ensure that all firms operate on a level playing field.

Throughout the discussions on the regulation of travel firms, significant time has been devoted to the cost of compliance for those businesses. It is worth noting that many travel firms receive in excess of 25 per cent commission on each policy that they sell. In the light of that, I believe that the costs associated with regulation will not have a significant impact on those firms and, as such, cannot be used as a reason not to regulate travel agents and tour operators.

Several options are available to travel firms that do not wish to become directly authorised by the FSA. They can form relationships with existing regulatory firms by becoming appointed representatives, introducer appointed representatives or simple introducers. Each of those options would reduce the compliance costs involved with regulation while still ensuring that the standards remain high. In light of the reasons that I have outlined before the Committee, I support the order in its current form and wish to see it adopted.

Lord Davies of Oldham: I am grateful to all who have contributed to the short debate and to the two noble Lords in particular. I am also grateful to the noble Baroness. I was quite shocked when the noble Lord, Lord Newby, suggested that he had underestimated the noble Baroness’s ability to find fault with government

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proposals. I certainly did not underestimate her, nor did I fail to predict that gold-plating would emerge at some stage in the discussion, as well as the Financial Services Authority and Northern Rock. The noble Baroness has deployed her case with her usual skill but, as I hope to convince the Committee, not with sufficient conviction.

Let me make it absolutely clear that when we implemented the directive in 2003, we wanted, as it will be appreciated, to keep the regulatory burden at an absolute minimum, which is why we did not include provisions covered by the order. We brought forward the order on the basis of the weight of evidence that has emerged over the three years. We did so not because we are enthusiastic about adding burdens to industry—far from it; the Government stay committed to light-touch, minimum regulation—but because we must regulate where discerned and defined difficulties occur.

The noble Baroness suggested that the Treasury Select Committee in the other place expressed little anxiety about the position. However, it said:

That was the burden of the remarks made by the noble Lord, Lord Sheikh. He identified where consumers could be at risk if they did not deal with a proper agent who knew exactly what insurance terms should obtain and did not ask the right questions.

It is quite difficult to buy insurance and then commit oneself to reading the very small print. Yet the very small print is often the absolute essence of what the insurance offers. It is all too easy, particularly in a widening market where inevitably there are many players, for seductive arguments to produce the necessary impetus for the consumer to take up the offer, who then perhaps neglects the essential aspect of being sure that the insurance does what it says.

The problem with travel insurance, as I indicated in my opening remarks, is that being inadequately covered can be quite disastrous, because the issues come to light only when one is already stranded abroad. We are all too well aware that, because we benefit from certain healthcare provisions in this country and have reciprocal arrangements in the European Community and with a number of other Administrations, it is easy for people to assume that they do not need to be absolutely clear about the policy or absolutely sure about the authenticity of the person who is selling it. They then go to somewhere such as the United States where medical costs can prove to be absolutely crippling when things go wrong and they are utterly inadequately covered.


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