The FSA highlighted to the Insurance industry in December 2004 the need to improve the way it settles the terms on which it does business and gave the industry two years to ensure that its processes ensured that contract terms are agreed at the time policies commence.

The FSA also has the power under the Unfair terms in Consumer Contracts Regulations 1999 to challenge organisations that use unfair terms in their standardised consumer contracts. Under the Regulations, the test of unfairness is based on whether, contrary to good faith, a contract term causes a significant imbalance in the rights and obligations of the parties to the detriment of the consumer. If a term is found to be unfair, it may be ineffective. The FSA has required a number of organisations to enter into undertakings to not enforce contract terms that are considered unfair.

The FSA can consider most kinds of financial services contracts concerning:

• mortgages and the selling of mortgages
• insurance and the selling of insurance
• bank, building society and credit union
• savings accounts
• life assurance
• pensions
• investments and
• long-term savings

The FSA has also previously expressed concern about the way in which policy terms and conditions are applied in practice and the impact that terms might have on a organisations financial resource. It might be the case that over time, the manner in which insurance policy terms are applied, differs from the terms that were intended, having a detrimental affect on the insured. Moreover, organisations need to consider whether the proper application of policy terms might have a material impact on the resources of the insurer in the event of them having to be applied.

Organisations need to consider the nature of the policy terms they issue, the consequence of these terms, are they properly understood and ensure that staff involved in the administration of insurance business are in a position to appropriately apply policy terms.

How we can help

• Review the manner in which new insurance products are developed including a review of the process and systems in place to design, specify, draft and approve new products. This will include interviews with management and procedure reviews of how new policy ideas are specified, how instructions for design are provided to legal department, how instructions are translated into drafting and how instructions for design are provided to operations department
• Review and provide recommendations on your systems for specifying and designing administration and support systems for new products. This includes a review of how your Operations Department translate instructions into operation systems and IT support for new products
• Conduct a review of the arrangements you have in place for training of Operations, Legal, Compliance, Complaints Handling, Business Monitoring Units, Marketing and Training Department personnel, on new policy terms and conditions
• Review the process for escalation of litigation and investor complaints concerning policy terms into the organisation and new policy design.
• Provide induction, ongoing or remedial training and coaching to your staff on the latest FSA regulation impacting how you design, implement new policy terms an conditions.