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Financial Services

Volume 406: debated on Thursday 5 June 2003

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I can now announce that legislation to bring mortgages and the selling of general insurance within the scope of Financial Services Authority (FSA) regulation will be laid before Parliament today. This follows extensive consultation with interested parties including consumer groups and the industry.Regulation will provide major benefits to UK consumers in two large and important markets. Each year UK consumers pay £26.4bn of general insurance premiums and take £219bn of mortgage loans. Consumer protection in these markets will be increased, with regulation providing safeguards for consumers and introducing minimum standards of advice. Intermediaries selling a range of financial services products will have to deal with one regulator, the FSA rather than the current complex mix of statutory and self regulatory arrangements.The Government consulted on their proposals to implement mortgage regulation in February 2002, publishing the responses in August 2002. This legislation incorporates the outcome of this consultation.This legislation also incorporates the outcomes of the consultation "Regulating Insurance Mediation" the publication of which was reported to Parliament on 21 October 2002 (

Official Report, columns 83–84W). The consultation set out the Government's proposals to regulate various activities relating to the sale and administration of general insurance. This will implement the Insurance Mediation Directive (the Directive). I am grateful to the 400 or so respondents who took the trouble to reply to the consultation. A summary of the consultation responses and the Government's decisions have today been placed in the Library.

The Directive requires the regulation of insurance mediation activities in relation to all contracts of insurance. However, it provides for certain exemptions for insurance sold as part of a package, including travel insurance sold with a holiday and some extended warranties that are contracts of insurance.

Following extensive consultation the Government have decided not to regulate travel insurance sold with a holiday. The consultation provided insufficient evidence of consumer detriment to warrant the extra costs of regulation, particularly for small independent travel agents.

However I recognise that there are concerns about this market. The Treasury will therefore hold a review of this decision two years after implementation of general insurance regulation in early 2007.

I can confirm that the Government will await the outcome of the Competition Commission enquiry into extended warranties on domestic electrical appliances before taking a decision as to whether extended warranties that are contracts of insurance should be regulated.

The appointed representatives regime will apply to insurance mediation. This will allow representatives of FSA authorised persons to carry out regulated activities without themselves being authorised provided the authorised person has accepted responsibility for their conduct. Following representations during consultation this regime will be extended in relation to general insurance contracts. As well as being able to arrange and advise on contracts of general insurance, appointed representatives will also be able to conclude contracts of general insurance as agent. They will also be able to assist in the administration and performance of contracts of general insurance. These changes reflect market practice and should make it easier for firms and individuals to become appointed representatives if they and their principals wish.

The Treasury received representations regarding transitioning of complaints. Some respondents wanted the Financial Ombudsman Service (FOS) to be given powers to deal with consumer complaints which arise after FSA regulation starts but which relate to products bought before FSA regulation commences from firms regulated by Mortgage Code Compliance Board (MCCB) or the General Insurance Standards Council (GISC). Transitioning these complaints would benefit consumers. However this has to be weighed up against the possibility of additional costs for firms, and any differences in approach and scope between the FOS and the current self-regulatory schemes. The Government will therefore hold an open consultation later this summer to give all interested parties a chance to respond on these issues.

I can also announce that the Government will be holding an open public consultation this Autumn on whether to bring home reversion plans into the scope of regulation by the Financial Services Authority.

There are two main types of equity release plans, mortgage backed equity release plans and home reversion equity release plans. Under mortgage backed equity release plans a homeowner takes out a loan secured against a property. The loan is used to provide a regular income or provide a lump sum payment. Ownership remains with the homeowner. The loan is repaid when the property is sold either upon death of the owner or if the borrower moves house. Mortgage backed equity release schemes will fall within the scope of FSA regulation when the FSA takes on responsibility for regulating mortgages in October 2004.

Under home reversion equity release plans homeowners agree to sell all or part of their home in return for a lump sum payment and the right to remain in the house rent free until they die or move home. At such a time the home reversion provider is free to sell the property. A key part of the transaction is therefore the underlying agreed house valuation. A home reversion plan is not in itself a financial services product. Any potential decision to regulate home reversions would go beyond the FSA's scope as defined in the Financial Services and Markets Act 2000, and would therefore require primary legislation.

The Pensions Green Paper "Simplicity, Security and Choice: Working and Saving for Retirement"—published by the Department for Work and Pensions on 17 December 2002—said that the Government would be looking at options to create a level playing field for the regulation of equity release and home reversion plans to protect consumers and make the market work better.

The Government have had discussions with a number of stakeholders. These stakeholders have provided no evidence of consumer detriment at present in the home reversion equity release plan market. However there are concerns about the potential for consumer detriment as the market grows and as the FSA takes on responsibility for regulating mortgage backed equity release schemes from 31 October 2004. Therefore I have decided that there is a need for a more in depth analysis of the costs and benefits of regulating home reversion plans and we will hold an open consultation in the autumn.