FSA consults on plans to regulate connected travel insurance

The FSA's consultation paper describes its proposed regime as being lighter than regimes governing other forms of insurance mediation; but it also expects it to deter most travel agents, tour operators and airlines from selling CTI.

"We consider that many travel firms may stop carrying on CTI," the paper states. "Out of a market of around 3,200 travel firms we believe that only a fraction are likely to incur the costs of becoming authorised or regulated as ARs [Appointed Representatives]."

FSA research suggests that fewer than 200 travel firms are likely to become authorised. "Irrespective of how light the regime we apply to these activities, it is clear the application fees alone are likely to deter many firms from choosing this option," it said.

Connected travel insurance is currently excluded from the FSA regime. Travel insurance bought separately from travel or accommodation, however, is fully regulated.

But, according to a February 2007 report by the House of Commons Treasury Committee, consumers buying CTI do not really understand the product whereas those buying stand-alone travel cover are generally better informed. They also have access to statutory remedies and compensation regimes should things go wrong. 

The new regime will come into effect on 1st January 2009. Long before then, firms selling CTI will have to decide whether to apply to become fully authorised by the FSA; to become an appointed representative of another authorised firm; or to limit their role to effecting introductions and distributing promotional material.  

Authorisation would mean meeting similar capital resources requirements and obeying the same client money handling rules as firms selling general insurance. The FSA also wants to introduce minimum requirements for professional indemnity insurance, but has not yet decided what those should be.

The FSA has tried to reduce the regulatory burden where it can – for instance, by not requiring CTI firms to provide a full status disclosure to customers. But some of the same conduct of business rules would apply, including the need to take reasonable steps to ensure the policy is suitable and the customer eligible to make a claim under it.

The new regime would also mean CTI-related claims for compensation could be taken to the Financial Ombudsman and, if the firm is in financial trouble and unable to meet its liabilities, to the Financial Services Compensation Scheme.

The final rules are expected in May or June 2008, but the FSA says it will start accepting applications for new authorisations from 30th June 2008. Firms wishing to continue selling CTI after the 1st January 2009 deadline will need to submit their applications by or on 15th November 2008.