22/12/2021
The UK’s financial regulator has set its sights on unregulated businesses providing service obligations that look and feel like insurance.
Unregulated firms can’t simply thumb their noses at the expressed concern. The FCA has razor-sharp teeth, including powers to prosecute those it believes are carrying on insurance business illegally in the UK. In addition, the FCA has statutory powers under The Consumer Rights Act 2015 to take action against any firm it considers is in breach of Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). The FCA also has powers under Part 8 of the Enterprise Act for breaches under various consumer legislation, including the Consumer Rights Act 2015.
Activities fall under the FCA’s control if they are specified by primary and secondary legislation creating the so-called ‘Perimeter’. Anything inside of which is regulated activity requiring authorisation. Whereas anything outside of the Perimeter does not. As you might imagine, the Perimeter line is complex and finely drawn at times. This creates an ambiguity that can be exploited by bad actors seeking to ignore regulations and laws designed to protect consumer interests.
The section of the latest Perimeter Report from the FCA dealing with general insurance does not ask the Government to extend the Perimeter by creating new regulated insurance activities or change the accepted definition of an insurance contract. Instead, it focuses on two specific areas of concern relating to unregulated firms. First, it is alarming that some firms appear to be avoiding the requirement to be authorised by labelling consumer services as discretionary. The FCA is also concerned about failures to correctly apply FCA Perimeter guidelines (PERG) and insurance law which has led some firms to think, wrongly, authorisation by the FCA is not required. We look at each area in more detail below.
Discretionary Services
Some unregulated firms think they can avoid their service being classified as insurance by describing benefits as discretionary. The obvious problem is that the customer is either unaware that benefits may not be paid or the service is purchased on the assumption that the vendor will never use their discretion to decline a valid claim. FCA thinks discretionary terms in agreements with consumers could be a foil to avoid the service becoming an insurance contract and, therefore, subject to its control. It intends to deal with this problem by judging the nature of a proposition (i.e. whether it is an indemnity or discretionary scheme) based on the eating. Then, when it deems it appropriate, the FCA will see-through discretionary terms and conditions and deal with the service provider as an unauthorised insurer, a criminal offence in the UK. The extent to which the courts agree with the FCA’s characterisation of a service contract is a moot point. This may be why the FCA has also signalled its intention to take action under The Unfair Terms in Consumer Contracts Regulations 1999. In our opinion, a consumer contract that allows the supplier to deny service or benefit after being bound is likely to be unfair. We think these discretionary powers are likely to be deemed objectionable under the Regulations because the service is open to abuse, and it is unclear to the consumer how they can benefit from the service. It is also worth keeping in mind the FCA’s willingness to intervene and use its powers apply irrespective of whether the discretion is used.
Extended Warranty
The FCA’s second area of concern is third-party extended warranties. According to the FCA, some unscrupulous warranty providers give undue prominence in their terms and condition to repair (non-regulated) services while describing the insurance type perils it covers as incidental benefits. In reality, a significant proportion of claims do not involve repair and their warranty service is an insurance obligation.
It would seem that a few extended warranty providers are determined to avoid FCA regulation. This is a perennial problem for both consumers and the FCA. We agree with the FCA’s that third-party providers of extended warranties are likely to require authorisation to affect insurance contracts. Although un4seen does not support or work with third-party warranty providers we do urge these firms to review their selling practices in light of the FCA’s comments.
In conclusion, if you offer a discretionary service obligation, you may wish to review your terms and conditions of sale in light of the Unfair Terms in Consumer Contracts Regulations 1999. If these require amendment but cannot be changed without creating a contract of insurance, you should consider withdrawing the service in the UK. At the same time, you should apply to the FCA and PRA for authorisation to allow you to affect an insurance contract. Providers of third-party warranties may wish to restrict their services to repair only while seeking authorisation as an insurer.
If you are a vendor of goods and services and would like more information about any of the issues discussed in this post, why not become a member of un4seen? It’s free to join. We help our members design optional service obligations and explain them to their customers fairly and clearly. This is part of a range of support services to help you provide customers with better after-sales service and comply with UK consumer law.
