GIGI 3.3 Advising and Selling Standards (ICOB 4)

This section of the Guide explains the advising and selling rules in ICOB 4. The rules in ICOB 4 cover:

1. (1)

   information about your firm ('status disclosure') (ICOB 4.2);

2. (2)

   suitability of advice (ICOB 4.3);

3. (3)

   statement of demands and needs (ICOB 4.4);

4. (4)

   excessive charges to retail customers (ICOB 4.5);

5. (5)

   telling commercial customers about your commission (ICOB 4.6);

6. (6)

   unsolicited services (ICOB 4.7); and

7. (7)

   the language in which information should be provided (ICOB 4.8).

None of these rules apply when you are dealing with a commercial customer insuring a 'large risk' (a contract of large risks has a special meaning in the rules - see Appendix A).

Summarised below is the information you need to disclose to your retail and commercial customers unless you are introducing (ICOB 4.2.8 R provides a more detailed explanation):

1. (1)

   Name and address of your firm.

2. (2)

   Your firm's statutory status, using the appropriate wording required by the General Provisions sourcebook (see GEN 4 Annex 1), for example, that you are authorised and regulated by the Financial Services Authority.

3. (3)

   That (1) and (2) can be checked on the FSA's Register.

4. (4)

   Any holdings you have in an insurance company, and that an insurance company or its parent has in your firm that represent more than 10 per cent of the voting rights or the capital of the insurance company or your firm.

5. (5)

   The range of insurance companies you are selecting products from in a sale to a particular customer. This can be from a wide range of insurance companies (which is referred to in the rules as providing a service on the basis of a 'fair analysis' of the market), or from just one or a limited number of insurance companies. You must also tell the customer that he can request a list of the insurance companies you deal with, unless the service you provide is on the basis of a 'fair analysis' of the market.

6. (6)

   How the customer can complain to you and that complaints may subsequently be referred to the Financial Ombudsman Service (FOS).

7. (7)

   The compensation arrangements if you are unable to meet your liabilities.

You must provide all the information above before conclusion of the non-investment insurance contract, in a durable medium unless one of the following situations, set out in ICOB 4.2.2 R, applies:

1. (1)

   the customer asks for the information to be provided orally;

2. (2)

   immediate cover is required; or

3. (3)

   the contract with the intermediary is by telephone and the customer agrees to receiving more limited information.

In the first two cases you must give the information at paragraph 3.3.2 orally before the conclusion of the non-investment insurance contract. However, if the contract is concluded over the telephone and the customer agrees to receiving limited information, at least the details listed below must be provided before conclusion of the contract:

1. (1)

   the name of your firm;

2. (2)

   if you initiated contact, the purpose of the contact;

3. (3)

   the name of the person in contact with the customer and his link with your firm; and

4. (4)

   that other information is available on request, and the nature of the information.

You must then give the customer all the information in paragraph 3.3.2 in a durable medium immediately after conclusion of the contract.

The information above does not need to be given when contracts are renewed if the information given out at inception of the contract remains up-to-date. If certain elements have changed then you must update the customer on these particular elements but you do not need to send out a whole new set of information (ICOB 4.2.20 R).

We have included two template documents in Annexes 1 and 2 to ICOB 4 that you can use to give the status information in paragraph 3.3.2 to your customers. We call these the initial disclosure document (IDD) and the combined initial disclosure document (CIDD). These documents have been developed by us and tested using consumer research. You can download templates of these documents from our website: www.fsa.gov.uk/disclosure. Using these documents is optional; you can choose to present the status disclosure information in a different format if you wish.

Where you are selling just non-investment insurance contracts, you can use the IDD to provide the status information above. You can use all or part of the IDD, but in all cases you must ensure that all the status information required by the rules is given to the customer. However, if you choose not to use the full IDD then you must not include the key facts logo or the heading and text in Section 1 of the IDD.

Where you use the full IDD, it must be a standalone document and there are certain rules on the use of the key facts logo, for example, on its size, prominence and positioning (ICOB 4.2.6 R). You cannot make changes (including adding, altering or removing text) to the full IDD unless allowed by the notes that accompany the form.

Where you are arranging mortgages and/or packaged products and also non-investment insurance contracts, you can give the customer a CIDD. This means you can describe the service you are providing in relation to all these products in one document. If you choose to use the CIDD, you must use the document in full and make no changes to the text other than those allowed by the notes that accompany the form. Also, unlike the insurance rules, the rules in the Mortgage: Conduct of Business sourcebook (MCOB) and Conduct of Business sourcebook (COB) require you to give the IDD or CIDD on initial contact with the customer.

There are examples of completed IDDs and CIDDs on our website: www.fsa.gov.uk/mgi.

A waiver and modification by consent has been in force for firms (third party processors) who undertake regulated activities on behalf of another authorised firm. This waiver and modification affected MCOB 1.2.1 R, ICOB 1.2.1 R and GEN 4.3.1 R. This has now been replaced by permanent rule amendments, which came into force on 1 June 2005. See the Third Party Processors Instrument 2005 - 2005/25 - www.fsahandbook.info/FSA/handbook/LI/2005/2005_25.pdf

The rule amendments allow a third party processor (Firm A) undertaking regulated mortgage activities or insurance mediation activities (in relation to non-investment insurance contracts) on behalf of another authorised firm (Firm B) under an outsourcing contract to disclose to customers that it is B where our rules would otherwise require A to disclose its real identity. The outsourcing agreement between the two firms must acknowledge that the firm outsourcing the activities (Firm B) accepts responsibility for the activities carried on by the other firm (Firm A) on its behalf.

The rules also cater for cases where an AR acts as third party processor for its principal, or where an authorised firm acts as third party processor for an AR.

Where you are only introducing a customer to another intermediary (or to an insurance company) you are not required to give the information at paragraph 3.3.2. Instead, you must give the customer the following information in good time before the introduction is made (see ICOB 4.2.9 R):

1. (1)

   the name and address of your firm;

2. (2)

   your statutory status using the appropriate wording required by the General Provisions sourcebook (see GEN 4 Annex 1R);

3. (3)

   details of any fees you will charge for the introduction; and

4. (4)

   whether you and the firm you are introducing to are members of the same group.

As noted above, one of your options is to disclose that you provide a service on a fair analysis basis. You cannot state that you offer a fair analysis service - that is, that you consider a representative sample of the market when selecting products - unless you have considered a sufficiently large number of insurance contracts in the relevant sector for that particular customer and that consideration is based on adequate knowledge of that sector. There is guidance on how this requirement can be satisfied, including the selection and use of panels and the frequency with which panel arrangements should be reviewed, in ICOB 4.2.12 G to ICOB 4.2.13 G.

You must disclose any fees (actual fees or, where actual fees cannot be given, the basis for calculating fees) you charge to retail and commercial customers for mediation services (ICOB 4.2.15 R to ICOB 4.2.18 G). The information must be given to the customer before they become liable to pay the fee, or before conclusion of the contract, whichever is earlier. So, for example, fees that will be charged for mid-term adjustments must be disclosed before conclusion of the contract. The information can be provided in any medium before conclusion of the contract, and must be given in a durable medium immediately after conclusion of the contract. Fees do not include premiums or commission that forms part of premium.

If you choose to use the full IDD (see paragraph 3.3.9), section 4 requires you to state the amount of the fee you charge for your services, if any, together with an explanation of what the fee is for and when it is payable. If you do not know the exact amount of the fee you may give the basis of calculating it (e.g. £X per hour). If the fee is only payable in certain circumstances then you may state this and cross refer to another document for details of the circumstances. If you use the full IDD you cannot add words to describe what other remuneration you might receive, e.g. commission.

The rules on advised sales are in ICOB 4.3 (Suitability). These rules apply when you make a 'personal recommendation' (this term has a special meaning - see Appendix A for further details) to a customer to buy or sell a non-investment insurance contract. The personal recommendation must be based on the scope of the service you provide (selection of insurance contracts on a fair analysis basis or from one or a limited number of insurance companies).

A personal recommendation has three elements:

1. (1)

   you must give advice describing the merits of buying or selling the insurance contract;

2. (2)

   the advice must relate to a specific contract, e.g. 'I recommend ABC's contents insurance'; and

3. (3)

   the advice must be to a specific person or specific group of people.

There is guidance on the regulated activity of 'advising on contracts of insurance' in the perimeter guidance in the Authorisation manual (see AUTH App 5.8).

If your sale involves a personal recommendation, you must ensure that the contract is suitable for the customer's demands and needs. To do this you should first assess the customer's demands and needs and then assess the suitability of the contract against these.

You must give all your customers a demands and needs statement when you sell them a non-investment insurance contract, including at renewal (ICOB 4.4.1 R). The statement must contain:

1. (1)

   details of your customer's demands and needs;

2. (2)

   a statement of whether a personal recommendation has, or has not, been provided; and

3. (3)

   where a personal recommendation is made, the reasons for making the recommendation.

The statement must also reflect the complexity of the contract. ICOB 4.4.3 G to ICOB 4.4.6 G includes guidance on the style and presentation of the demands and needs statement. If the contract is straightforward, and you have not made a personal recommendation, this guidance says that you may be able to satisfy the rule by including a generic statement in your product information, for example.

The demands and needs statement must be given before conclusion of the contract, unless the contract is concluded over the telephone. For telephone sales it must be provided immediately after the conclusion of the contract in a durable medium.

The demands and needs statement can be provided orally if the customer requests it or if immediate cover is necessary, but in both cases it must be provided in a durable medium immediately after contract conclusion.

Where a personal recommendation is made and the customer acts on that recommendation by buying from you the contract you recommended, you must keep a copy of the demands and needs statement. You must keep this for at least three years from the date on which you made the personal recommendation (see ICOB 4.4.7 R). You do not need to keep a copy if the customer does not act on your recommendation.

You need to ensure that your charges to retail customers for insurance mediation services are not excessive (see ICOB 4.5). In determining whether or not your charges are excessive you should consider:

1. (1)

   the level of your charges compared to charges for similar services or products in the market;

2. (2)

   the degree to which the charges are an abuse of the trust put in you by your retail customer; and

3. (3)

   the nature and extent of information provided to your customer on charges.

ICOB 4.6 requires you to disclose commission to commercial customers on request. If asked, you must disclose any commission earned by you plus any commission earned by any associate. The commission has to be disclosed in a durable medium and in cash terms. If you cannot indicate it in cash terms, you must give the basis of its calculation, also in a durable medium.

Commission includes remuneration arrangements for sharing profits and payments relating to volume of sales (see ICOB 4.6.7 G).

By associate, we mean any company in the same group, any appointed representative of your firm or a firm in the same group or any other person or firm connected to your firm. Where an associate is part of a distribution chain, you still need to disclose any commission paid to it. But you do not need to give information on the commission earned throughout the distribution chain.

There are no rules requiring you to tell retail customers about your commission although normal agency law requirements apply.

ICOB 4.7.1 R prevents you from providing services to retail customers in connection with non-investment insurance contracts, where this involves a request for immediate or deferred payment, unless you have obtained the customer's prior consent. This includes entering into these contracts but does not prevent the tacit renewal of these contracts (ICOB 4.7.2 R). For example, this means that the common practice of rolling forward insurance contracts at renewal and continuing to take direct debit payments can continue without breaching this rule. This rule only applies to distance contracts.