Punched drunk by ICOBS and CIDRA? FCA proposes sobering detox

There has been surprisingly little fuss about the new Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) that came into force 6 April.

Whilst it does simply reflect the accepted practice under ICOBS and before the FOS, CIDRA has significant implications for policies and procedures and has played havoc with the rules, not least by creating yet another definition of 'consumer'.  The FCA says "any changes required by firms will be minimal" – amending sales scripts etc – and that "firms should have already made, or be making, these changes".  Our experience suggests insurers and brokers are engaging in costly exercises to review and revise a raft of documentation, with attendant changes to systems and training.

The CIDRA's provisions replace the consumer's duty to disclose all material facts with a duty to take reasonable care not to make a misrepresentation (section 2(2) CIDRA).  The definition of a 'consumer' in ICOBS 2.1.1 R is currently "any natural person who is acting for purposes which are outside his trade or profession", whilst the definition in CIDRA is "an individual who enters into the contract wholly or mainly for purposes unrelated to the individual's trade, business or profession".

We highlighted some of the consequential problems and inconsistencies in an industry seminar in March before the CIDRA came into force.  The new provisions of CIDRA and the existing ICOBS rules conflict; resulting, rather unhelpfully for the insurance industry trying to adapt systems and controls and revise policies and procedures, in ambiguity and confusion. The most obvious issues relate to 'mixed use' policies (where there is some private and some commercial use intended) and the flat contradictions between the CIDRA and the claims handling rules in ICOBS 8.

The FCA has responded relatively quickly to address the inconsistencies.  On 6 June, it published its proposed consequential amendments to ICOBS (albeit in what appears to be a last minute addition to the new regulator's first quarterly consultation paper (CP13/3)). The difference between the current rules and the CIDRA in respect of 'mixed use' policies is both an obvious and an important one.  Under ICOBS, an individual acting both as a consumer and in their commercial capacity is currently defined as a 'commercial customer'; but such mixed use policies are within the scope of CIDRA where the main purpose of the contract is private use.

In its consultation, the FCA proposes to widen the guidance on the ICOBS definition to include the following:

"ICOBS 2.1.3 G

(2) For the purposes of ICOBS 5.1.4 G and ICOBS 8.1.2 R, if, in relation to a particular contract of insurance, the customer entered into it mainly for purposes unrelated to his trade or profession, the customer is a consumer".

This may cure the obvious inconsistencies but creates additional complexity by allowing for an alternative conclusion when considering client categorisation for purposes other than those to which ICOBS 5.1.4 G and ICOBS 8.1.2 R apply.

In contrast, the changes to ICOBS 5.1.4 succeed, without adding any complexity, in clearly reflecting  s. 3(1) CIDRA  which stipulates that whether a consumer has taken "reasonable care" not to make a misrepresentation to insurers is determined "in the light of all the relevant circumstances". Further, s. 3(2) specifically states that "how clear, and how specific, the insurer's questions were" is a relevant factor to be taken into consideration, as is, "in the case of a failure to respond to the insurer's questions in connection with the renewal or variation of a consumer insurance contract, how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so)."

To reflect this, the FCA proposes that the guidance in ICOBS 5.1.4 on 'disclosure ' includes the following:

"...ways of ensuring a customer knows what he must disclose include:

(3) explaining to the customer the responsibility of consumers to take reasonable care not to make a misrepresentation and the possible consequences if a consumer is careless in answering the insurer's questions, or if a consumer recklessly or deliberately makes a misrepresentation; and

(4) asking the customer clear and specific questions about the information relevant to the policy being arranged or varied." 

Although this does not go as far as the CIDRA in explaining other circumstances which are relevant to deciding whether or not a consumer has taken reasonable care not to make a misrepresentation, it certainly brings the rules in line with the legislation so that the two can be read in tandem and without contradicting each other.

The proposed changes to ICOBS 8.1.2 R will declare it unreasonable for insurers to reject a consumer policyholder's claim (except where there is evidence of fraud) "for misrepresentation by a customer and the misrepresentation is not a qualifying misrepresentation" (only in relation to insurance policies which incepted (or were varied) after CIDRA came into force). The handbook definition of a "qualifying misrepresentation" is stated as that in CIDRA, which is a misrepresentation that is either deliberate, reckless or careless (section 5 CIDRA).

The current claims handling rules relating to non-disclosure of material facts will continue to apply to pre-April 2013 policies; albeit any firms seeking to rely on the 'old' rules before the FOS will receive even shorter shrift than now. Thus the proposals appear, on paper, to address many of the concerns expressed about the inconsistencies and the FCA claims that they will bring "clarity about the standards" it expects. Any insurers who have not yet amended their consumer documentation should be mindful of this, and that any references to the old duty of disclosure are probably in breach of the ICOBS 'clear, fair and not misleading' rule as they could mislead consumers in respect of their duties. Although the insurance industry would be forgiven for being 'punched drunk' on CIDRA and the inconsistencies revealed in policies, procedures and rules, the FCA's efforts must be a welcome attempt at consistency.