FSA enhances consumer protection for long term care insurance

Michael Folger, Director, Conduct of Business Standards, said:

"The LTCI market is relatively young though with an ageing population, there is considerable potential for it to grow. These changes represent a major step forward in strengthening and extending safeguards to provide protection for consumers, who then buy these products to protect themselves at a time when they are likely to be at their most vulnerable."

In developing its proposals, FSA has aimed to ensure that:

• Consumers who buy products designed to help them fund the costs of long-term care will receive the same level of protection whether they are insurance-only pure protection products or investment-based products (e.g. immediate care annuities or LTCI bonds).

• LTCI advisers recommend to consumers the products that match their needs and circumstances. This will be achieved through advisers meeting regulatory requirements, covering matters such as suitability and know your customer and through enhanced training and competence requirements. There will be an approved examination on LTCI to new advisers to reduce risk of consumers receiving bad advice.

• Firms provide consumers with relevant pre- and post-sale information and risk warnings to help them make informed choices on the type of product and amount of cover they need. For example:

"firms will be required to provide customers with clear information about the key features of an LTCI product including whether premiums are subject to review."

" firms who sell LTCI-linked investment bonds will be required to send customers annual statements to keep them informed about the performance of their bond and to encourage them to review performance annually to assess whether the product is on track to meet their funding needs."

• Firms treat consumers fairly and promptly at the point of claim.

• Consumers with an eligible complaint about any LTCI product will have access to the Financial Ombudsman Service.

• Consumers with a valid claim against an insolvent firm about any LTCI policy are protected by the Financial Services Compensation Scheme.

The FSA proposals have been drawn up after extensive informal discussions with the industry and market specialists and analysis of detailed market data carried out for the FSA by KPMG.

The FSA are also publishing today a consumer factsheet on LTCI which is designed to improve public understanding of these complex products. The factsheet is available from the FSA Consumer Helpine on 0845 606 1234.

The proposed new requirements would come into force on 31 October 2004.

Notes for editors

1. LTCI products were first marketed in the UK in the early 1990s. According to ABI data, by the end of 2002, there were approximately 45,000 LTC policies in force. More than 90% of Long Term Care policies are distributed by IFAs.

2. The basic purpose of LTCI is to help consumers provide for all or part of the cost of long term care. Long term care refers to care that is needed on a continuing basis for the foreseeable future, for example, as the result of permanent conditions such as arthritis, a stroke or dementia. It does not apply to care needed to recover from short-term illnesses or convalescence during such illnesses. Long term care could involve help in the policyholder/customers own home or in a care home (a residential or nursing home) with activities such as washing, feeding or dressing.

3. LTCI policies have evolved over the past decade and they come in a range of different and often complex forms. They fall into two types of pre-funded policies:

   • pre-funded policies you buy this kind of policy to protect you in case you need care in the future. There are two main types:

   • pure protection insurance, which are insurance only products with no investment element, or

   • investment bonds that are specifically tied to a LTCI pure protection insurance contract. These can be funded either by single or regular premiums.

   • immediate care plans - you can only buy this type of plan when you actually need care. These are investment-based products (form of impaired life annuity) which, as their name suggests, help to fund the costs of long-term care at the point when it is required. They provide a regular income stream in exchange for a single lump sum payment.

4. Responses to the FSA proposals in CP200 Regulation of Long-Term Care Insurance should reach us by 30 January 2004. The FSA aims to make the final rules in April 2004 to give firms a reasonable period before the new requirements come into force on 31 October 2004.

5. HM Treasury announced on 22 October 2001 its intention to bring the sale and marketing of LTCI products within the FSA's regulatory scope. This followed a recommendation in the 1999 report of the Royal Commission on long-term care for the elderly. HM Treasurys subsequent consultation confirmed that there was general support for the introduction of full conduct of business regulation for all LTCI providers and intermediaries. Implementation was delayed to align this with the timetable for the implementation of the IMD. However, slippage in the adoption of IMD by the European Parliament, and consequently the implementation timetable, and in view of the Governments previous commitments, the Treasury decided to bring LTCI into regulation at the same time a mortgage regulation (on 31 October 2004).

6. The sale of LTCI pure protection contracts currently falls outside the FSA regulation. But, the ABIs Code of Best Practice currently requires LTCI insurance to sell these products as they were investments. It also encourages intermediaries to comply with these standards.

7. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

8. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.