Our retail distribution review (RDR) discussion paper DP07/1 in June 2007 introduced customer-agreed remuneration as a means of reducing the distorting influence of providers on the advice process.

Because different people drew different conclusions from the name, we did not use it again when we published the RDR interim in April 2008. But the concept remains and we explain this further on this page.

We need to go back to basics to properly understand what we mean by remuneration determined without input from product providers, and to demonstrate how this could reduce conflicts of interest. We start by considering remuneration under two fundamentally different headings:

• how remuneration terms are set, and
• how the remuneration is paid.

Our proposals simply tackle how remuneration terms are set. Whether there is a need for consumers to haggle or only to acknowledge the remuneration terms is not the main issue. Our principal intention is that the product provider plays no role in setting the terms and therefore cannot influence the advice process.

Having agreed or acknowledged it, there are then only two ways for the customer to pay the remuneration:

• the customer pays direct (for example a fee, perhaps drawn by cancelling units in the customer's investment account); or
• a third party – nearly always the product provider whose product has been sold – pays on the customer's behalf and the customer then reimburses that party. In this case the transactions can look like "commission" – for instance, an upfront payment to the adviser with the customer paying an additional charge over the full term of the product to reimburse the provider. But the important difference is that, unlike with traditional commission approaches, the product provider has not determined how much the adviser receives.

It follows that there might be no constraints on how the remuneration is paid (or the payment pattern) under this approach, so long as product providers cannot influence the amount or timing of the remuneration and thereby potentially bias the advice.

So the proposals are not for another method of remuneration – it is simply a different way to set remuneration terms. Factory gate pricing (FGP) is then one way that product poviders can structure their products to accommodate this approach.

Under FGP, a product provider (playing no part in setting how much is paid and when) can arrange payments to the adviser, and then add explicit charges to the product for the customer to reimburse the product provider for the remuneration payments.

But FGP is not the only way that product providers might accommodate remuneration determined without provider input – commission rebating may be another possibility.  

We have published our new Insurance: Conduct of Business sourcebook (ICOBS). This updates the standards and requirements on how you deal with general insurance customers.

We have simplified our rules in areas where outcomes for consumers are generally good. In a few areas, like payment protection insurance (PPI), we have responded to continuing market failures and consumer detriment by introducing carefully targeted rules to help ensure that consumers achieve a fair deal.

The new general insurance regime will come into effect on 6 January 2008. There will be a six month transitional period and we therefore expect you to meet the required standards by 6 July 2008.

Below is a summary of the changes. For a full explanation, please see our Policy Statement (PS 07/24), which also gives feedback on the responses we received to our Consultation Paper and the decisions we have made in the light of those responses.

Summary of changes

'Other' general insurance products

For products such as household, motor, pet and private medical insurance where markets are generally working well the emphasis is on high-level rules, except where detailed provisions are required by EU Directives or are the only practicable way to protect consumers. While this will mean more flexibility for you, we will require the same standards of conduct and essential consumer safeguards remain. For example, we no longer require firms to disclose information using a policy summary in a specified format. Instead there is a new high-level product disclosure rule requiring you to provide customers with appropriate information in good time, allowing them to make an informed decision.

Protection products

The new ICOBS targets additional rules at areas of consumer detriment, in particular improving selling practices for protection products (critical illness, income protection, term assurance and PPI). Some of these new measures will apply to all protection products including a new standard to ensure better oral disclosure of key information about policies to help consumers make informed purchasing decisions.

Payment protection insurance

There will be a stronger framework of rules to back the FSA's drive to improve selling standards in PPI markets. As well as oral disclosure, we have increased the existing cancellation period of 14 days to 30 days for all PPI policies and a new rule requiring firms to take reasonable steps to establish that customers would be eligible to claim under the terms of the protection offered.

Our 2007 sub prime project found no improvement in intermediaries' practices since our previous work in this area in 2005.

Improvements are needed in demonstrating the suitability of the product recommendation and record keeping in particular. Many of the good and poor practices identified were similar to those found in the mortgage quality of advice processes work in January 2007.

The examples below focus on those areas which were most commonly found in the sub prime work: assessment of customer needs; affordability; self certification; mortgages into retirement; training and competence; communications with customers; post sale; and non-advised sales.

Assessment of customer needs

Nearly half the files reviewed in this project did not contain adequately documented 'know your customer' information. Fact find documents were inadequate or not sufficiently completed. It is essential firms gather enough information before making a recommendation to a customer so they have reasonable grounds to decide whether the product meets the customer's needs.

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Affordability

Affordability was not adequately assessed in over a third of the cases reviewed. We found particular weaknesses where the loans extended into retirement and around the self-certification of income. Record keeping was also weak.

Self certification

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Mortgages into retirement

Training and competence

It is essential that senior management have appropriate training and competence schemes tailored to the firm's needs which are regularly reviewed and updated. This ensures a firm treats its customers fairly and provides suitable advice.

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Communicating with customers

In cases where firms used suitability letters to inform the client of the reasons for their product recommendation, two thirds were considered to be inadequate.

Post-sale

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Non-advised sales

The scripted questions used by firms as part of their non-advised sales process were inadequate in a quarter of cases reviewed. The questions did not provide the firm with sufficient information to enable them to offer their customers a reasonable range of unbiased products.