The Financial Services Authority is not happy with the way legal expenses insurance is being sold. However, it seems the industry believes the regulator has a point. Marcus Alcock reports
In recent years the legal expenses market has rarely been out of the spotlight. Since the groundbreaking Access To Justice Act was introduced in 1999, there has been a plethora of arguments and counter-arguments as to the legitimacy or otherwise of the after-the-event insurance market, the appropriate level of 'success fee', and, more recently, the extent to which regulatory oversight should be introduced to police this sector.
And the turbulence continues. In April, the Financial Services Authority criticised brokers for failing to make clear to customers that insurance extras, such as legal expenses, are optional. In 70% of the records reviewed, the regulator found customer information that was "unclear" and "potentially misleading". For example, one policy stated "motor legal assistance membership scheme is included in your renewal premium", which the FSA said failed to make clear the cost of the extra cover and the fact it was optional.
Although it seems likely these comments would provoke widespread upset, in fact many people actually seem to agree with what it had to say. "I'm not surprised and I'm not disappointed either," says Phil Ruse, divisional manager of Allianz Cornhill Legal Protection. "I would say the FSA has got it right."
So does he agree that the industry is to blame for failing to make clear exactly what policyholders are buying?
"I'm trying to think whether 'blame' is the right word," he responds. "It's just a question of why we are where we are. Legal expenses insurance is a low-cost product, which will remain a bolt-on to standalone insurance." Just because it is optional doesn't necessarily make it a bad thing, Mr Ruse says: "There are two ways legal expenses insurance can be promoted: either as an inclusive part of the product or as an optional purchase, and I would say where it is an optional purchase the take-up is very good. So I'm not really concerned by the FSA's criticisms - as far as I'm concerned the more people that know about this product the better. So the next stage is fairly well defined: those people who are not making the purchase of legal expenses insurance clear and transparent will need to."
David Campbell is business director in the legal cost management division at Liberata, which deals with cost negotiations once a claim is settled on behalf of major insurers such as Norwich Union. He says this is indeed a marketplace that isn't functioning brilliantly: "We see an awful lot of confusion throughout the process, which is nobody's fault in particular, and there's no magical solution. At the end of the day, legal expenses insurance is quite a complex matrix: there's before-the-event, which is mainly sold in relation to household, motor and credit-card-related policies, and ATE, which solicitors predominantly sell - and even they don't always fully understand what it does."
The nature of the product itself, though, makes it difficult to see just how more time and effort would be put into marketing it in more detail. "Given that the product sells at £15 or £20 you're not going to get people spending an awful lot of time selling it and explaining it," he says.
According to Richard Finan, director of legal expenses intermediary Arc Legal Assistance, much of the problem with regard to transparency lies specifically in the ATE, rather than BTE, sector. "The important fact here relates to the potential costs to the consumer," he comments. "While most solicitors, either directly or via claims introducers, offer conditional fee agreements or no-win, no-fee, this is not a free service and enables a solicitor to deduct fees from the claimant's damages in successful claims.
"The media is littered with stories of consumers who have suffered considerable deductions from their damages as a result of using less scrupulous no-win, no fee providers. If their claims had been covered by a BTE legal expenses policy there would have been no deduction."
He believes more needs to be done to promote BTE's benefits: "The profile of BTE cover needs to be increased to ensure that customers use the benefit of this cover, rather than go down the no-win, no-fee route. The reputable sector of the legal expenses insurance industry is striving to achieve this. Steps taken by the industry of late include more efficient referral processes to the cover at the point of claim."
And Mr Finan is convinced that self-funding isn't the answer. "There are instances where conditional fee agreements are appropriate and therefore it is our responsibility as an industry to deliver the most appropriate and ethical solution to protect a consumer's interests," he explains. "However, BTE cover is the best solution for a consumer to protect themselves against their exposure to legal costs."
For the time being, it seems that finding a way to address the FSA's points will not be easy. As Mr Campbell concludes, the main obstacle will always be the relative cheapness of the product, which doesn't encourage extra effort: "Should the brokers take a bigger view and say to customers that a vital part of the policy is legal expenses cover, and therefore we should spend more time explaining it? Yes - but that's unrealistic."
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