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Can a customer change their mind after choosing Refund Protection and receive their money back?

UK and EU consumers buying insurance have a statutory 14 days to change their minds. They can cancel a policy for any reason and usually receive their premium back from the insurance company. This cooling-off period starts when the cover commences or when they receive their policy documents, whichever is later.

Most vendors offer refund protection/cancellation rights as a service obligation which is not insurance. These are services provided in connection with the sale of goods. Sales are regulated by consumer laws that confer certain consumer rights in the UK. Similar to the rules applicable to selling insurance, consumers can change their minds about the goods bought by distance means. For example, purchases made online or using an App. Customers can cancel their purchase at any time from placing their order and up to 14 days from the date they take delivery of their goods and receive their money back. For example, a retailer of electrical components selling an optional 30-day warranty to replace items damaged during assembly must allow a 14-day statutory cooling period, covering the cost of the items, including the extended warranty. (Please note different rules apply to extended electrical warranties covering more than 12 months).

The vendor is not required by these same consumer laws and regulations to provide cooling-off rights for sales made on their premises or distance sales of certain goods exempt under Consumer Contracts (Cancellations) Regulations. This includes tickets to cultural events made to measure items and goods with a limited shelf life. However, it’s often good practice to do so because it allows the customer to consider the vendor’s Terms and Conditions. This is important where the refundable service includes exclusions, conditions or if the customer's circumstances could be such that they cannot benefit from the service.

As a member of un4seen, we help you design and operate post-sale services that benefit your customers. This is part of a range of support services to help you comply with UK consumer laws by ensuring that the consumer receives good value and is treated fairly.

Can I use opt-out selling to sell more Refund Protection?

Yes, provided the protection is arranged as a service obligation. Unfortunately, you cannot use an opt-out process to sell insurance in the UK.

Opt-out selling occurs when a vendor automatically includes ancillary goods or services with the customer’s primary purchase. It’s left to the customer to decide if they want or need that product or service, and then remove it from their shopping basket.

Opt-out selling practices effectively boost refund protection sales by appealing to several human preferences and perceptions. For example, a ticket vendor might expect to increase sales of refund protection up-sale from 9% to above 50% by adopting an opt-out sales process.

The customer’s cognitive biases, including Status Quo, Anchoring, Loss Advsersion are not always rational, and the subject of academic study is known as Behavioural Economics. It’s almost impossible to overstate the impact of Behavioural Economics on modern life. Its principles inform government policies, health services, personal finance and commerce.

Opt-out selling of ancillary insurance is banned in the UK because financial intermediaries can exploit customer bias, leading to poor consumer outcomes. Consequently, if you arrange for your customer to protect their purchase by selling insurance, your customer must actively select to protect their purchase based on the information you are required to give them by the Financial Conduct Authority rules.

If you want to know more about Behavioural Economics, why not become a member of un4seen? Learn more about how simple adaptations to your sales process can drive higher ancillary sales and revenue. Our guides and resources help you exploit cognitive bias and treat customers fairly.

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The UK’s financial regulator has set its sights on unregulated businesses providing service obligations that look and feel like insurance.

Unregulated firms can’t simply thumb their noses at the expressed concern. The FCA has razor-sharp teeth, including powers to prosecute those it believes are carrying on insurance business illegally in the UK. In addition, the FCA has statutory powers under The Consumer Rights Act 2015 to take action against any firm it considers is in breach of Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). The FCA also has powers under Part 8 of the Enterprise Act for breaches under various consumer legislation, including the Consumer Rights Act 2015.

Activities fall under the FCA’s control if they are specified by primary and secondary legislation creating the so-called ‘Perimeter’. Anything inside of which is regulated activity requiring authorisation. Whereas anything outside of the Perimeter does not. As you might imagine, the Perimeter line is complex and finely drawn at times. This creates an ambiguity that can be exploited by bad actors seeking to ignore regulations and laws designed to protect consumer interests.

The section of the latest Perimeter Report from the FCA dealing with general insurance does not ask the Government to extend the Perimeter by creating new regulated insurance activities or change the accepted definition of an insurance contract. Instead, it focuses on two specific areas of concern relating to unregulated firms. First, it is alarming that some firms appear to be avoiding the requirement to be authorised by labelling consumer services as discretionary. The FCA is also concerned about failures to correctly apply FCA Perimeter guidelines (PERG) and insurance law which has led some firms to think, wrongly, authorisation by the FCA is not required. We look at each area in more detail below.

Discretionary Services

Some unregulated firms think they can avoid their service being classified as insurance by describing benefits as discretionary. The obvious problem is that the customer is either unaware that benefits may not be paid or the service is purchased on the assumption that the vendor will never use their discretion to decline a valid claim. FCA thinks discretionary terms in agreements with consumers could be a foil to avoid the service becoming an insurance contract and, therefore, subject to its control. It intends to deal with this problem by judging the nature of a proposition (i.e. whether it is an indemnity or discretionary scheme) based on the eating. Then, when it deems it appropriate, the FCA will see-through discretionary terms and conditions and deal with the service provider as an unauthorised insurer, a criminal offence in the UK. The extent to which the courts agree with the FCA’s characterisation of a service contract is a moot point. This may be why the FCA has also signalled its intention to take action under The Unfair Terms in Consumer Contracts Regulations 1999. In our opinion, a consumer contract that allows the supplier to deny service or benefit after being bound is likely to be unfair. We think these discretionary powers are likely to be deemed objectionable under the Regulations because the service is open to abuse, and it is unclear to the consumer how they can benefit from the service. It is also worth keeping in mind the FCA’s willingness to intervene and use its powers apply irrespective of whether the discretion is used.

Extended Warranty

The FCA’s second area of concern is third-party extended warranties. According to the FCA, some unscrupulous warranty providers give undue prominence in their terms and condition to repair (non-regulated) services while describing the insurance type perils it covers as incidental benefits. In reality, a significant proportion of claims do not involve repair and their warranty service is an insurance obligation.

It would seem that a few extended warranty providers are determined to avoid FCA regulation. This is a perennial problem for both consumers and the FCA. We agree with the FCA’s that third-party providers of extended warranties are likely to require authorisation to affect insurance contracts. Although un4seen does not support or work with third-party warranty providers we do urge these firms to review their selling practices in light of the FCA’s comments.

In conclusion, if you offer a discretionary service obligation, you may wish to review your terms and conditions of sale in light of the Unfair Terms in Consumer Contracts Regulations 1999. If these require amendment but cannot be changed without creating a contract of insurance, you should consider withdrawing the service in the UK. At the same time, you should apply to the FCA and PRA for authorisation to allow you to affect an insurance contract. Providers of third-party warranties may wish to restrict their services to repair only while seeking authorisation as an insurer.

If you are a vendor of goods and services and would like more information about any of the issues discussed in this post, why not become a member of un4seen? It’s free to join. We help our members design optional service obligations and explain them to their customers fairly and clearly. This is part of a range of support services to help you provide customers with better after-sales service and comply with UK consumer law.

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