Posted: 29th March 2017
The FCA’s consultation paper on changes to the Insurance Distribution Directive (IDD) was published on the 6th March 2017.
The IDD will need to be implemented by firms by the 23rd February 2018, and some of the requirements are already incorporated within the FCA’s Insurance Conduct of Business (ICOBs) rules.
This is the first of two consultation papers, with the second due in September 2017. The second consultation will consider the IDD requirement for firms to provide the customer with a standardised Insurance Product Information Document (IPID) and it will also cover conduct of business requirements for life businesses, including insurance-based investment products (IBIPs), product oversight and governance.
Where current UK domestic provisions go beyond IDD requirements ("gold plating") the FCA does not propose any changes.
The IDD (previously known as “IMD2”) will replace the Insurance Mediation Directive (IMD) which was introduced in early 2005 and was designed to encourage competition between insurance firms, as well as ensure appropriate levels of protection for consumers across the EU. The IDD aims to strengthen and consolidate the existing rules of IMD.
Commenting on IDD implementation, Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:
"This directive is a significant piece of legislation with implications for the insurance industry as a whole. Many of the changes extend UK standards to other parts of the EU and where domestic provisions already exist we will seek to minimise the disruption to UK firms."
Key points from CP17 / 7
The IDD proposes to extend ICOBs application to:
- All firms involved within the insurance distribution chain (including those with no direct contact with the end customer)
- Contracts of large risk
Reinsurance will remain out of scope. The main points from the consultation are as follows:
Professional and organisational requirements
These apply to all insurance distributors and include:
- All staff involved in insurance and reinsurance distribution must possess appropriate knowledge and ability to perform their duties. This is backed up by a requirement that staff undertake at least 15 hours of continuing professional development (CPD) per year
- That insurance and reinsurance intermediaries hold adequate levels of professional indemnity insurance. This is higher than what is currently required in the UK
- That necessary measures are in place to protect client assets
Complaints and out-of-court redress
Current DISP requirements meet the IDD’s requirement for insurance distributors to have in place procedures for handling complaints with appropriate out-of-court redress procedures. However, the requirement to have a complaints procedure for eligible complainants will extend to all insurance and reinsurance distributors when carrying on distribution activities.
The FCA is also consulting on widening the definition of an eligible complainant from just micro-enterprises to include all SMEs (although this is not an IDD requirement).
Conduct of business requirements
The requirements build on the existing IMD. In summary:
- All firms must act honestly, fairly and professionally in the customer’s best interests – in a contemporary regulatory landscape, retaining documentary evidence to illustrate that the firm is meeting this requirement is recommended
- Firms must make appropriate pre-contract disclosures about themselves and the scope of their services
In line with the ‘client’s best interests’ rule, firms need to consider how to ensure information is meaningful to customers. Information should be provided in a durable medium in a way that is fair, clear and not misleading. Within this there are further requirements, including:
- Conflicts of interest and transparency - This includes the disclosures relating to conflicts of interest and transparency. Intermediaries must disclose if they have 10% or more voting rights or capital in an insurer, or vice versa. They must also disclose whether they give advice based on fair and personal analysis of the market. Where an intermediary is contractually bound to place business with a specific insurer or insurers, it must provide the name of these insurers - currently, this information needs to only be supplied when requested by the customer.
- Remuneration - Firms must disclose the ‘nature’ (type of remuneration) and ‘basis’ (source of remuneration) they receive, in relation to the contracts proposed. There is however no requirement to disclose the exact monetary amount of commission due to firms within the value chain.
- Fee disclosure - ICOBs 4.3 currently requires firms to disclose any fees payable by the customer. Under IDD firms will need to provide the exact figure of the fee or the method of calculation if the amount cannot be provided. This also applies to post-contract fees that the customer may incur during the life of the policy.
Advised and non-advised sales
IDD builds on existing ICOBs requirements, requiring firms to actively seek to understand the customer’s demands and needs by asking appropriate questions. In addition, the IDD includes an additional provision that “any contract proposed shall be consistent with the customer’s insurance demands and needs". To comply with this additional requirement firms must:
- Identify the customer’s demands and needs matching them to available products
- State the customer’s demands and needs to assist them in making an informed decision
The FCA does not expect firms operating a non-advised sales process to carry out a detailed investigation of customer circumstances, but they should still identify the customer’s demands and needs.
Amendments to ICOBs – sales practices
The practice of bundling insurance alongside a primary product is prohibited.
Regime for ancillary insurance intermediaries (AIIs)
In-scope AIIs will be within the FCA’s regulatory perimeter. Both connected travel insurance providers and other firms that meet the UK’s connected contracts (out-of-scope AIIs) will fall outside the UK’s regulated perimeter, e.g. motor vehicle dealers and electrical good retailers.
Regulatory next steps
The FCA requests responses to the consultation by the 5th June 2017, after which they will consider feedback and aim to publish rules in a Policy Statement by Q3 2017.
Considerations for firms
The new best interests rule places an obligation on firms to consider how they can make information meaningful to customers and places an onus on firms to make sure that information is provided at an appropriate time and through the right channels. Firms should be reviewing their approach to customer communications with the aim of ensuring customers pay attention to them to inform their decision making process.
Firms should assess what if any changes they will need to make to their processes in order to comply with the directive by the 23th February 2018.
The IDD proposes to enforce professional and organisational requirements which in practice will require thinking around any staff training that is needed. Firms should also consider the potential need to evidence their work in this area to the regulator, and also think about the impact of the Directive on other conduct of business rules and complaint handling processes.
Firms can begin considering their positions now, even ahead of the second consultation expected in September. However, they should bear in mind that there are more recommendations to come in this area, and these may have implications on any work that takes place before the second consultation paper is published.