On the 19th January, the FCA published its response to feedback received on Consultation Paper 17 / 33 – the third and final consultation paper relating to the implementation of the Insurance Distribution Directive (IDD) in the UK.
The policy statement responds to feedback received to CP17 / 33, as well as feedback on certain matters deferred from CP17 / 23 (the second CP), and feedback to the IDD-related aspects of two quarterly consultation papers (CP17 / 32 and CP17 / 39).
The IDD replaces the Insurance Mediation Directive (IMD). It aims to enhance consumer protection when buying insurance, including within non-investment insurance, life insurance, and insurance-based investment products (IBIP) – and to support competition between insurance distributors by creating a level playing field.
IDD aims to enhance the protection of consumers and retail investors by ensuring greater transparency on the part of insurance distributors regarding the price and costs of their products, better and more comprehensive product information and improved conduct of business rules. The new rules will be applicable to all distribution channels, including direct sales by insurance companies. The aim is to create a level playing field for all distributors and guarantee uniform high standards of protection for consumers to mitigate the risk of mis-selling and associated customer detriment.
In addition, IDD introduces generalised product oversight and governance (POG) into EU insurance distribution law, with the aim of ensuring that all insurance products for sale to customers meet the needs of their specific target market. The POG rules will be mainly addressed at manufacturers of insurance products and oblige them to maintain, operate and review a POG policy to ensure on a continuous basis that all marketed insurance products are appropriate for their specific target market. Insurance distributors must support this by operating product distribution arrangements which ensure that they have all the information needed to sell the product in line with the POG policy set by the manufacturer.
Key Points from PS18 / 01
PS18 / 01 outlines the following proposed changes to current regulatory requirements:
Insurance-based Investment Products (IBIPs)
The IDD empowers the EU Commission to adopt delegated acts related to the product oversight and governance requirements and in relation to the distribution of IBIPs. The FCA will replicate the product governance and IBIP regulations in the FCA handbook.
Firms must ensure the payment of a fee, commission or non-monetary benefit does not have a detrimental impact on the quality of the service provided and does not impair compliance with the duty to act honestly, fairly and professionally in the best interest of customers.
Suitability and appropriateness
Regarding suitability, firms must:
- Assess whether the product recommended is suitable for that person, particularly in relation to their risk tolerance
- Collect information about the customer, including their investment knowledge and experience, financial situation, ability to bear losses, investment objectives and risk tolerance
- Assess the suitability of the overall package where advice is provided on a package of bundled services or products
- Provide a suitability statement specifying the advice and how it meets a client’s preferences, objectives and other customer characteristics
- Update the suitability statement to reflect periodic suitability assessments
Regarding appropriateness, firms must:
Assess a customer’s knowledge and experience to determine whether an IBIP is appropriate
Restrict execution-only sales to non-complex products that comply with conflicts of interest requirements. Execution only sales must be driven by the customer’s own initiative and firms must make customers aware that appropriateness has not been assessed
Changes to rules to implement requirements in the IDD that apply to life and non-investment insurance business
Conflicts of Interest
- The application MIFID II requirements as outlined in Senior Management Arrangements, Systems and Controls (SYSC) 10 will be extended to firms carrying on insurance distribution
- For firms subject to IBIP regulation, a new section in SYSC 3.3 will apply (includes identification and management of conflicts of interest arising between the firms, its managers, employees and appointed representatives or any person directly or indirectly linked to them by control; or between one client and another)
- For firms not subject to IBIP regulation, the insurer will be subject to SYSC 3 and distributors to SYSC 10
- A new requirement in SYSC 19f prohibiting remuneration and performance management practices which conflict with a firm’s duty to act in the customer’s best interests
Product oversight and governance
High-level product governance measures will apply to all insurers and insurance intermediaries where those firms manufacture or distribute insurance products.
Manufacturers are required to:
- Specify a target market for the product
- Ensure all relevant risks are assessed
- Provide appropriate information to distributors
- Take steps to ensure the product is distributed to the target market and review products regularly
- Firms distributing products which they do not manufacture should obtain information from the manufacturer to clarify the way in which they are expected to distribute the product(s)
Article 33B of the Regulated Activities Order (RAO) introduces new exclusion based on “the mere provision of information” about a potential policyholder to a relevant insurer or intermediary.
- New firms will need to be authorised in a shorter timeframe (three months)
- Supervision (SUP) 12 amendments relating to registration of appointed representatives (ARs) and continued oversight by principal firms. Principal firms will be required to collect additional information from ARs
- Passporting – SUP 13 amendments relating new powers for the FCA in relation to refusing a notification of an intention to establish a branch
- Proposals: Amendments to SUP 13, 13A, 14 to reflect IDD requirements
- Professional firms: Consequential amendments within Professional Firms (PROF), including a change to the disclosure the FCA specify which is an exempt professional firm
Regulatory Next Steps
On the 20th December 2017, the European Commission proposed delaying the application date of the IDD to the 1st October 2018. The European Parliament and the Council will need to agree on the new application date before the delay is formally adopted and published in the Official Journal of the European Union. Under this proposal, firms would now have until the 1st October 2018 to implement the new IDD requirements.
In addition to a delay of the application date for the industry, Member States are calling for a delay of the transposition deadline for Member States to the 1st July 2018 - in line with a letter of the European Parliament’s ECON Committee sent to the Council on the 9th January.
At this stage, it is not clear if the European Commission is agreeing to further change its position on the deadline of the IDD transposition. However, this is unlikely to unduly affect the UK Government’s timescales.
The FCA intends to publish final rules once the Treasury’s legislation is in force. Firms affected by these rules will need to ensure compliance by the application date specified in these final rules, depending on the outcome of the proposed delay.
Considerations for firms
Firms should be assessing the impact of the requirements on how they do business and develop implementation plans to comply with the requirements.
- If your firm is a manufacturer of a product do you fully understand the activities performed by distributors on your behalf?
- If your firm is a distributor, do you understand your responsibilities to help the manufacturer in effective oversight of the product?
- Do your remuneration or performance management practices conflict with the duty to act in the best interests of customers?
- Does your conflicts policy adequately outline the conflicts arising from your business model? Have your staff been trained to identify conflicts of interest and are adequate controls in place the measure and manage your conflicts of interest?
There are a variety of requirements which firms will need to comply with to ensure the requirements of IDD are met. The extension of the original timeframe has given firms a further short window of time to adapt to the new requirements, and to ensure ongoing compliance.