On the 15th December 2017, the Financial Conduct Authority (FCA) published its response to feedback received on Consultation Paper 17 / 23 – the second of three consultation papers relating to the implementation of the Insurance Distribution Directive (IDD) in the UK.
The document sets out the implementation of most Level 1 directive matters, including the remaining conduct requirements for life policies and information disclosure relating to general insurance products.
The IDD replaces the Insurance Mediation Directive (IMD) and is a minimum harmonisation directive intended to provide threshold minimum standards of consumer protection when buying insurance across Europe, encouraging competition within the non-investment insurance, life insurance and insurance-based investment products (IBIP) sectors.
Key Points from PS17 / 27
PS17 / 27 outlines the following proposed changes to current regulatory requirements:
1. Matters applicable to all firms that distribute and / or manufacture insurance products (e.g. banks and building societies as well as insurers)
a) Product oversight and governance
The paper provides high-level product governance measures 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 in order to clarify the way in which they are expected to distribute the product(s).
b) Client money requirements
- IDD will extend current CASS requirements to firms involved in reinsurance distribution
c) Professional requirements
- IDD will extend good repute checks to the new category of in-scope Ancillary Insurance Intermediaries and in a prescribed format
2. Life Insurance business (in relation to insurance-based investment products)
a) General obligations
- Standards for non-advised sales have been set, requiring firms to identify and specify the customer’s demands and needs on the basis of information obtained from the customer and, where advice is given, provide a personal recommendation explaining why a particular product best meets the customer’s needs
- Ancillary products must be optional
- Authorised firms will be held responsible for the products distributed through exempt Ancillary Insurance Intermediaries (firms or individuals whose core business is not financial services, but actively distribute insurance by way of business)
- 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
c) Suitability - new requirements
- 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 bundled services or products
- Provide a suitability statement specifying the advice and how it meets client’s preferences, objectives and other customer characteristics
- Update the suitability statement to reflect periodic suitability assessments
- The customer’s knowledge and experience should be assessed to determine whether an IBIP that is provided is appropriate for them
- Execution-only sales:
- Should be restricted to non-complex products that comply with conflicts of interest requirements
- Should be driven by the customer’s own initiative
- Should ensure a customer is made aware that appropriateness has not been assessed
3) Additional changes for non-investment insurance business
The Directive will require the introduction of the Insurance Product Information Document (IPID) to effectively replace the policy summary under current requirements. It will apply to any insurance product, including “add-ons” (but not contracts of large risks). The IPID should be provided prior to the conclusion of the contract and the mid-term adjustments. The document should be fair, clear and not misleading, jargon-free and in a prescribed format.
Regulatory Next Steps
The FCA will publish its third and final policy statement this month, which will provide feedback on CP17 / 33, which consulted on requirements of the IDD delegated acts, including further requirements for life firms regarding IBIPs, and additional requirements for all firms (e.g. conflicts of interest, product oversight).
On the 21st December, the FCA confirmed the European Commission had proposed to push back the application date of the IDD by seven months to the 1st October 2018, following requests from the European Parliament and Member States for a postponement.
Member States (including the UK) will still be required to transpose the IDD into national law by the original date, the 23rd February 2018. However, under the current proposals, firms will not be required to comply with the IDD until the 1st October 2018. The European Parliament and the Council will need to agree and confirm the new application date in an accelerated legislative procedure. Aiming to implement changes by the original date will afford firms time to test the effectiveness of their implementation plan in a live environment prior to October 2018.
Considerations for firms
Firms should be in the process of reviewing the impact of the requirements to inform their implementation plans.
- Manufacturers should assess the effectiveness of their oversight of distributors in ensuring that products are suitable for customers’ needs. Distributors should co-operate fully with the manufacturer based on clearly defined roles and responsibilities supported by contractual arrangements. Distributors should review their arrangements to ensure they reflect agreed responsibilities
- For life insurance business, firms need to assess whether their sales processes support customer understanding of the product they have been recommended and why it is suitable for their circumstances given the customer’s knowledge and experience; and add-on products should be offered as optional rather than bundled in with the primary product
- For general insurance products, firms need to develop and test their arrangements for the provision of the IPID