The Insurance Distribution Directive (IMD2) came into force on 22 February 2016; and insurance manufacturers and distributors will have to comply with it from 23 February 2018 (at the latest). We don’t know exactly what that means yet because, although the European institutions have made the ‘framework’ Directive, they’re still developing most of the rest of the new rules. Here’s what we know so far:
Insurance product manufacturers (PMs) will have to use a specific approval process for every policy they produce. The process must (a) identify the target market; and (b) ensure the distribution strategy and target market are consistent, and that the policy will only be distributed to that market. PMs will be expected to give distributors information about each of these things; and distributors will have to ensure they understand it. We’re still waiting for the rules and guidance that will tell us what the approval process must look like; how to distinguish between the PM and distributor; and who will be responsible for what.
Insurers and intermediaries will have to identify conflicts of interest between themselves and their customers, and between one customer and another. Then, if they’re distributing an investment policy, they’ll have to use “organisational and administrative arrangements” to stop these conflicts damaging their customers’ interests. If they can’t, they must disclose the conflict before the customer invests. Further rules will explain what “organisational and administrative arrangements” means; and what to take into account when deciding whether a conflict damages a customer’s interests, or not.
Insurers and intermediaries will only be able to make or receive a payment, or provide or receive a non-monetary benefit, in connection with an investment policy if that won’t adversely affect the service they’re providing. And they must ensure that any payments and non-monetary benefits they do pay or receive will not stop them from acting honestly, fairly and professionally in accordance with their customer’s best interests. Insurance distributors will also have to use appropriate and proportionate “structural arrangements”, to ensure that the fees, commissions and benefits paid by anyone other than their customer are properly disclosed to him and won’t have a detrimental impact on him. Future updates will tell us more about the payments and benefits that might have an adverse effect; and the circumstances that suggest that an insurer or distributor isn’t acting honestly, fairly and professionally.
Finally, an insurance distributor will have to gather information from its customers, and use it to specify their demands and needs. It will also be required to give objective product information to its customers, so they can make informed decisions about whether to proceed. Then, if the distributor gives advice, it will have to make a personal recommendation which explains why the product meets its customer’s demands and needs. These arrangements will be complemented by a suitability and appropriateness test, for investment policies. The information required for this will vary, depending on whether advice is being given, and whether the policy is part of a bundle. Controversially, if a customer wants to buy an investment policy without advice, the distributor will have to ask him about his knowledge and experience, assess whether the policy suitable, and warn him if it’s not. The next set of rules will explain more about what this means, and what firms will have to do if the customer won’t play ball.
The European Insurance and Occupational Pensions Authority will spend much of 2016 preparing an advice to the European Commission, so the Commission can prepare the rest of the rules, and publish them in 2017. In the meantime, UK insurers and distributors will be wondering how this affects them. The truth is that no-one really knows exactly what difference it will make. All we can say is that, whilst some of the new rules will be broadly the same as the FCA’s existing rules, some will be more detailed, and others will set higher standards, making this one to watch, both this year and next.