The Insurance Distribution Directive (IDD), a key piece of EU legislation in regulating insurance intermediaries, came into force on 22 February 2016. ‘Directive (EU) 2016/97 on Insurance Distribution (Recast)’ focuses on practices for selling insurance products and in particular seeks to establish a level playing field between participants in insurance sales in order to improve customer protection, strengthen competition and facilitate market integration. The IDD updates the 2002 Insurance Mediation Directive 2002/92/EC (the 2002 Directive), which introduced a framework for regulating EU insurance brokers, agents and other intermediaries.
The IDD has a wide scope of application, applying to all sellers of insurance products (including those that sell directly to customers and price aggregator comparison websites), anyone who assists in the administration and performance of insurance contracts (e.g. claims management activities, Lloyd’s managing agents, service companies dealing with customers) and ancillary insurance intermediaries. It applies both to insurance and reinsurance distribution.
The overriding aim of the IDD is to ensure that insurance intermediaries act professionally, honestly, fairly and in the best interests of their clients. Some of its specific provisions include:
- Professional development: employees of insurance intermediaries must complete at least 15 hours of professional training or development per year.
- Disclosure: before the conclusion of a contract, intermediaries must disclose to their customers the nature and basis of their remuneration (e.g. fee and commission).
- Remuneration: intermediaries must not remunerate or assess the performance of employees in a way which conflicts with their duty to act in the best interests of their clients.
- Provision of information: intermediaries must provide certain information to their customers (e.g. product information document, which summarises the main features of the proposed contract).
The IDD is not ‘directly applicable’. As is the case with all EU directives, this means that it must be implemented into domestic law by each EU Member State. The deadline for domestic implementation is 22 February 2018, at which point the 2002 Directive will be repealed.
Generally speaking, if the UK leaves the EU, it would of course no longer be required to implement EU directives after it ceases to be an EU member state. However, in the event of a vote for Brexit, the UK is unlikely to leave the EU until after 22 February 2018, meaning that it would in theory still be under an obligation to implement the IDD into UK law. The 2002 Directive would continue to apply to the UK through domestic implementing legislation unless it is specifically repealed.
In the UK, the 2002 Directive was implemented into UK law through the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003. This statutory instrument was subsequently replaced by the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005/1529, which does not specifically refer to the 2002 Directive and does not depend on the 2002 Directive being in force at EU level. This means that if the UK votes for Brexit but does not implement the IDD or repeal the implementing legislation for the 2002 Directive, the 2002 Directive will continue to apply in the UK after 2018 when it has been repealed at EU level. This is likely to be one of the many issues to be decided in the event of a vote for Brexit and an example of the complexities that a vote for Brexit could create.
Assuming that the IDD is implemented into UK law, anyone involved in selling insurance products should take note of the new IDD. In particular, (re)insurers should be aware that the IDD widens the scope of EU regulation by replacing “mediation” with “distribution” to reflect the fact that (re)insurance distribution is carried out by (re)insurers themselves as well as brokers and other intermediaries. In the UK, we expect that the practical effect of this change will be minimal: the UK “gold-plated” the 2002 Directive when implementing it, so the current UK rules and regulations on mediation already catch (re)insurers. However, (re)insurers and intermediaries should review their internal business protocols to ensure that they are compliant with the new requirements.
The IDD is available here1.