Background and RegZone reports

RegZone is publishing a series of reports about UK changes to the definition of financial advice and UK implementation of the Insurance Distribution Directive (“IDD"). This RegZone report headed

  • ‘FCA consultation on IDD implementation (1)’ looks at the changes to ICOBs considered in FCA consultation CP17/7.

There are 3 separate RegZone reports on

  • ‘Changes to the definition of financial advice – a compromise’, looks at the changes made by SI 2017 No.500[1] following the HM Treasury consultation (Amending the definition of financial advice (September 2016)) and the consultation response (February 2017); these changes arise in the context of the implementation of the recast Markets in Financial Instruments Directive (“MiFID II”) and IDD and the FCA’s Financial Advice Market Review (“FAMR”);

  • ‘HM Treasury consults on the implementation of the Insurance Distribution Directive', which looks at the consultation (Transposition of the Insurance Distribution Directive (February 2017)) and the legislative changes to implement IDD – mainly relating to perimeter issues, administration and the passporting arrangements.

The FCA is expected to publish a second consultation on the implementation of IDD, and consultation and guidance on the changes to the definition of financial advice later in 2017.

EIOPA has submitted IDD Level 2 technical standards to the European Commission and work is ongoing on Level 3 guidelines.[2] A RegZone report on EIOPA Level2/3 materials will be published shortly.


This report concentrates on the ICOBS changes.

FCA is consulting on the implementation of the Insurance Distribution Directive ((EU) 2016/97) (“IDD”)[3]. The IDD will replace the current EU regime under the Insurance Mediation Directive (2002/92/EC) (“IMD”) and must be implemented by 23 February 2018. This article considers CP17/7 which is the first of two FCA consultations on IDD implementation. The second FCA consultation, expected later this year, will cover implementation of the insurance product information document (“IPID”) requirements and the approach to the conduct of business requirements for life business (including insurance-based investment products (“IBIPs”)). The second FCA consultation paper will also cover product oversight and governance. EIOPA has consulted on its technical advice on delegated acts under IDD (see advice here) and on guidelines.

Broadly, the IDD harmonises the regulation of intermediaries (general and life insurance and reinsurance) including authorisation and passporting, but also has organisational conduct of business requirements which are also applicable to insurers and reinsurers. It includes new harmonised requirements for intermediaries, such as product oversight and governance, and enhanced conduct rules for IBIPs. The IDD aims to align customer protections with those provided by MiFID II. For further information on the IDD, you can read the RegZone report here  and access further materials at the RegZone topic page here.

CP 17/7 covers the scope of IDD (including the wider application of the general principles to all intermediaries in the chain – see below), professional, organisational and prudential requirements, complaints handling and out-of-court redress, ancillary insurance intermediaries and amendments to the FCA’s Insurance Conduct of Business Sourcebook (“ICOBS”). 

Proposed changes

The FCA will give effect to the IDD requirements by:

  • Including a new rule in ICOBS requiring insurance distributors to act honestly, fairly and professionally in the best interests of their customers (“the customer’s best interests rule”);

  • Amending the current ICOBS rules on communications and financial promotions to require that all marketing communications be clearly identifiable as such;

  • Including a new rule in SYSC to prohibit remuneration and performance management practices that would conflict with the customer’s best interests rule.

The consultation aims to modify the rules on the ICOBS within six broad categories:

  1. The IDD General Principles  (ICOBS 2)

  2.  General pre-contract disclosures (ICOBS 4)

  3. Disclosures relating to conflicts of interest and transparency (ICOBS 4)

  4. The means of providing information (ICOBS 4)

  5. Standards for advised and non-advised sales (ICOBS 5)

  6. Cross-selling (ICOBS 6A).

The IDD general principles

IDD introduced general principles applicable to all insurance distributors[4]. These are already similar to the pre-existing FCA provisions; however, there are differences that the FCA will implement via changes to the Handbook.

In terms of scope, firms should note that these overarching principles will apply to all firms carrying out insurance distribution activities where they have a direct impact on the policyholder. “This will include, for example, a wholesale intermediary who concludes a policy placed with it by a retail intermediary, or a price comparison website who proposes a contract but directs a customer to another intermediary or insurer”.

The FCA will

  • include a new rule in ICOBS requiring insurance distributors to act honestly, fairly and professionally in the best interests of their customers[5];

  • amend the current ICOBS rules on communications and financial promotions to require that all marketing communications be clearly identifiable as such;

  • include a new rule in SYSC to prohibit remuneration and performance management practices that would conflict with the customer’s best interests rule.

Existing guidance within ICOBS 2.3.1G is similar to the proposed new rule on customer’s best interests. However, ICOBS 2.3.1G goes further by including conflicts between customers. The FCA will keep this rule and add a reference to the customer’s best interests rule.

The FCA will add, in ICOBS 2, new requirements for authorised firms who distribute policies through ancillary insurance intermediaries exempt from authorisation (under Article 72B of the Regulated Activities Order 2001). They will be required to consider the customer’s best interests rule. See our other report in this series (FCA consultation on IDD implementation (2)) for a discussion of the changes regarding regulation of ancillary insurance intermediaries.

Pre-contractual disclosures

IDD builds on the pre-existing pre-contract requirements currently in place. The FCA will amend ICOBS 4 to incorporate these new requirements:

  • The pre-contract disclosure regime now applies to insurance undertakings;

  • Firms must state what type of firm they are (an intermediary or an undertaking);

  • Firms must state whether they provide a personal recommendation;

  • Insurance intermediaries must state whether they are acting on behalf of the customer or the insurance undertaking.

Earlier work undertaken by the FCA (e.g. Smarter Consumer Communications) revealed the need for firms to provide meaningful and timely disclosure. The FCA’s earlier work revealed that customers do not always understand the difference between information and advice. Therefore the FCA suggests a well-worded disclosure can assist the customer understand the scope of the service the firm is providing.

See our other report in this series (Changes to the definition of financial advice – a compromise) to learn more on the changing definition of financial advice and the implications for firms providing personal recommendations.

Disclosures relating to conflicts of interest and transparency

Links between firms

IDD builds on existing conflicts of interest disclosure requirements in ICOBS. The FCA will amend ICOBS 4 to align this with IDD. The IDD requirements apply only to insurance intermediaries. ICOBS 4 will be amended to reflect the following:

  • Intermediaries must disclose if they have 10% or more voting rights or capital in an insurer, or vice versa. Currently the requirement is “more than 10%”;

  • Intermediaries must disclose whether their advice is based on “a 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 names of those insurers. Currently this information need only be supplied on request by the customer;

  • Where an intermediary is not contractually bound to place business with specific insurers but does not provide advice on the basis of a fair and personal analysis of the market, it must name the insurers with whom it may place business.  Currently this information only needs to be disclosed on request by the customer.

These requirements apply to both advised and non-advised sales. Intermediaries who conduct non-advised sales will always need to disclose the names of the insurers with whom they may place business.

Remuneration arrangements

IDD introduces new requirements regarding pre-contract disclosure of insurance distributors’ remuneration. Intermediaries must disclose the nature and basis of the remuneration they receive in relation to the insurance contract. Insurers must disclose the nature of the remuneration paid to their employees. Where remuneration takes the form of a fee paid by the customer, the amount of that fee must be disclosed.

FCA will provide guidance in ICOBS to ensure ‘nature’ and ‘basis’ of remuneration are interpreted/applied consistently across the market. The FCA’s proposed guidance:

  • ‘nature’ – the FCA requires firms to disclose the type of remuneration they will receive or pay e.g. basic commission, bonus, profit share, or other financial incentive;

  • basis’ – the FCA requires firms to disclose the source of the remuneration they received, which is specified in Article 19(1)(e) of IDD[6].

As IDD states that information must be disclosed about the remuneration in relation to the contracts proposed, firms should disclose information about remuneration that has a direct connection to the insurance contract being sold e.g. bonuses for hitting sales targets[7]. Firms should disclose the information in a way that is helpful to customers in showing the relationship between firms in the distribution chain and any potential conflicts of interest.

Certain existing parts of ICOBS 4 are not affected by IDD and the FCA does not propose to amend them. These include ICOBS 4.4 whereby insurance intermediaries are required to disclose the amount of commission received in relation to an insurance policy on request by the commercial customer. Guidance in ICOBS 4 has similar obligations regarding retail customers.

It will be noted that the FCA’s proposals in this consultation paper do not affect other obligations regarding remuneration arising from the general law such as the position under section 140A of the Consumer Credit Act 1974 concerning fairness of a relationship between a lender and a borrower under a credit agreement.  See our report on this and the Plevin case here.

The FCA will also amend the definition of ‘fee’ in the Handbook glossary to reflect the position in IDD. ICOBS 4.3 requires firms to disclose the amount of any fees payable by the customer. The FCA emphasises the following as regards implementing these requirements:

  • Providing a range e.g. up to £50 without further information will not be compliant with ICOBS. Firms must provide the exact amount or the method of calculation if the exact amount cannot be provided.

  • It is only permissible to provide the method of calculation if the exact amount cannot be calculated at the time. If the exact amount is known it must be disclosed. Firms should also remember, when providing the method of calculation, the requirement to communicate in a manner which is clear, fair and not misleading.

  • The requirements apply to all post-contract fees that the customer may incur during the life of the policy, including e.g. administration fees for matters such as mid-term adjustments.

Means of providing information

The IDD sets out new provisions on how information must be provided to customers:

  • All the information required must be provided in a “clear, accurate and comprehensible manner”, in the “official language of the Member State” and “free of charge”;

  • Information may be provided on paper, a “durable medium” other than paper or a website (where it is not a durable medium and satisfies certain conditions). If the information is provided through a medium other than paper, the customer must have the option to have the information on paper free of charge;

  • There is no provision for the information to be provided orally at the request of the customer;

  • Telephone sales should comply with existing EU law in relation to distance marketing.

The FCA emphasises that where firms wish to provide the information through a durable medium other than paper or a website (where it is not a durable medium), they are expected to  present the customer with a choice between the available options (rather than simply presenting the customer with one option and asking for their consent).

The FCA is also planning to adopt a stricter definition of “durable medium”.  The FCA will amend this definition in ICOBS in line with the one provided by IDD; for instance, the FCA intends to remove references to floppy disks included in IMD/IDD from its Handbook[8].

Standards for advised and non-advised sales

The IDD specifies that all firms are required to identify their “customers’ insurance demands and needs based on information obtained by the firm from the customer[9]. Where a firm provides advice it must be able to explain why a contract best meets the customer’s needs.

The FCA intends to copy the new IDD requirement that “any contract proposed shall be consistent with the customer’s insurance demands and needs” in ICOBS 5.

In order to meet this requirement, firms must take 2 steps:

  • Identify customer’s demands and needs and match this with the product; and

  • State the customer’s demands and needs to assist them in making an informed decision.

The FCA acknowledges the need to maintain a clear distinction between advised and non-advised sales:

  • Non-advised sales – the FCA does not expect firms to undertake a detailed investigation of the customer’s circumstances, but they should identify the customer’s demands and needs and ensure the contract offered meets these.

Page 26 of the FCA’s consultation paper sets out a table with examples of demands and needs.

The FCA has amended the guidance in ICOBS 5.2.4G to emphasise that firms must identify and state the demands and needs of the particular customer rather than giving generic statements. Generic statements of demands and needs may be appropriate if the firm has narrowed the product options it offers to only those where the customer’s demands and needs match those in the statement.

  • Advised sales – the FCA proposes to add a new requirement for firms that provide a personal recommendation to provide a personalised explanation why the proposed product best meets the customer’s insurance demands and needs. To comply with this and the requirement to act in the customer’s best interests, if the firm does not offer a product which meets the customer’s needs it should state this.

Sales practices and Cross-selling

IDD Article 24 introduces new requirements for the cross-selling of insurance products. These requirements apply where an insurance policy is sold in connection with, or alongside, other goods or services as part of a package or the same agreement. In packages where insurance is the primary product, information must be given to the customer on whether the different components of the package can be bought separately. If so, an adequate description of the different components of the agreement or package must be provided as well as separate evidence of the costs and charges of each component. In packages where insurance is ancillary to other goods or services, the distributor should offer the customer the option of buying the product or service separately without the insurance.

The cross-selling rules in IDD do not apply where insurance is sold ancillary to certain other financial products (such as payment accounts and mortgages) or ancillary to another insurance product.

The FCA will copy the new IDD requirements in ICOBS 6. The FCA reiterated that existing ICOBS rules will apply to an insurance policy sold as part of a package, irrespective of whether insurance was the primary or ancillary product in a package. This includes pre-contract disclosure requirements and the prohibition on opt-out selling. Moreover, firms must continue to comply with the existing provisions relating to the sale of guaranteed asset protection (GAP) and insurance as part of a packaged bank account, as well as our rules and guidance on the sale of add-on insurance products.

The IDD also requires firms to provide customers with objective information about an insurance product in a comprehensible form to allow them to make informed decisions. The FCA will rely on the existing ICOBS 6.1.5R to implement this requirement.

For non-life insurance products, the IDD requires that product information be provided in a standardised Insurance Product Information Document (IPID). The FCA intends to consult on IPID related transposition in its second consultation paper, after the relevant implementing technical standards have been adopted. EIOPA has focused on retail customers in developing the technical standards for the IPID and has stated that it will be for Member States to decide whether the IPID should be provided to all customers or only retail. The IPID will not be required in relation to the distribution of contracts of insurance for large risks. The FCA is seeking stakeholder views, ahead of the consultation, on the application of the IPID to commercial customers.

Next Steps

The consultation was launched on 6 March 2017 and will close on 5 June 2017. Firms can find a consolidated list of questions in Appendix 1 of the Consultation Paper[10]. The consultation paper together with the link to the online response form can be found here.

These proposals are driven by the requirement to implement the IDD by 23 February 2018. The FCA will consider the firms’ feedback and aim to publish their rules in a Policy Statement by September 2017.