The FCA has published the first of two consultation papers setting out its proposals for transposing the Insurance Distribution Directive (IDD) into English law.
The deadline for implementing the IDD is 23 February 2018, which means that the new laws will be introduced prior to the UK's exit from the EU. Responses to the first consultation paper are requested by 5 June 2017, in advance of the FCA's policy statement scheduled for September 2017.
The IDD replaces the Insurance Mediation Directive and seeks to strengthen consumer protection. It aims to deliver a number of requirements of a professional, organisational and prudential nature as well as dealing with complaints handling and out-of-court redress requirements. The new rules will apply to all persons who conduct insurance distribution to consumers, and introduces a new category of firm - ancillary insurance intermediaries (AIIs). An AII is a firm which meets the following requirements: their principal professional activity is not insurance distribution, and they only distribute insurance products that are complementary to goods and services they provide as their primary professional activity.
"Minimum knowledge" requirement
In terms of professional and prudential requirements, the IDD requires staff of re/insurance intermediaries to have "minimum knowledge" of product coverage, the claims process and insurance regulation. The FCA propose to implement this but extend its scope beyond intermediaries to all those involved in re/insurance undertakings. They also propose to require staff directly involved in distribution activities to undertake 15 hours of continuing professional development in line with IDD requirements. Professional indemnity (PI) insurance requirements in the IDD do not require implementation as current FCA requirements for PI insurance already exceed the levels required.
The IDD also sets out complaints handling requirements, specifically for re/insurance to have a process in place for customers and other eligible parties to register complaints and receive replies, and for EU Member States to have adequate and effective, impartial and independent out-of-court complaint and redress procedures. Amendments to DISP in the current FCA regulatory framework are proposed to reflect the IDD's requirements.
The IDD builds on the existing pre-contract disclosures rules in ICOBS, with a number of new additions, such as a new rule requiring insurance distributors to act honestly, fairly and professionally in the best interests of their customers (the "customer's best interests" rule). Significantly, ICOBS currently only applies to intermediaries who are in contact with the customer, and not all intermediaries in the distribution chain. Proposed changes to the Handbook mean that certain new IDD requirements will apply to all intermediaries in a distribution chain, irrespective of whether such intermediary has contact with the customer.
Finally, under the IDD, re/insurance undertakings and intermediaries are required to use only authorised or exempt insurance intermediaries for insurance distribution. This is more restrictive than current FCA rules which apply only to insurance and reinsurance undertakings. Amendments to MIPRU are proposed to reflect this change.
Consultation is still in its first phases, and more guidance is expected when the second consultation paper is published later this year. This paper is expected to cover the implementation of the Insurance Product Information Document (IPID) requirements, the conduct of business requirements for life business and product oversight and governance. In the meantime, the first consultation paper provides a preview of the FCA's approach, building on the current framework rather than rewriting it, and confirms that the IDD will be implemented despite Brexit.
This article was co-authored by Rob Paine, Trainee Solicitor in RPC's Corporate Insurance and Financial Services team.