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 ((EU) 2016/97) (“IDD”)[1]. 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 RegZone report

  • ‘FCA consultation on IDD implementation (2)’ looks at the changes in CP17/7 other than those relating to ICOBS.

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[2] 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”);

  • ‘UK 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 (here) and work is ongoing on Level 3 guidelines.[3]A RegZone report on EIOPA Level 2/3 materials will be published shortly.

New professional, organisational and prudential requirements

IDD introduces a minimum 15 hours’ continuing professional development (CPD). Existing FCA requirements in the Training and Competence Sourcebook (TC) are regarded as being IDD compliant; the FCA proposes to apply the IDD requirements, including 15 hours CPD obligation, to those outside TC (moving knowledge and competence requirements in MIPRU 2.3 to SYSC). This will apply to insurers (which is not required by IDD) as well as intermediaries as well as those involved in insurance distribution (including those in management with responsibility for insurance distribution). The FCA will issue guidance regarding CPD requirements in the case of script reading call centre staff (to ensure proportionality in the application of the requirements, the format and content of CPD can be modified according to the nature and complexity of the employee’s role). Record keeping (demonstrating compliance with the knowledge and ability requirements) applies.

The requirement to hold professional indemnity insurance (or a comparable guarantee) applies only to insurance and reinsurance intermediaries. The FCA proposes to increase the minimum cover levels[4] in line with IDD, and will retain the more detailed UK requirements (in MIPRU 3 and IPRU (INV) 13) including the additional income-based minimum aggregate requirements.

The FCA intends to consult on changes to the Client Assets Sourcebook (CASS) in the second consultation later this year. The new IDD requirements extend to reinsurance intermediaries and FCA are considering making CASS 5 compulsory for reinsurance contracts/mediation with only risk transfer (rather than segregation) permitted.

The IDD restriction on the use of intermediaries goes beyond the FCA’s current rule which only applies to insurance undertakings. FCA proposes to amend[5] guidance in MIPRU[6] to reflect the IDD requirement that insurance and reinsurance undertakings and intermediaries must only use authorised or exempt insurance intermediaries for insurance distribution services.

Complaints handling and out-of-court redress

The FCA proposes amendments/additions to its complaints handling rules in Dispute Resolution: Complaints (DISP). For non-eligible complaints, the existing requirement in DISP 1.1.8R will be extended to all insurance and reinsurance distributors when carrying on distribution activities. It is proposed that current rules will be amended to include complaints about insurance and reinsurance distribution business carried on by UK firms from a branch in another EEA state.

IDD out-of-court redress requirements will continue to be met by DISP 1, and  the Financial Ombudsman Service (FOS). This will continue to apply to firms with establishments in the UK including UK branches of incoming EEA firms. The FCA takes the view that IDD requirements are applicable to retail consumers, but  - independent of IDD implementation – is considering extending Ombudsman jurisdiction over commercial insurance (currently applicable to micro-enterprises) to include some larger SMEs. The FCA proposes to introduce a requirement for insurance distribution business conducted by EEA branches of UK (re)insurers and intermediaries to adhere to an Alternative Dispute Resolution (ADR) entity in the EEA state in which they are established to resolve consumer disputes.

New category of insurance intermediary: ancillary insurance intermediaries

The Directive also introduces a new category of insurance intermediary: Ancillary Insurance Intermediaries (AII). They are firms whose principal activity is not insurance distribution and who offer insurance products in connection with their primary activity of selling goods and services. These firms may fall outside of IDD if they satisfy the conditions of Article 1(3) of IDD, but are otherwise within IDD (but with some reduced information requirements). The UK position is complicated by the ‘Connected Contracts Exclusion' in Article 72B of the RAO (“CCE”) and its super-equivalent approach to Article 1(3) IDD and under the equivalent provisions of IMD – see our other report in this series ‘HM Treasury consults on the implementation of the Insurance Distribution Directive’.

The consultation paper divides AIIs into three categories, ‘in-scope AIIs’, ‘connected travel insurance (CTI) providers’ and ‘out-of-scope AIIs’.

In-scope AIIs“[…] includes firms within scope of the Directive and firms such as motor vehicle dealers whose insurance distribution activities may be outside of the IDD but who are within the UK regulatory perimeter.” The FCA’s general approach is to align the regime for in-scope AIIs with the regime for insurance intermediaries.

CTI providers are “firms whose primary business is to make travel arrangements for customers, but who distribute insurance that is complementary to those services, such as travel agents, tour operators and airlines[7].”There are some areas where the FCA does not feel that intermediary requirements need apply to CTI providers.

Out-of-scope AIIs are “firms who are outside the UK regulatory perimeter by virtue of the CCE [Connected Contracts Exclusion in the RAO]. Common examples include electronic goods and furniture retailers.” The FCA intends to introduce new rules on firms distributing products via out-of-scope AIIs to ensure the minimum IDD requirements are met.

The detailed proposals are set out in chapter 6 of the consultation paper.

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[8]. 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.