On 6 March 2017 the FCA published its first consultation paper (CP 17/7, the “Consultation Paper“) on its proposals for implementing the Insurance Distribution Directive ((EU) 2016/97, the “IDD“). The deadline for implementation is 23 February 2018.
The FCA plans to make a number of important changes to the FCA rules in order to accommodate the new requirements under the IDD. Notably, the new requirements will apply to all insurance intermediaries regardless of whether or not they have any direct contact with the end customer.
Other significant changes include widening the scope of the FCA rules to apply to a new category of firm – ancillary insurance intermediaries (“AIIs“) – and the inclusion of a new “customer’s best interests” rule.
As the consultation process is in its very early stages, it is not certain to what extent the FCA’s proposed changes will be adopted. However, the Consultation Paper provides the (re)insurance industry with a useful steer on the approach that the FCA will take to implementing the IDD.
A second FCA consultation paper is planned for later in 2017 after the European Commission has adopted the delegated legislation and implementing technical standards that will set out requirements relating to approach to conduct of business for life business, and product governance and oversight. In particular, we expect this to cover new requirements in relation to the handling of client assets and the provision of standardised insurance product information documents (“IPIDs“). We will provide an update when the second consultation opens.
The IDD replaces the existing Insurance Mediation Directive (2002/92/EC, the “IMD“). It is primarily intended to strengthen consumer protection in order to make the requirements more consistent with other cornerstone pieces of EU financial services legislation. For more background information, please see our client brochure on the IDD here.
Brexit? While the UK voted in June 2016 to leave the EU, the negotiation timetable for exit will last for at least a further two years. This means that Brexit will not happen before 23 February 2018 – the date on which the UK is required to implement the IDD. Accordingly, the FCA expects to implement all the final IDD measures by 23 February 2018 but only after it has completed its consultation.
Professional, organisational and prudential requirements
The FCA proposes applying the IDD minimum requirement of 15 hours per year of continuing professional development (“CPD“) for staff involved directly in distribution activities. It has considered the proportionality of imposing this requirement on firms in relation to staff members who do not actively advise customers (such as call centre staff using scripts to make sales) and will be issuing further guidance on how firms can tailor their CPD provision to the nature and complexity of the roles being performed.
The IDD imposes “minimum knowledge” criteria (covering areas such as product coverage, the claims process and insurance regulation) on (re)insurance intermediaries in order to ensure that their staff are adequately informed. The FCA intends to extend this requirement to (re)insurance undertakings.
The requirement to ensure that insurance distribution is conducted only through authorised or exempt firms is extended so that it will now apply to intermediaries as well as (re)insurers.
The FCA is considering making CASS 5 compulsory for reinsurers. In practice, this is only likely to affect the small number of reinsurance-only intermediaries; most intermediaries that engage in both insurance and reinsurance are already CASS-compliant in respect of both. There will be more detailed consideration of proposed changes to CASS in the second consultation paper.
The IDD introduces minimum required levels of professional indemnity insurance cover, although in practice this will have little effect on UK firms because the requirements under the current FCA regime already exceed it.
Complaints handling and out-of-court redress
The IDD requires (re)insurance distributors to have a process in place for customers and other eligible parties to register complaints and receive replies. To achieve this, the FCA proposes extending DISP to cover all (re)insurance distributors when they are carrying on distribution activities.
The FCA is not proposing to expand the jurisdiction of the Financial Ombudsman Service (“FOS“) to include complaints from commercial customers because it considers that the requirement for out-of-court redress arrangements under the IDD is only intended to apply to retail clients. But, it is separately considering broadening the scope of the FOS jurisdiction to include some Small to Medium Enterprises (i.e., raising the financial/revenue threshold).
Member states are required to have “adequate and effective, impartial and independent out-of-court complaint and redress procedures.” The FCA proposes extending the scope of the rules to apply to complaints made about (re)insurance distribution business carried out by UK firms in other EEA states.
Conduct of business requirements
The IDD introduces some general principles, including the need for all insurance distributors to act fairly and “in the customer’s best interests”, communicate in a manner that is clear, fair and not misleading, and ensure that remuneration does not conflict with the duty to act in the customer’s best interests. These principles will apply to all intermediaries carrying out insurance distribution activities, regardless of whether or not they are in contact with the direct customer. The FCA currently proposes that the principles will not apply to reinsurance intermediaries.
In accordance with the general principles, there will be new requirements for distributors to identify all marketing material clearly and to ensure that the basis and nature of any remuneration is clearly and accurately disclosed (including the precise amount of any fee payable by the customer). Additionally, for both advised and non-advised sales, firms will need to ensure that they only offer contracts that meet their customers’ demands and needs having effectively identified them.
Provision of information to customers
Generally, the IDD requires firms to disclose more information to clients. Many of these requirements already exist for UK firms under ICOBS. Principally, firms must provide information pre-contract in relation to the distributor’s remuneration (specifically what form it takes and where it comes from), what type of firm they are, whether they are providing a personal recommendation, and – a requirement that will be new for UK firms – whether they are acting on behalf of the customer or the insurance undertaking.
The IDD introduces a requirement for non-life insurance distributors to produce standardised insurance product information documents (or IPIDs). Detailed rules and requirements in relation to IPIDs are due to be set out by the European authorities in Level 2 legislation; the FCA will propose its implementation strategy as part of the second consultation later this year, once the European Commission has adopted the relevant texts.
Ancillary insurance intermediaries
AIIs, which are new and have been introduced by the IDD, are defined as firms whose principal professional activity is not insurance distribution and that only distribute insurance products that are complementary to goods and services provided in the course of their principal activity. Since the UK heavily gold-plated the IMD requirements in 2005, the UK regulatory regime already catches some AIIs; so, AIIs are not new to the UK.
While there are various exemptions within the UK regulatory regimes for persons undertaking insurance mediation, the FCA proposes to identify three categories of intermediary for the purposes of its regulatory regime in light of the IDD requirements for AIIs: “connected travel insurance (“CTI“) providers” (typically travel agents that have the benefit of the CTI connected travel contracts exclusion); “out-of-scope AIIs” (firms, other than CTI firms, that have the benefit of the connected contracts exclusion like electronic goods distributors and furniture retailers); and “in-scope AIIs” (firms that carry on insurance mediation activities without the benefit of any of the foregoing statutory exclusions).
Broadly, the FCA proposes to align the regulatory requirements applicable to in-scope AIIs and CTI providers with the requirements applicable to fully authorised insurance intermediaries as required under the IDD. Out-of-scope AIIs will be subject to a less stringent regime but responsibility for meeting certain of the conduct requirements (such as pre contract disclosures) will rest with authorised firms that distribute their products through the out-of-scope AIIs. It is worth pointing out that the CTI exemption under the UK regulatory regime is narrow; consequently it is not anticipated that many UK travel agents would qualify as CTI providers.
Firms have until 5 June 2017 to respond to the Consultation Paper via the online response form, or by email or letter to the FCA.
HM Treasury is also consulting on the implementation of the IDD (see here). Responses must be submitted by 22 May 2017.