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
- ‘UK implementation of the Insurance Distribution Directive’, looks at the legislative changes to implement IDD – mainly relating to perimeter issues, administration and the passporting arrangements (based on HM Treasury's consultation, which closed in May 2017).
There are 3 separate RegZone reports on
‘FCA consultation on IDD implementation (1)’, which relates to the changes to ICOBs considered in FCA consultation CP17/7;
‘FCA consultation on IDD implementation (2)’, which relates to the other changes in CP17/7; and
‘Changes to the definition of financial advice – a compromise’, which looks at the changes made by SI 2017 No.500  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”).
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 guidance. A RegZone report on EIOPA Level 2/3 materials will be published shortly.
HM Treasury (“HMT”) consulted on the transposition of the Insurance Distribution Directive (2016/97/EU) (“IDD”), which will repeal and replace the Insurance Mediation Directive (2002/92/EC) (“IMD”). Transposition will be completed through a mix of legislation (via the Financial Services and Markets Act 2000 (“FSMA”) architecture) and FCA rules.
UK implementation of IMD involved extending statutory regulation - by the Financial Services Authority (the precursor to the Financial Conduct Authority (“FCA”) - of the sale and administration of insurance and reinsurance. As IMD was a 'minimum harmonising' directive, the government took the decision that regulation should apply not only to intermediaries (as IMD prescribed) but also to direct sales of insurance products by insurers (as is now the position under IDD). IDD involves a number of changes to the scope of EU requirements. These include amending exemptions from regulation for market participants who sell insurance products on an ancillary basis as part of a package/add-on, and the removal of the requirement in IMD to regulate those who carry on the activity of "introducing".
The position is complicated by the fact that the UK ‘gold-plated’ IMD and currently regulates activities which fall outside IMD. The existing UK exemption for add-on products is Article 72B of the FSMA Regulated Activities Order 2001 (“RAO”); it is known as the ‘connected contracts’ exemption. It is narrower than the IMD add-on exemption for ancillary intermediaries particularly in relation to travel insurance and motor extended warranty (see below).
Proposed changes to exemptions - Add-on products and the ‘connected contracts’ exemption
IDD makes various changes to the exemption for ancillary providers who sell add-on insurance products which are complementary to the primary service or goods which they supply. The UK government proposals for amending the connected contracts exemption are summarised below -
IDD removes a requirement under IMD that to qualify for this exemption the insurance products must require no more than knowledge of the policy coverage in order to be sold. The government believes that, other than travel insurance products (see below), the majority of products sold in relation to this exemption are inherently simple and this change will not have much impact in practice. This change will therefore be reflected in UK law.
The government will be making other changes to reflect IDD: removing the caveat that products must have a term of less than 5 years to qualify for the connected contracts exemption and increasing the threshold for premiums below which products are eligible for the connected contracts exemption.
Under IMD life and liability products fell outside the exemption (except in relation to travel where the cover was ancillary to the main insurance). IDD removes this limitation and permits these products to be sold if they are complementary to the primary service/goods. The UK government does not propose to follow this relaxation and will therefore gold-plate IDD.
The exemption is extended under IDD to include insurance for ‘non-use’ of the service supplied by the provider. The government intends to adopt this extension.
Under IDD and IMD regulation is not required where travel insurance products are sold as part of a package alongside holiday or other travel arrangement. The UK gold-plated IMD and regulated travel insurance sold with holidays – which is known as 'connected travel insurance'.There are only limited cases where travel insurance provided as an add-on/package qualifies for the UK’s connected contracts exemption as set out in Article 72B(1)(d)(ii)(aa) and (bb) of the RAO. The government does not intend to de-regulate these product sales in-line with IDD, and only the existing narrow RAO exemption will continue.
Extended warranties for motor vehicles
The UK gold plated IMD by dis-applying the connected contracts exemption for motor vehicles. This means that motor warranty products sales are regulated in the UK regardless of the premium (i.e. even where it falls below the IMD connected contract premium limit). The government does not propose any changes to this position.
The UK’s proposed approach above will result in 3 categories of ancillary intermediaries –
in-scope (those within IDD and those outside IDD but within the RAO such as motor vehicle dealers);
connected travel insurance providers (those within the UK perimeter, even if outside IDD, for whom FCA has different requirements); and
out-of-scope (firms outside the UK perimeter under the connected contracts exemption – such as electronic goods and furniture retailers).
FCA CP17/7 and RegZone report ‘FCA consultation on IDD implementation (1)’ looks in more detail at the applicable requirements.
Proposed changes to the scope of regulated activities – the activity of ‘introducing’
IMD included (against the wishes of the UK at the time) the activity of ‘introducing’ within the scope of insurance distribution activities to be regulated. This did not include the provision of information when not incidental to another professional non-insurance related activity, but otherwise covered the provision of information about potential customers to authorised insurers or intermediairies, or providing information on insurance products/insurance distributors to potential customers.
In the UK, those whose insurance distribution activities are limited to the provision of information, such as vets, are largely introducer appointed representatives (“IARs”) and regulated through their principal broker/insurer (rather than being directly authorised by FCA).
IDD removes the mere provision of data and information from the scope of regulation. The UK government believes that where a firm’s activities are limited to the mere provision of information the risk of consumer detriment is limited. It therefore proposes to remove these activities from regualtion but this is subject to a requirment that the provider “does not take any step other than the provision of the information to assist in the conclusion of a contract of insurance”. It is envisaged that the activities of introducers taken out of regulation will continue to fall within FCA oversight via the authorised firm to whom introductions are made.
Definition of financial advice
Unlike IMD, IDD includes the activity of ‘advising’ on insurance products as a separate regulated activity and defines ‘advice’ as “the provision of a personal recommendation to a customer, either upon their request or at the initiative of the insurance distributor, in respect of one or more insurance contracts”. IDD recital 56 refers to the cross-linkage with MiFID (insurance-based investment products are often made available to customers as substitutes/alternatives to products under MiFID) which also defines advice by reference to a personal recommendation.
The UK is currently super-equivalent (under both IMD and MiFID) in that it regulates advice based on a broader definition which includes circumstances where no personal recommendation is given.
The UK has now passed legislation which will restrict the advice definition in-line with IMD/MiFID for regulated firms but is keeping the existing broader definition for unregulated firms – as we explain in the RegZone report ‘Changes to the definition of financial advice – a compromise’.
IDD changes to passporting and other arrangements
Various IDD changes will be reflected in the FSMA regime - on passporting, home/host state regulation, and other FCA administration issues. These include -
Applications for authorisation to carry out insurance distribution activities will be determined within 3 months (rather than 6 months at present); FCA will publish sanctions/other measures it found necessary to take; and EIOPA will be informed of any supervisory actions it has taken/any appeals against those actions.
There are minor changes to passporting procedures and notifications.
The FCA also has new responsibilities as the ‘host state’ regulator of EEA firms. Under IDD the responsibility for compliance with the directive is primarily the responsibility of the home state for services business and, in the case of a UK branch, is split between the home state and host (UK) state. IDD outlines the circumstances where the appropriate host regulator can intervene in the event of a breach of IDD requirements which are the home state’s responsibility. In instances where an insurance distributor’s primary place of business is located in the UK rather than its home member state, Article 7 IDD allows the relevant UK regulator to enter into an agreement with that firm's home state regulator to act as if it were the home state regulator.
The consultation period has now ended (deadline for consultation responses was 22 May 2017). The FCA is also consulting on implementation of IDD (CP17/7: Insurance Distribution Directive Implementation) and is expected to issue a second consultation later in 2017.