On 3 July 2012 the European Commission published a provisional version of the text of the revision of the Insurance Mediation Directive (IMD2).
The proposals will change the Directive so that it will eventually make it compulsory for all intermediaries to disclose what remuneration they are receiving. Although there will be a five year transition period for non-life products this is a significant change and this is likely to have a significant effect on most insurer/intermediary relationships in the UK general insurance market.
The text is likely to be formally adopted at EU level during 2013. Once it is adopted, further work will be undertaken at an EU level on detailed implementation and the new Directive will come into force in 2015 at the earliest.
The changes will mean that the Directive applies to insurance companies selling insurance direct to customers as well as firms acting as intermediaries. Though this will, as it is meant to, level the playing field between direct and intermediated sales, it will add cost and complexity to insurers' direct sales processes. It will also impose new information requirements in relation to bundled products.
Scope and Definitions
The scope of the Directive will be expanded by changing the definition of 'Insurance Mediation' to include:
• the activities of insurers selling directly to customers – this will level the playing field between direct and intermediated sales. Although insurers in the UK are already subject to rules governing how they sell products direct, the Directive will require specific information provision that will add cost and complexity to insurers' direct sales processes.
• claims management activities by and for insurers, loss adjusting and expert appraisal of claims – this broadens the scope of the regime significantly and will mean that more companies are subject to regulation. This may improve service provision for insurers, as firms have to have better controls in place, but is likely to mean additional cost is passed on to insurers.
• the activities of insurance aggregator websites - these are already implicitly covered by the UK regulatory regime but the explicit reference in IMD2 will add clarity.
The definition of 'insurance mediation' will no longer include 'introducing'. This would appear to allow member states to remove introducers from the scope of regulation, but there is no guarantee that this would happen in the UK because member states have the option of going beyond strict EU requirements.
The revisions narrow the exemptions in relation to certain sales of policies in conjunction with products or services: this will now only apply to insurance provided in conjunction with goods. This exemption has historically been available to car rental companies and travel agents, although in the UK the rules around insurance sold with travel were tightened since the original Directive. These companies will now be within the scope of regulation, although a lighter regime will apply (see below).
The revisions propose a simplified registration procedure for:
(a) persons conducting insurance mediation on an ancillary basis;
(b) persons whose only insurance mediation activity is professional management of claims or loss assessment services.
Instead of applying for full authorisation, they will be entitled to submit a declaration to the regulator containing certain specified information.
This simpler process applies to many of the persons who are being brought into regulatory scope for the first time.
A lighter regulatory regime will apply to these persons, in that they won't be subject to the section of the Directive dealing with Information Requirements and Conduct of Business Rules (Chapter 6).
Information Requirements and Conduct of Business Rules
- Under the revisions insurers selling direct will be obliged to provide specific information to customers prior to a sale. Some of this will be information that UK insurers are not currently required to provide by existing regulation and therefore will increase an insurer's compliance burden in relation to direct sales.
- Remuneration disclosure for intermediaries will be mandatory for all categories of insurance business. This will be subject to a five year transition period for non-life products, during which a disclosure 'on demand' regime will apply.
This is an extremely significant change and its effect is likely to be felt on most insurer/intermediary relationships, even during the transition period. It may cause intermediaries to explore new commercial structures to minimise disclosure requirements and there will be risks associated with such 'avoidance' techniques.
- Insurance undertakings and intermediaries must also disclose any variable remuneration received by employees for distributing or managing the product in question.
This may lead to changes in staff remuneration structures within insurers and intermediaries.
- Where an insurance product is offered as part of a bundled package the consumer must be informed that the elements may be purchased separately and an itemised price list for the components of the package provided.
Guidance on the implementation of this rule will follow and it is difficult to assess how broadly it will be applied. As well as products such as packaged bank accounts, it may also apply to the sale of insurance products with built in add-ons that are underwritten by different insurers, such as motor products that include a legal expenses insurance element. This may incentivise reinsurance based structures.
Additional customer protection requirements in relation to insurance investment products
These revisions only apply to insurance intermediaries or undertakings when selling insurance investment products. They will impose additional rules including in relation to the identification and management of conflicts of interest, further information requirements and a prohibition on an independent intermediary receiving remuneration from a third party.
These changes are likely to have less of an impact in the UK due to the Retail Distribution Review and the conflict regime already contained in the section of the FSA Handbook dealing with systems and controls (SYSC).