FCA outlines Insurance Distribution Directive changes for all insurance firms

Additional FCA Handbook changes for general insurance firms

The FCA's first consultation on implementation of the Insurance Distribution Directive (IDD), published in March, dealt with most of its proposed Handbook changes for general insurers. However, this consultation outlines a few remaining matters including the regulator's expectations for the Insurance Product Information Document (IPID).

The FCA plans to introduce a new rule in the Insurance Conduct of Business Sourcebook (ICOBS) requiring an IPID to be provided to general insurance contract consumers. The IPID is a pre-contractual document for non-life insurance products to be drawn up by the manufacturers of those products and provided to customers in advance of the conclusion of a sale. This is irrespective of the distribution channel used, so applies to direct, intermediary, telephone, online, comparison websites and other sales. The IPID does not though replace the policy terms and conditions. It was described in technical advice published by the European Insurance and Occupational Pensions Authority (EIOPA) in March.

The FCA has confirmed that the IPID requirement will not be extended to commercial customers following feedback from respondents to its first consultation strongly discouraging this step because strict IPID requirements for commercial customers "could over-simplify product information and lead to misleading and potentially detrimental disclosures".

The FCA states however that it continues to expect that commercial customers receive appropriate product information and that it is proposing additional Handbook guidance emphasising that this information be relevant and comprehensible. The FCA has also warned that IDD transposition work with the European Commission is ongoing therefore it will need to consider any further European developments on the IPID before finalising its rules. 

Conflicts of Interest requirements – all insurance firms

The FCA has confirmed that the IDD conflict of interest requirements are broadly consistent with its existing rules in part 10 of the Senior Management, Systems and Controls (SYSC) section of its Handbook so the impact on firms should be low. It also considers that the substance of the requirements in the revised Markets in Financial Instruments Directive (MiFID II) and IDD requirements on this issue are the same.

It does intend to maintain its current approach of applying its conflict of interest requirements to distributors of all types of insurance - including all life and general insurance businesses - rather than limiting the application to IBIP firms only. In general, the FCA proposes to apply its existing rules in SYSC 10, as amended by MiFID II requirements, to firms carrying on insurance distribution. Where the IDD requirements go beyond those in MiFID II or the current rules, it intends to copy out those requirements.

Product oversight and governance requirements for all insurance firms

Article 25 of the IDD says that insurance undertakings, as well as intermediaries which manufacture any insurance product for sale to customers, “shall maintain, operate and review a process for the approval of each insurance product, or significant adaptations of an existing insurance product, before it is marketed or distributed to customers”. The requirements do not apply to the insurance of large risks.

The FCA does not expect the introduction of the new provisions to require significant change for UK firms in practice given its existing guidance in this area. That guidance will be implemented into a new chapter in Product Intervention and Product Governance sourcebook (PROD) – developed for MiFID II standards in this area.

The product governance provisions will be applied to all insurers and insurance intermediaries where those firms manufacture or distribute insurance products, whether products are distributed directly or via intermediaries. The FCA intends to apply the requirements to firms which may not be within scope of the IDD as it considers they should apply to all firms involved in insurance product manufacture and distribution to create a level playing field.

Organisational requirements for all insurance firms

The FCA proposes that the most appropriate method for implementing requirements regarding the protection of clients' money is through the existing options of segregation and risk transfer contained in part 5 of the client assets and money (CASS) section of its Handbook and it does not propose to amend the current capital regime for insurance intermediaries or require a guarantee fund to be set up. The application of CASS 5 will however be amended to make it mandatory instead of optional, for reinsurance mediation.

Professional requirements for all insurance firms

The IDD requires that the employees of insurance intermediaries and undertakings, who pursue insurance or reinsurance distribution, shall be of good repute.

Following the IMD, the FSA introduced good repute requirements into the Prudential Sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU). The requirements apply to all firms with permission to carry on insurance mediation activity under Part 4A of the Financial Services and Markets Act 2000, other than connected travel providers. The FCA proposes therefore:

• retaining existing rules with some modification for IDD requirements;
• moving the rules from MIPRU to SYSC so that the relevant professional requirements are all in the same sourcebook;
• maintaining the same application of the provisions i.e. applying them to all firms with a Part 4A permission to carry on insurance mediation activity, other than connected travel providers who will continue to benefit from the existing carve-out;
• introducing a good repute requirement for in-scope ancillary insurance intermediaries (AIIs);
• transposing the relevant record-keeping requirements into SYSC 23 and applying the requirements to all firms to which the good repute requirements apply.

The second FCA consultation on implementation of the IDD also includes changes to FCA conduct of business requirements for life insurance firms including those selling insurance-based investment products (IBIPs).

The FCA now intends to issue a previously unplanned third implementation consultation to deal with its approach to the Level 2 draft delegated regulations recently published by the European Commission; the HM Treasury consultation on implementation; and issues relating to alignment of the IDD with the MiFID II standards. The third consultation will be published in late September before the second consultation comes to a close on 20 October. A Policy Statement is expected in December.