The Insurance Distribution Directive will come into force next year around Europe. The UK will implement the Directive despite plans to leave the EU in 2019. It will have less impact in the UK than elsewhere, though, because it replicates many provisions that already in force in the UK.
FCA rule changes
The FCA will change its rules to reflect the IDD. In a consultation it proposes:
- the creation of new rules to enhance the promotion of customers’ best interests. This is very much in-line with the FCA’s recent direction of travel with regard to treating customers fairly. It creates black letter requirements covering behaviour that would currently only be caught by higher-level principles, such as a rule obliging distributors to act in customers’ best interests and new obligations prohibiting remuneration that would conflict with the customers' best interests;
- increased scrutiny of multi-party distribution chains, which is linked to the FCA’s 'treating customers fairly' agenda as it recognises that customers may be adversely impacted by parties with whom they have no direct dealings. New rules in the FCA's Prudential Sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU) (102-page / 383KB PDF) will extend to all intermediaries in the distribution chain the requirement to use only the insurance distribution services of intermediaries who are authorised or exempt – something which previously applied only to insurers. The new customers’ best interests rules will also extend to all parties in the distribution chain, including wholesale brokers.
- new pre-contract disclosure requirements about who the intermediary is acting for. Intermediaries will be required to make a pre-contract statement as to whether they act on behalf of the customer or the insurer;
- that the FCA's Insurance Conduct of Business Sourcebook (ICOBS) will be updated to reflect the IDD requirements for intermediaries to disclose the “nature and basis” of remuneration they receive. The consultation provides some helpful clarification on how the FCA views the distinction between “nature” (relating to type of remuneration) and “basis” (relating to source – ie policyholder’s premium or insurer’s own funds) and specific guidance is proposed in this regard. The FCA restates that it is not planning to consult on changes to commission rules for non-investment insurance in light of Plevin but that this remains under review.
- that guidance on the issuing of statements of demands and needs is updated to clarify that generic statements will only be appropriate when the firm has first narrowed down the policy options presented to the customer to those which are suited to his or her stated demands and needs. This clarifies that firms will be required to make an assessment of demands and needs based on customer information prior to relying on generic statements and should only present policy options that meet those demands and needs. This may add a step to the sales process for some distributors.
The FCA drew attention to the Treasury's consultation on changing the scope of the 'connected contracts' exemption in light of the similar/more expansive concept of “Ancillary Insurance Intermediaries” proposed under IDD. IDD does not require direct regulation of such intermediaries, but the FCA proposes to treat “in-scope AIIs” (i.e. firms who do meet the AII definition in IDD but are caught by the FCA’s existing regulatory perimeter) as regulated intermediaries in any event and so not to extend the existing exclusions in this regard. They do, however, propose reduced conduct requirements for connected travel insurance providers.
This consultation does not deal with elements that are still under consideration by the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA), which is providing technical advice that will shape further rules on the implementation of the IDD. It will consult on these issues later this year.
The consultation closes on 5 June and the FCA will publish finalised rules by September.
UK government consultation
The Treasury is also consulting on the implementation of the IDD, focusing on the changes that will be needed to the Financial Services and Markets Act of 2000 and the Regulated Activities Order associated with it.
The FCA will be responsible for implementing the associated prudential and conduct changes through amendments to its rules. The Treasury is consulting on:
- which insurance contracts are regulated – changing the scope of the 'connected contracts' exemption;
- which activities are regulated – deregulating the mere provision of information in relation to insurance products or potential policyholders
- how firms are regulated – minor changes to requirements on the FCA in respect of authorisation applications and supervisory action, and its responsibilities in relation to cross-border operations.
As the IDD is a minimum harmonising directive, the government has scope to both decide the means by which it will legislate for the directive to take effect and also whether to 'gold-plate' its transposition with additional regulation. This is the path the government took for the Insurance Mediation Directive (IMD), the predecessor to the IDD. One of the positive impacts for firms here is that many of the new regulatory measures introduced by the IDD already apply in the UK because of the IMD 'gold-plating'.
The consultation will close on 22 May and legislation will be amended later this year.
Further EU changes
Parts of the IDD allow for further 'delegated acts' to be created to implement technical standards and guidelines. These are non-legislative acts which the Commission can use to supplement or amend parts of the IDD.
The Commission has proposed delegated acts covering product oversight and governance (POG), conflicts of interest, inducements and the suitability of insurance-based investment products (IBIPs).
The Commission asked EIOPA to provide technical advice on these proposals, which it did in February.
Creators of insurance products should keep consumers' needs in mind throughout the development process, EIOPA said. It has further developed its guidelines to extend them to insurance intermediaries who act as 'manufacturers' of products, and to define what qualifies as a manufacturer. It has also laid out the level of granularity that it expects from manufacturers when defining their target market, depending on the type of products and the insurance coverage involved.
EIOPA has also published technical standards detailing the standardised format of the Insurance Product Information Document (IPID). This must be drawn up and provided to customers prior to the conclusion of certain products. It is proposed that this will be adopted by the Commission as an implementing regulation, which will be directly applicable in the UK after its publication in the Official Journal of the EU.
EIOPA also published its consultation on guidelines for the assessment of IBIPs that incorporate a structure which makes it difficult for the customer to understand the risk involved and for the assessment of IBIPs being classified as non-complex. That consultation is open until 28 April and EIOPA will issue its guidelines by 23 August.
Ian Sawers is an insurance expert at Pinsent Masons, the law firm behind Out-Law.com