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FCA consultation clarifies plans on insurance distribution directive

ANALYSIS: The Financial Conduct Authority (FCA) has provided some useful clarity on its implementation proposals for the Insurance Distribution Directive (IDD) in the UK in the first of two consultation papers.08 Mar 2017

This follows the publication at the end of February of the government consultation on implementation of the IDD in which the government confirmed that EU legislation governing insurance distributors would be transposed into UK law despite the country moving towards an exit from EU membership.

The proposed policy changes in the FCA consultation have been developed in the context of the UK’s current regulatory framework within the EU. Unsurprisingly, the FCA states that it will keep these policy changes under review pending completion of negotiations for the UK’s exit from the EU.

The FCA and government consultations will move in tandem to ensure a streamlined implementation process and to ensure firms' readiness for the deadline date of 23 February 2018. This is the date by which EU member states must have implemented all of the provisions into national law.

The consultation covers topics including how the IDD will generally apply to the UK regulatory system, professional and organisational requirements for insurance distributors, changes to conduct of business rules for non-life insurance products, and the regulatory regime for ancillary insurance intermediaries.

The IDD replicates many existing UK provisions that are already in place and that, in some cases, go beyond the IDD requirements, and the FCA proposes to keep these rules in place. Where the IDD goes beyond existing UK provisions, the FCA proposes to copy most of the new provisions into its handbook.  

This clarification of how the FCA proposes to approach implementation of the IDD is helpful. Primarily, we have received some comforting, and widely anticipated, confirmation that the IDD will not represent a major overhaul of the existing distribution regime. Unlike with the insurance mediation directive the FCA does not appear to be planning extensive additions to the regulations, opting instead for a minimum harmonisation approach, although where existing rules go further than IDD minimums they will remain unchanged. 

It should be noted, however, that the FCA has identified areas where its rules and guidance will need to be changed to give effect to the IDD. In some cases these proposed changes will simply codify specific provisions that would probably have been covered by the existing principles, but the FCA is also proposing changes that will apply its requirements to all participants in the distribution chain, not just customer-facing distributors.

In addition to changes which enhance familiar concepts such as the promotion of customer interests and pre-contract clarity, the consultation paper proposes some new specific obligations, for example in respect of commission disclosure, training requirements and cross-selling, that it considers are required to bring its rules in line with the new EU standard.

A second consultation to be published later in the year will cover conduct of business rules for life business and insurance-based investment products and product oversight and governance.

Iain Sawers is an insurance expert with Pinsent Masons, the law firm behind Out-Law.com