UK elects to 'delay' new insurance distribution rules amidst uncertainty at EU level

The Insurance Distribution Directive (IDD) requires each EU member state to implement its rules into national law by 23 February 2018, but the European Commission has put forward a proposal to extend the deadline for the application of the new rules to 1 October this year.

The Commission's proposal, however, is not due to be considered by law makers at the European Parliament until 28 February – five days after the current deadline expires. Amidst the uncertainty about what this means for implementation, the UK Treasury announced on Friday that it would not bring new its own rules for transposing the IDD into UK law into force until there is a decision made on the Commission's proposal.

"In order to provide certainty for industry, government will delay making the 'The Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Order 2018' until the outcome of this proposal has been confirmed," the Treasury said. "This is expected to be after 23 February 2018, the original application date of the directive."

"When the Order comes into force, the Financial Conduct Authority (FCA) will be able to finalise their rules (which were published in near-final form on 19 January 2018). Firms will then be required to comply with those rules from whatever date is ultimately agreed as the application date of the directive. Under the current proposal from the Commission this date may be 1 October 2018. A further update will be provided following confirmation of the outcome of the EU’s legislative processes," it said.

The government's move was welcomed by insurance industry body, the Association of British Insurers (ABI).

James Bridge, head of conduct regulation at the ABI, said: "This [announcement] will provide insurers with the maximum possible level of certainty at this stage of the difficult implementation process. Delaying the application date of the IDD will benefit consumers by giving firms a realistic timeframe to properly design and test the changes they need to implement for IDD."

"This decision comes just three weeks in advance of the scheduled implementation date of the IDD, and firms are likely to bear economic costs due to the uncertainty of the past few months. This situation was not necessary and we are glad that the UK government has worked with its European counterparts to help address this issue," he said.

Ed Lister, an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com, said: "The government has acted sensibly in delaying the transposition of the Insurance Distribution Directive into domestic law until the application date has been decided formally at European Union level. However, despite support for the delay from the European Parliament and the European Commission, the position for member states and insurance distributors remains uncertain."

"Affected firms, therefore, should continue their implementation preparations to ensure that they are able to comply with the changes required by the Directive from the moment that they enter into domestic legislation," he said.

Once in force, the IDD will revise and update the EU's framework for regulating insurance brokers, agents and other intermediaries, which is currently contained in the 2002 Insurance Mediation Directive. The UK intends to implement the IDD despite its impending exit from the EU, although the new regime will have less impact on UK firms because it replicates many provisions that are already in force in the UK.

Headline changes brought about by the IDD are the extension of distribution rules to direct sales by insurers and reinsurers, the introduction of new product oversight and governance rules, and the enhancement of product rules for Insurance-Based Investment Products (IBIPs) – these are products offering a maturity or surrender value that is exposed to market fluctuations, such as insurance bonds and endowment policies. The term does not cover non-investment insurance and pension products that entitle members to certain benefits.

In addition to the new regulations, the IDD will be implemented in the UK through changes to the FCA Handbook.

The extent to which the new rules introduced in the IDD apply to a particular firm will depend on the nature of the product sold and whether they are "distributing" the product – marketing, selling or advising to customers – or whether they are simply performing the role of "manufacturer" in designing the product and establishing the distribution channels. Although some rules apply both to manufacturers and distributors, many apply only to insurance distributors.