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In January 2005, the Insurance Mediation Directive (IMD) was transposed into UK law. For franchised dealers, this heralded the start of insurance regulation under the Financial Services Authority (FSA). Over the intervening years, the FCA has been replaced by the Financial Conduct Authority (FCA) and the initial regulatory regime for dealers has evolved and altered with the most significant change coming in 2015 with the introduction of GAP selling rules.
Franchised dealers now face further changes to their insurance business with the new Insurance Distribution Directive (IDD). This will come into effect on 23 February 2018 and includes new provision on training and business conduct. The Directive is a minimal harmonisation one giving Member States a wide scope on how to achieve its implementation. The UK’s current insurance regime, regulated by the FCA and falling under the Financial Services and Markets Act (FSMA) already goes beyond the requirements of the IDD. It should also be noted that even though the UK has voted to leave the EU, the Government must implement the Directive into UK law as the exit date will be beyond the Directive implementation one.
In general the IDD builds on the original IMD provisions. It will apply to anyone who conducts insurance distribution, in other words firms who sell, advise on or conclude insurance contracts or those who assist with administering or performing such contracts. This will be insurers, insurance brokers, banks and retailers including motor dealers. The Directive also adds a new category of insurance firm called an Ancillary Insurance Intermediary (AII) for firms that provide insurance alongside their primary business such as motor dealers (and travel agents).
Below is a summary of the significant provisions in the IDD.
The IDD introduces General Principals for Insurance Distribution that are similar to the FCA Principals of Business. The IDD Principals state distributors must: – act in the best interests of their customers; must communicate clearly and not mislead; and distributor remuneration must not conflict with the duty to act in the customer’s best interest. The FCA propose to keep their current General Principals but will make some modifications to include the IDD requirements.
The IDD introduces a minimum of 15 hours Continuing Professional Development (CPD) for staff involved with insurance provision. This is to demonstrate employees have the appropriate knowledge and ability in areas such as product knowledge. Only staff in a firm directly involved with or responsible for insurance will need to undertake the training. The FCA suggest appropriate forms of training as: eLearning modules relevant to insurance distribution; reading insurance product literature and publications from relevant bodies such as the FCA; and attending internal briefings. Training records demonstrating CPD training will need to be kept to prove compliance.
The IDD continues the IMD’s requirement for firms to hold Professional Indemnity Insurance (PII). The FCA note the requirements within the IDD are less than the current ones that the FCA require, although the levels of PII cover are higher in the new Directive. The FCA will keep their current PII conditions but will increase the minimum cover levels to E1,250,000 per claim and E1,850,000 per year in aggregate.
The IDD requires all insurance and reinsurance distributers to have processes in place to handle complaints. The current FCA rules generally already meet these requirements but some changes will be made around provisions for European Economic Area (EEA) firms operating in the UK. Also the FCA are considering increasing the Financial Ombudsman Service (FOS) jurisdiction to some smaller firms who are currently not classed as micro-enterprises.
The IDD builds on the current FCA pre-contract requirements. Additional requirements from the new directive are the need for both intermediaries and insurers to make disclosures, the need to state if a firm make a personal recommendation and for intermediaries to state if they are acting on behalf of the customer or the insurance undertaking. Intermediaries must also declare any potential conflicts of interest, a requirement that changes slightly from current FCA rules.
The IDD introduces new requirements to disclose information about insurance distributors remuneration. The Directive defines the information should refer to the ‘nature’ and ‘basis’ of any remuneration. The ‘nature’ would be the type of remuneration e.g. commission, bonus, profit share and other financial incentives; the ‘basis’ would be the source of remuneration. These requirements do not go beyond the current FCA commission disclosure requisites of ‘disclosure on a customer’s request’. The FCA do not plan to consult further on commission disclosure and the rules should remain as they are following implementation of the IDD. The only change will be for fees where the definition will be amended slightly.
The IDD has new provisions for providing information to customers. All information must be provided: – in a clear, accurate and comprehensive manner; in the official language of the EU Member State; and free of charge. The information may be provided either on paper, a durable medium or website. There must always be an option to have information on paper but there is no provision for information to be given orally. The FCA intend to amend the definition of a durable medium to align it to the IDD as the original IMD definition is inconsistent with a number of EU directives including the new insurance Directive.
IDD makes it clear that a firm must actively identify a customer’s demands and needs and that any contract offered must be consistent with this. It is expected that this is done both when selling on an advised on non-advised basis. Also, where a firm make a personal recommendation of a product there must also be a personal explanation of why. The FCA will amend their ICOBS rules to reflect this.
The IDD introduces new requirements for cross-selling where an insurance is sold alongside another product the customer must be able to buy the products separately and distributors must give an adequate description of the insurances in the packages. The IDD also requires the use of a standardised Insurance Product Information Document (IPID).
The IDD introduces Ancillary Insurance Intermediaries (AII) as a new category of insurance intermediary for businesses that distribute insurance complimentary to their primary activity which is not insurance and currently act as insurance introducers. AIIs are not required to be directly regulated by the FCA and would be monitored through a regulated insurance distributor. The FCA intend to apply similar requirements and rules on these firms as fully regulated firms to ensure consistency across the market and to prevent firms circumventing regulation. In addition, the FCA believe consumers are at no less risk from AII’s as any other insurance firm and this approach to them will help ensure consumer are protected. All’s will have to comply with the training and PII requirements as noted elsewhere in this document.
In the IMD extended warranties (MBIs) sold as an add-on to a primary product were excluded from regulation if they cost less than E500 and met certain conditions. This provision continues in the IDD but with an increase in the limit to E600.
When transposing the IMD the UK Government decided to not allow this exclusion for motor vehicle warranties on the grounds of preventing distortion in the market. The concern was that motor dealers could switch to selling warranties costing less than the monetary limit, which could give consumers less protection. The UK Government and the FCA wish to continue with this approach when transposing the IDD.
There is some debate as to whether this is still the correct approach. Although, it has prevented firms offering warranties at cost belpw a statuary limit it has driven other practices to avoid firms being regulated in particular the rise of non-insured guarantees. The concern is these may offer consumers less protection than a warranty that is insurance backed.
There are currently two live consultations on the implementation of the IDD, one from HM Treasury (Transposition of the Insurance Distribution Directive) and the other from the FCA (CP17/7). The NFDA intend to respond to both. At least one further FCA consultation is expected later this year.
For further information or to forward feedback for the consultation please contact the NFDA on 01755 538303 or email email@example.com.