FCA issues new rules under Insurance Distribution Directive – 18/9
27th September 2018
The Insurance Distribution Directive (IDD) came into force on 22nd February 2016 requiring Member States to transpose the IDD by the 1st July 2018. Firms are expected to apply those requirements by 1st October 2018. The Directive sets out the regulatory requirements for firms designing and selling insurance products and will replace the existing Insurance Mediation Directive (IMD).
The FCA introduced the final changes in the form of Insurance Distribution Directive instrument 2018 and Insurance Distribution Directive (Amendment) Instruments 2018, where all changes are consolidated into one document.
The purpose of the IDD is to enhance consumer protection when buying insurance (including non-investment insurance, life insurance and Insurance-Based investment products (IBIPs)) and to support competition between insurance distributors. In doing so, the IDD introduces a number of novelties to insurance and reinsurance intermediaries, in particular by:
- expanding the scope of agents and brokers by adding all sellers of insurance products
- setting stricter requirements in order to manage conflicts of interest and remuneration disclosures
- introducing new product disclosure requirements and other product oversight requirements
- introducing additional requirements for IBIPs and an Insurance Product Information Document (IPID) for non-life insurance products
- applying the Retail Distribution Review rules to firms distributing IBIPs
- establishing new provisions regarding cross-border activity (freedom of services and freedom of establishment)
- strengthening administrative sanctions and other measures
The IDD also enables the Commission to adopt delegated acts related to product oversight and governance requirements in relation to the distribution of IBIPs. Consequently, the Commission issued two supplementing Directives:
- Commission Delegated Regulation (EU) 2017/2358 which supplements the Directive (EU) 2016/97 of the European Parliament and supports the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors.
- Commission Delegated Regulation (EU) 2017/2359 which supplements the Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products.
The FCA has issued a Handbook notice that finalises the transposition of the new EU Insurance Distribution Directive 2016/97 on insurance distribution requirements into the FCA Handbook through the amendment of existing sections and addition of new ones.
Main changes to the FCA Handbook
The FCA endeavours to propose changes that go even beyond the IDD minimum requirements, essentially by:
- applying the IDD standards to a wider range of firms or businesses than required by the Directive, resulting in the promotion of effective competition in the interests of consumers, by achieving consistency of regulatory standards and avoiding arbitrage
- going beyond the minimum IDD requirements in order to preserve existing UK regulatory standards
- introducing standards beyond the minimum IDD requirements as a result of policy decisions, particularly the decision to align the Directive with Markets in Financial Instruments Directive II (MiFID II)
New requirements for life-insurance companies
The FCA introduces some changes to the Handbook and has also decided to apply the inducements rules in Chapter 2.3A of the Conduct of Business Sourcebook (COBS) which states that inducements must enhance the quality of service provided to the customer, to firms distributing IBIPs in order to ensure that firms carrying on insurance distribution meet the MiFID II standard, providing a single standard across business to which COBS 2.3A applies.
Firms will now also be permitted to receive or make payments which are necessary for the distribution of IBIPs, such as regulatory levies or legal fees. This also aligns the approach applicable to IDD firms with MiFID II.
Suitability and appropriateness rules
The FCA has transposed the relevant parts of the IBIP regulation into the FCA Handbook and applies them as rules for firms which are subject to the FCA’s rules but to which the IDD doesn’t apply directly when distributing IBIPs. The rules on appropriateness will apply to new contracts from the date on which the IDD will be implemented, therefore switches or the operation of existing contracts would not trigger those requirements.
The 5-year minimum retention period will be retained for records relating to suitability and appropriateness. Firms subject to the IBIP regulation will be required to hold records for at least the duration of the relationship between the firm and the customer, which can be longer than 5 years.
Furthermore, the IBIP regulation provides information on the range of products that are considered non-complex, therefore the FCA has decided to adopt these rules into the Handbook.
Information and product disclosure
Firms will need to amend their disclosure documents for non-investment insurance business prior to the 1st October 2018 deadline. New IDD information disclosure requirements for IBIPs include the requirement to prepare and disclose adequate periodic reports to customers and keep a record of customer agreements. Article 29(1) of the IDD requires appropriate information to be provided to the customer including, at least, all costs, charges, risk warnings and whether the firm will conduct periodic assessments of suitability.
Currently, authorised and regulated firms are subject to the COBS disclosure rules and are required to:
- provide fair, clear and not misleading information
- produce information in a comprehensible format
- provide general and specific information about the firm and its services
- provide general and specific information on all costs and associated charges, including a breakdown of charges when requested by a customer, and timing and ongoing disclosure requirements.
Proactively providing a client with a breakdown of charges is considered best practice, especially if it could provide the customer with additional knowledge about the products and services offered to them.
Distributor firms must confirm to their client whether they provide personal recommendations or not, and provide a description of the insurance products offered from a wide range of providers which must be based on a fair and personal analysis of the market. Firms must also provide their customers with information about the firm’s charging structure. Firms have to disclose information about costs and charges associated with the distribution of a life policy separately, in case it is not included in a Key Information Documents (KIDs).
New MIFID II implemented chapters already contain requirements similar to those introduced by the IDD for IBIPs and are similar to the current rules in relation to non-IBIP life business. The FCA intends to implement the new IBIP disclosure requirements alongside their MiFID II counterparts into the Handbook and, in some cases, consolidate current standards and new rules in the same sections.
The following Handbook provisions will also be applicable to firms carrying on insurance distribution and insurance intermediation activity:
- COBS 2.2A – requirement for firms to provide appropriate and sufficient information in good time before the provision of the service
- COBS 6.1ZA – requirements to disclose information about related costs and charges
- COBS 8 and COBS 8A – requirement to establish and keep a record of documents agreed between the firm and customer setting out their rights and obligations
- COBS 16A – the requirements to provide adequate reports on the service provided in a durable medium to customers
Other disclosures include:
- Requiring intermediaries to disclose whether they are acting for the client, the insurer or both.
- Where insurance is the primary product, firms will be required to inform their client whether it is possible to buy certain elements of the package separately, including the costs and charges attributable to each element
- Informing the client that they are able to buy non-financial products without the insurance in cases where they are sold together
Requirements for all Insurance Distribution business
Training and Competence
Any staff involved in the firm’s insurance distribution activities such as advisers and supervisors or senior managers will be required to complete a minimum of 15 hours CPD.
Professional Indemnity Insurance
The required minimum limits of indemnity for a firm’s single claim per year will be €1,250,000, while the PI cover in the aggregate year aggregate year will be €1,850,000.
Conflicts of interest
In order to create a level playing field for consumers, give them adequate protections and to avoid practices which distort the market, the rules in SYSC 10 relating to conflicts of interest will be applied to firms carrying on insurance distribution. Firms will be required to identify conflicts of interest between themselves and their customer, or between one customer and another. They will also be required to prevent any conflicts of interest and disclose the general nature of any sources of conflicts which persist. This includes, for example, the requirement that the arrangements put in place to prevent conflicts of interest should be proportionate to the activities performed, the insurance products sold and the type of distributor the firm is.
Product oversight and governance
The rules on product governance which were introduced as part of MiFID II will also be applied to firms providing insurance distribution. The FCA believe that target market assessments favourably places distributors to gain a better understanding of products obtained from manufacturers, jointly with any groups of consumers, who would be considered to be the target market, for whom the products would be less suitable.
Firms, when distributing products which they do not manufacture, should obtain information about the product and the product approval process, and understand the identified target market. In some cases there may be commercially sensitive information that would make publication of such information undesirable. In these circumstances, the FCA permits firms to assess the presence of commercially-sensitive information which they may not wish to provide, whilst still ensuring that adequate and relevant information is provided to its customers.
Insurance intermediaries and insurance undertakings that are both manufacturers, will be required to sign a written agreement which lists the procedures through which they shall agree on the identification of the target market and their respective roles in the product approval process. Firms who collaborate to manufacture an insurance product must outline their mutual responsibilities in a written agreement.
The product approval process should be appropriate and proportionate to the nature, scale and complexity of the firm. Products targeted to larger target markets do not require the same level of disclosure as products which are more complicated and created for a smaller target market.
The FCA reflects the new Product Governance requirements applicable to firms involved in insurance distribution in the Product Intervention and Product Governance sourcebook (PROD) which was brought in as a result of MiFID II. The applicable provisions are set out in PROD 4.
Additional changes to the FCA Handbook
Minor changes were made to other parts of the FCA Handbook. The Perimeter Guidance manual (PERG) has been extended accordingly to reflect the changes brought about by the IDD. The most important changes in the Perimeter Guidance manual relate to the new exemption of ‘mere provision of information’ and the meaning of ‘potential policyholders’, which provides clarity on whether the guidance would apply if information is provided in relation to an existing policy.
The guidance in PERG 5.6.4BG clarifies that the context in which information is provided will be a material factor. Information that is provided which is accompanied by acts or statements that, when taken together as a whole could be seen as attempting to persuade a customer to buy or do business with an insurer, will be subject to the IDD rules. In addition, existing policyholders looking to renew a contract or enter into a different contract will be considered ‘potential policyholders’.
Introducer Appointed Representatives (ARs) may no longer be required to register as an introducer with the FCA. The registration process for firms and its ARs will remain substantively the same, not requiring firms that are already registered under the IMD to re-register. The FCA has amended Chapter 12 of the Supervision manual (SUP) to reflect the IDD registration requirements, which includes the following requirements:
- Requiring principal firms to collect additional information from the Appointed Representative. This has been done by amending the AR notification forms in which principals confirm that they have complied with all their regulatory obligations in relation to ARs.
- The identities of shareholders with more than 10% holding in the Appointed Representative and any persons with close links must be obtained.
- ARs must now inform their principal firm of any changes to the information gathered from the AR in relation to shareholdings and close links.
Complete applications for authorisation must be dealt with within three months’ instead of the current six months’ timescale.
How can CPA Audit help?
Our consultants are at hand to conduct gap analyses on firms affected by the new IDD rules. Contact us to discuss your firm’s needs.
© CPA Audit LLP 2018.