The Financial Conduct Authority (FCA) has published the first of two consultations (the second of which is due to be published later in the year) on the implementation of the Insurance Distribution Directive ((EU)2016/97) (IDD). The consultation, CP17/7: Insurance Distribution Directive Implementation – Consultation Paper 1, proposes a number of changes to the FCA Handbook to ensure that the IDD is implemented in the UK.
The IDD comes into effect on 23 February 2018 and, although the UK will leave the European Union will be implemented in UK and maintained under the proposed Great Repeal Bill. Accordingly we will leave the EU with IDD rules and standards in place.
The FCA proposals require changes to the SYSC, TC, MIPRU, IPRU(INV), ICOBS and DISP parts of the Handbook. The introduction of the Insurance Product Information Document (IPID) does not fall within this consultation as the design and content of the standard product document has yet to be finalised by the European Insurance and Occupational Pensions Authority.
The second consultation will cover the treatment of life business – including Insurance Based Investment Products – and product governance and oversight and client asset rules.
Responses to CP17/7 are invited by 5 June 2017.
Proposals include the following:
- ICOBS currently does not apply to reinsurers and only limited rules apply to large risks. The general principles contained in Article 17 of the IDD include the requirement to act at all times in ‘the best interests of customers’ and to ensure that information is ‘clear, fair and not misleading’. Article 24 contains rules on the cross-selling of insurance products. Both Article 17 and 24 are applied to the distribution of large risks with the result that the customers’ best interest obligation will be applied in marine and aviation markets and applied to large corporate risk programmes. Neither Article 17 or 24 (or indeed the remainder of the customer information obligations) are applied to reinsurers.
- Whereas intermediaries in a chain who do not have direct contact with the customer are currently exempt from ICOBS requirements, the IDD brings all distributors, whether or not they are part of a chain under the rules. The effect will be that the general principles will be applicable to all those in the distribution chain – not just those with the relationship with the customer.
- The IDD requires that both distributors and their employees have appropriate knowledge to sell insurance products. This must be demonstrated by obtaining at least 15 hours of recognised Continuing Professional Development (CPD). Knowledge and ability requirements will be contained in SYSC (with requirements beyond the scope of the IDD remaining in TC). The minimum requirements will be applied to intermediaries, ancillary intermediaries and insurers. However, the knowledge and experience requirements will be applied only to those staff who are directly involved in distribution including sales managers. No formal qualifications additional to those already in TC will be required.
- The IDD requires that intermediaries disclose both the ‘nature’ and the ‘basis’ of remuneration. Employees of insurance undertakings selling directly must disclose only the nature of their remuneration. The FCA proposes to provide some guidance on what nature and basis will be understood to mean. They propose that ‘nature’ will concern the type of commission such as basic commission, profit share, bonus or similar whereas the ‘basis’ will concern disclosure of the source. Firms should disclose information about remuneration which has a direct connection to the insurance contract being sold so would extend to sales targets but not necessarily rewards for the quality of sales. The FCA provides some specific examples of disclosures that meet their requirements in CP17/7.
- The FCA is seeking to ensure that the IDD concept of an “ancillary insurance intermediary” (ie someone whose principal activity is other than selling insurance) delivers the same standard of sale as any other intermediary. Accordingly, most rules that are applied to authorised intermediaries will be applied to ancillary intermediaries such as motor dealerships or car rental agencies. This will include requiring that ancillary intermediaries meet the knowledge and competence requirements, meaning that sales staff must have at least 15 hours of relevant CPD each year. In addition, the FCA will expect authorised distributors to ensure that certain Handbook rules including the general principles in Article 17 and basic information disclosure apply to sales made through those who fall outside the scope of the IDD.