Don't get caught out by Insurance Distribution Directive rule changes
Author: Matthew Brown and Stephen Dawson
Applies to: UK wide
The Insurance Distribution Directive (IDD) will introduce a new regime for those involved in insurance sales, even if selling insurance is not your primary business.
The IDD is due to be transposed into UK domestic law by 23 February 2018. The government has made clear that the UK will implement the IDD regardless of the ongoing Brexit negotiations.
The FCA has recently published 'near final' versions of its proposed rules to implement the changes, so now is the time to make sure you will be in a position to comply when the new regime comes into force..
What is the IDD and will it affect your business?
The IDD is designed to build on the current framework regulating insurance sales. It aims to strengthen insurance customer protection, create a level playing field for all those involved in insurance sales and encourage cross-border trading.
It will also apply to all businesses involved in the insurance supply chain, including where insurance is sold alongside other products.
The IDD will generally increase the requirements placed upon those involved in distributing insurance, although a limited range of companies will now be subject to reduced levels of regulation.
As such, the implementation of the IDD presents a good opportunity for businesses to review their current processes and assess them against the incoming requirements.
What will the main changes be?
The FCA is proposing to build on the current framework, which is largely contained in the FCA Handbook, rather than starting from scratch.
While the changes introduced by the IDD are likely to bring about an evolution, rather than a revolution, of the UK framework, there will still be significant changes in a number of areas, including:
- Scope of the regime - the majority of businesses involved in insurance sales will face additional requirements under the new regime, including connected travel insurance providers such as travel agents and airlines. The so-called 'connected contracts exemption', under which certain companies (typically retailers of consumer goods other than motor vehicles) selling straightforward ancillary insurance do not need to be directly authorised, will be broadened slightly. However, new obligations will be placed on firms distributing via such retailers to ensure that these retailers comply with the more basic aspects of the new regime, so that these companies will actually now indirectly face additional requirements. Finally, businesses which introduce potential customers to insurers and vice versa may be able to benefit from a new exemption under the IDD, but only if they merely pass information on and take no further steps to assist in the conclusion of insurance contracts;
- Pre-contract disclosure - additional information will have to be provided to customers before a sale is completed, including a prescribed form called an Insurance Product Information Document for consumers and various further information about the nature of the distributor and the remuneration arrangements in place;
- Demands and needs - a more interactive process will be required to assess the customer's demand and needs. Generic statements of demands and needs will only be acceptable in certain limited scenarios;
- Cross-selling - there will be new requirements in relation to the information which has to be provided to customers where an insurance product is sold alongside another product;
- Staff competence requirements - the IDD introduces strict requirements in relation to the levels of knowledge and competence of staff working for insurers and intermediaries. This includes an obligation on a broad range of employees directly involved in selling insurance to undertake a minimum of 15 hours of continuing professional development (CPD) per year;
- Conflicts of interest - new requirements are due to be brought in around the conflict policies businesses have in place and how conflicts of interest are disclosed to customers. These rules will now apply to insurers as well as intermediaries.
What action needs to be taken?
Now that the FCA has published its first set of 'near final' rules, it is important that businesses involved directly or indirectly in insurance sales start considering the changes which are coming in.
The proposed changes are fairly significant and will inevitably require processes to be updated, which is likely to take some time. The FCA has made clear that it thinks businesses should be preparing for the changes now, so that they are prepared for the new regime as soon as it comes into force.
The introduction of these new rules gives businesses an opportunity to review their current processes and assess where they fit within the new regime, including corporates who sell insurance alongside other products.
Our dedicated insurance regulatory team is well placed to assist if you have any queries about how these changes may impact your business.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.