Please note this article is aimed at typical ATEB clients but there are references in it that others firm types should note and investigate further.
The Insurance Distribution Directive (IDD) that was delayed from February 2018 is now being implemented on 1 October 2018. It is replacing the Insurance Mediation Directive (IMD) with the aim ‘to enhance consumer protection when buying insurance – including general insurance, life insurance and insurance-based investment products (IBIPs) – and to support competition between insurance distributors by creating a level playing field’.
Links to key documents and the FCA summary can be found here.
There have been three IDD specific Consultation Papers (CP’s), IDD sections in three other CPs, three Policy Statements and one Handbook Notice totalling over 1250 pages! We summarise the key aspects below.
Insurance-based investment products (IBIPs)
Definition: ‘An IBIP is an insurance product that offers a maturity or surrender value that is exposed to market fluctuations. Examples include endowment policies and insurance bonds’.
It is the FCA’s view that IBIPs and pensions, although outside the scope of MiFID ll, are closely aligned and are part of the same relevant market. For those reasons, they are aligning the vast majority of rules across the markets. However, the FCA has decided that full harmonisation will not be fully implemented yet for pensions. Otherwise, they are implementing disclosure, product oversight and governance and some regulatory processes for all – in an attempt to keep it simple!
Summary of IDD
See below for a brief summary of the IDD and how it will affect a typical insurance intermediary:
- the IDD requires employees to ‘have the appropriate knowledge and ability to perform their roles’;
- the requirement is to complete at least 15 hours of professional training or development (CPD) in each 12 month period;
- for those firms already subject to the 35 hours of CPD under RDR the 15 hours, minimum, will form part of the 35;
- what the CPD must cover is detailed in SYSC 28.2.3R;
- firms must keep records to demonstrate their compliance with these rules;
- all intermediaries should have in place professional indemnity insurance with the minimum annual cover levels of €1,250,000 per claim and €1,850,000 aggregate.
The IDD general principles for business state:
- firms must act honestly, fairly and professionally in accordance with their customers’ best interests;
- firms must communicate in a way that is clear, fair and not misleading;
- marketing materials must be clearly identifiable as such;
- remuneration of a firm or its employees, and performance management of employees, must not conflict with the duty to act in in accordance with their customers’ best interests.
Changes to ICOBS Business standards:
- firms must disclose whether they are an insurer or an intermediary;
- firms must disclose whether or not they provide a personal recommendation;
- intermediaries must disclose whether they act for the customer or the insurer;
- intermediaries must make disclosures about shareholding links between the intermediary and any insurers;
- intermediaries must disclose if they give advice based on “a fair and personal” analysis of the market;
- where intermediaries do not provide advice on the basis of a fair and personal analysis of the market, they must disclose the names of insurers with whom they may place business;
- intermediaries must disclose the nature of their remuneration in relation to the insurance contract and whether they work on the basis of a fee, commission or some other form of remuneration (or a combination thereof);
- all firms must disclose fees payable by the customer in cash terms; this includes fees which may become payable (such as for mid-term adjustments);
- information must be made available on paper or in a durable medium where the customer chooses and must be free of charge;
- all contracts proposed must be consistent with the customer’s demands and needs, for both advised and non-advised sales;
- firms who advise must provide a personalised recommendation explaining why the product recommended best meets the customer’s needs;
- where insurance is ancillary to other goods or services, the insurance must not be compulsory; the customer must be able to purchase the goods or services without the insurance.
For IBIPS the following rules can be transposed into the IDD:
- Aggregated costs and charges (Ex-ante and Ex-post);
- Inducements – after much consideration the FCA has adopted the high-level MiFID ll requirements into IDD i.e. ‘inducements must enhance the quality of the service’;
- MiFID ll suitability requirements can be transposed across re ATR, CFL, knowledge and experience, appropriateness, suitability statements ‘in good time’, document retention and periodic assessment of suitability if offered;
- ‘Whilst the IDD requirements in Articles 27 and 28 are not expressed in identical terms to the MiFID II conflicts requirements, we consider that, in many respects, the substance of the obligations are the same’;
- Product Manufacture (PROD) & Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD) – RPPD requirements to be maintained and new provisions will be introduced based on the MiFID PROD requirements. So if you design or manufacture investments you MUST familiarise yourself with these requirements.
Other points to note:
- Insurance Product Information Document (IPID) – is a product summary document in a standard format produced by provider and issued prior to conclusion of contract. Note this is not for pure protection or ‘large risk’ policies;
- Firms, including Appointed Representatives, that are already registered under the IMD will not need to re-register.
There is also further information for firms where the principal professional activity of a firm is not insurance distribution, for example, a motor garage or mobile phone retailer; these are referred to as Ancillary Insurance Intermediaries (AII). Such firms should read the relevant chapters of the Policy Statement.
If you deal with professional clients you will need to cross reference the rules.