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The European Commission began a review in 2010 of the Insurance Mediation Directive (IMD) which came into force in January 2005. The review resulted in proposed revised directive known as the Insurance Distribution Directive (IDD). UK firms were originally required to comply with this by 23rd February 2018, but this date was put back to 1st October 2018 by the EU.
The key points which are more relevant to mortgage and insurance intermediaries have been summarised below.
The IDD applies to firms that sell, advise on, or conclude insurance contracts, and those who assist in the administration and/or performance of insurance contracts. References to “insurance mediation” will be amended to “insurance distribution”
A new category of firm called an ancillary insurance intermediary (AII) has been created where the primary business function is not insurance distribution and the sale of insurance is secondary to other goods/services provided.
Currently the ICOBS rules apply to any intermediaries who are in contact with the customer. This means that requirements do not apply to other intermediaries in the distribution chain. This approach is consistent with the conduct of business requirements in the IMD, which primarily focus on information disclosure and so only apply to intermediaries that deal directly with customers. However, the IDD contains requirements – specifically the general principles –which are relevant to all intermediaries carrying out insurance distribution activities, regardless of whether they are in direct contact with the end customer.
The staff knowledge and competence requirements apply to insurers and intermediaries. The IDD introduces a minimum of 15 hours continuing professional development (CPD) for staff. The minimum knowledge criteria will apply to insurance and reinsurance intermediaries as well as insurance and reinsurance undertakings. This minimum knowledge criteria covers areas such as product coverage, claims process and insurance regulation. Firms will be required to demonstrate compliance with the CPD requirement and retain records for at least 3 years.
The IDD requires intermediaries to hold PII or a comparable guarantee against liability arising from professional negligence. Minimum levels of cover are €1,250,000 per claim per year, and €1,850,000 per year in aggregate. Existing income based requirements and client money requirements remain.
Distributors must act honestly, fairly and professionally in the best interests of their customers
Distributors must communicate in a way which is clear, fair and not misleading, including ensuring that marketing materials are clearly identifiable as such. Remuneration of a distributor or its employees, and performance management of employees, must not conflict with the duty to act in the customer’s best interests
A new rule in ICOBS will be introduced requiring insurance distributors to act honestly, fairly and professionally in the best interests of their customers (the customer’s best interests rule) The FCA will be amending the current ICOBS rules on communications and financial promotions to require that all marketing communications be clearly identifiable as such. Including a new rule in SYSC to prohibit remuneration and performance management practices that would conflict with the customer’s best interests rule.
The new requirements are:
· The pre-contract disclosure regime now applies to insurance undertakings.
· Firms must state what type of firm they are (an intermediary or an undertaking).
· Firms must state whether they provide a personal recommendation.
· Insurance intermediaries must state whether they are acting on behalf of the customer or the insurance undertaking.
· Intermediaries must disclose if they give advice based on “a fair and personal” analysis of the market.
· Where an intermediary is contractually bound to place business with a specific insurer or insurers it must provide the names of these insurers. Currently this information need only be supplied on request by the customer.
· Where an intermediary is not contractually bound to place business with specific insurers but does not provide advice on the basis of a fair and personal analysis of the market, it must name the insurers with whom it may place business. Currently this information need only be supplied on request by the customer
The IDD requires insurance intermediaries to disclose the nature and basis of the remuneration they receive in relation to the insurance contract. Insurers must likewise disclose the “nature” of the remuneration paid to their employees. Where the remuneration is in the form of a fee paid by the customer, the amount of that fee must be disclosed. Firms are permitted to disclose the method of calculation instead of the actual amount, but only if the amount cannot be calculated at the time.
Example wording on terms of business:
“We arrange the policy with the insurer on your behalf. You do not pay us a fee for doing this. We receive commission from the insurer which is a percentage of the total annual premium.”
The IDD builds on and amends the existing ICOBS standards for advised and non-advised sales.
All firms are required to identify their customers’ insurance demands and needs, and ensure that insurance contracts proposed are consistent with them. Where a firm provides advice, it must explain why a contract best meets the customer’s needs.
In addition the IDD includes an additional provision that “any contract proposed shall be consistent with the customer’s insurance demands and needs” meaning that firms must only offer contracts that meet the customers’ demands and needs.
To comply with this additional requirement, firms need to take two steps:
1. Identify the customer’s demands and needs, and match them to the available products, and
2.State the customer’s demands and needs to assist them in making an informed decision
It would not be appropriate to provide a generic statement of demands and needs where the firm has not first taken steps to identify the demands and needs of the actual customer. However, generic statements of demands and needs may be appropriate if the firm has narrowed the product options it offers to only those where the customer’s demands and needs match those in the statement.
Under advised sales a new requirement for firms which provide a personal recommendation to provide a personalised explanation why the proposed product best meets the customer’s insurance demands and needs.
We expect firms to match the customer’s demands and needs to the available products, and set out a personalised explanation of why the product proposed best meets those needs. To comply with this and the requirement to act in the customer’s best interests, if the firm does not offer a product which meets the customer’s needs it should say so.
We will be sending out any relevant updated documents to comply with the rules. If you are not a H3 member and would like to know more about the service we offer please contact us.