Many of the recent changes in financial services regulation have resulted from European Union legislation. One of the latest pieces of EU legislation was the Insurance Distribution Directive (IDD), which is currently scheduled to come into force on 1 October 2018.
The central aim of the IDD is to harmonise insurance regulation across all EU member states. It applies to insurers, price comparison websites, firms handling claims on behalf of insurers, insurance intermediaries and ancillary insurance intermediaries – essentially every firm who might form part of an insurance distribution chain.
This means that its provisions need to be implemented not just by firms who handle insurance business all day every day, but also by intermediary firms who might focus primarily on pensions or investment business, but who also handle insurance contracts.
Some of the changes the IDD will bring about include:
· Employees of all firms in the insurance distribution chain must have the necessary knowledge and experience to carry out their roles. For advisers who offer a holistic service, (which includes insurance based products) the IDD introduces a requirement to carry out 15 hours of continuing professional development (CPD) each year specific to the insurance market, although of course investment advisers are already required to carry out 35 hours of CPD annually
· Intermediaries must have professional indemnity insurance that provides cover of at least €1,250,000 per claim per year, and €1,850,000 per year in aggregate for all claims
· Firms that have branches in other European Economic Area (EEA) states must have a documented complaints process, and must comply with the requirements of the appropriate Ombudsman or equivalent dispute resolution service that applies in that country. The EEA comprises all 28 EU member states, plus Norway, Iceland and Liechtenstein
· Pre-contract, a firm must disclose whether it is an insurer or an intermediary, and whether or not it will provide advice. Intermediaries must explain whether they act for the customer or the insurer
· Unless a firm provides its advice having first carried out “a fair and personal analysis of the market”, it must disclose the names of the insurers who comprise its panel
· Firms who provide advice must provide a personalised recommendation explaining why the product recommended best meets the customer’s needs
· Firms who offer a non-advised service must still ensure that any product offered to a customer is consistent with their demands and needs.
· Intermediaries must disclose whether they are remunerated via a fee, commission or a combination of the two. Amounts must be stated in cash terms
· Where the customer has agreed to it, the requirement to provide information in a “durable medium” can be met by providing the information in electronic form, such as via email or on a webpage
The general principles of the IDD impose requirements on firms to act in the best interests of their customers; to communicate with them in a way which is clear, fair and not misleading; and to ensure that remuneration systems do not conflict with the duty of care owed to customers. All of this will of course be familiar to firms that operate under the Financial Conduct Authority (FCA) regime.
As with other EU financial legislation, firms should continue to comply with its provisions once the UK has left the EU next year. The Government is planning to incorporate all existing EU law into UK law, and in any case the FCA was one of the prime movers behind many of the recent EU financial directives.