1. PROTECT LEGAL AND REGULATORY REVIEW
Implementing the Insurance Distribution Directive
JULY 2017

2. The Insurance Distribution Directive
We are leaving the EU but the requirements of the IDD will be fully implemented into UK law - Brexit notwithstanding
So the only question is not “if” - but “how”?
That is the question has FCA started to answer via Consultation Paper CP17/07
We are not looking, today, at the final position – but FCA is not noted for huge shifts from Consultation!
A lot of detail coming in the next 40 minutes – but you can all access the slides from my website
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3. The areas affected
Who must be regulated – and who takes responsibility for what?
Pre contract disclosure
Remuneration and commission disclosure
Establishing demands and needs
Cross selling
Required knowledge and ability
Complaints handling and redress
“Other Professional requirements”
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4. The current position
Anybody doing anything to facilitate a contract of insurance (even introducing) must be regulated (or an AR/IAR)
Only exception is the “connected contract” – where:-
bog standard non-motor goods loss or damage insurance
is sold by a non financial services firm with a term less than five years;
with an annual premium of less than 500 euro
Connected Travel Insurance (CTI) operates under a slightly different regime . .
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5. Under the IDD
The IDD creates a new category of regulated firm – the “Ancillary Insurance Intermediary” (an “AII”)
Their principal activity is not insurance distribution; and
The insurance products handled are complementary to a good or service; and
The insurance doesn’t cover life or liability unless the cover compliments the goods provided
AIIs will be regulated – but the IDD intends that they may be regulated with a softer touch
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6. If an AII
Provides insurance which is complimentary to goods or services which it supplies; and
The insurance covers only breakdown, loss or damage to the goods or non-use of the service; and
The premium is less than 600 euro per annum (pro rata) or max 200 euro for 3 months
then the AII will benefit from a revised connected contract exemption and will not have to be regulated
Note: the connected contract exemption will no longer be limited to 5 year terms
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7. What does this add up to?
FCA have identified that this means there will be three categories of AII:-
In-scope AIIs” – Firms who meet the definition of being an AII and are within the UK’s regulatory perimeter. This includes firms within scope of the IDD and firms such as motor vehicle dealers whose insurance distribution activities may be outside of the IDD but who are within the UK regulatory perimeter
“Connected travel insurance (CTI) providers” – Firms whose primary business is to make travel arrangements for customers, but who distribute insurance that is complementary to those services, such as travel agents, tour operators and airlines
“Out-of-scope AIIs” – Firms who are outside the UK regulatory perimeter by virtue of the (revised) connected contracted exemption. E.G. electronic goods and furniture retailers
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8. Out of Scope AIIs The IDD says FCA cannot regulate them
However FCA firmly intends to regulate sales by them
If your firm sits “above” an Out of Scope AII in a distribution chain, then FCA (via a new ICOBS 2.6) will impose responsibility for the sale on your firm (rather like for an AR)
If an insurer and intermediary are in the chain - both take responsibility
An authorised firm distributing via a connected contract will have to have “appropriate arrangements” in place to ensure it can deliver compliance
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9. What about In-Scope AII’s ?
This might be a motor dealer
The IDD intends a lighter touch regulation for In-Scope AII’s
FCA is not at all keen on that!
The IDD is a minimum harmonisation directive so FCA can be tougher
FCA says it will treat In-Scope AII’s in just the same way as any other firm – because, it says, customers deserve the same protection
FCA has proposed some minor concessions with regard to CTI providers
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10. Responsibility
One of the big changes from the IMD to the IDD is the IDD’s application to direct sales by insurers. In the UK, the FCA regime already applies to such sales – so no change needed
The big change is that, currently, ICOBS only applies to intermediaries who are in contact with the customer. IDD requirements are relevant to all intermediaries carrying out insurance distribution activities, regardless of whether they are in direct contact with the end customer.
FCA propose to amend the application of ICOBS in line with the IDD
The other change is that (in general) the IDD (unlike ICOBS) does not make any distinction between consumers and commercial customers. FCA propose that:-
Where the IDD requires increased conduct of business requirements, FCA will apply them across the board
where existing distinctions, between consumers and commercial customers, are already in place within ICOBs, these will remain (unless affected by IDD changes)
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11. Changes proposed to ICOBS 2
ICOBS 2 is where FCA collects together all its general provisions relating to conduct of business
It is the appropriate place for FCA to pick up “overarching” new IDD requirements regarding dealings with customers. FCA will:-
amend the current ICOBS 2.2 rules, on communications and financial promotions, to require that all marketing communications be clearly identifiable as such (not a major issue); and
insert a new rule into ICOBS 2.5 to require insurance distributors to act honestly, fairly and professionally in the best interests of their customers. This will become known as ‘the customer’s best interests rule’). This is a major issue
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12. The customer’s best interest rule
The customer’s best interests rule introduces the IDD required duty of care towards customers into conduct of business regulation, and this duty will apply to all firms carrying out insurance distribution activities, wherever they may lie in the distribution chain, where they have a direct impact on the policyholder
Linked to the above, there will be a new rule in SYSC (19F2) to prohibit remuneration and performance management practices in firms that would conflict with the customer’s best interests rule
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13. On the big Change We have no news yet . . . . .
The IDD requires a standard (and highly prescribed) Product Information Document to be supplied to customers before purchase
The form of this “PID” has not yet been resolved by the EU
Therefore FCA will consult on this “later in the year” when all the details are known
But FCA can crack on, now, with how to implement other IDD pre-contract disclosure requirements . . .
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14. Proposed changes to ICOBS 4
ICOBS 4 is where FCA collects together all requirements for pre-contract information to customers about the nature and services to be provided by the insurance mediator
FCA say that the IDD requires a change of approach in ICOBS 4:-
“In line with the new customer’s best interests rule, it is important that firms consider how they make information meaningful to customers. Firms should make sure that the information is provided at an appropriate time and through the right channels
Firms’ communication is vital to help consumers make decisions - but it is only effective when consumers pay attention to the information, have the capacity to interpret it and are willing to incorporate it in their decision-making process. Therefore, we propose to include guidance into ICOBS 4.1 that reminds firms of the importance of meaningful and timely disclosure”
This is how FCA will do this
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15. ICOBS 4 will kick off with new Guidance . .
. . headed “Interaction with the Customer’s Best Interest Rule and Principle 7”
It will say:-
“To comply with the customer’s best interests rule and Principle 7 (communications with clients) a firm should include [when complying with ICOBS 4] consideration of the information needs of the customer including:-
(1) what they need to understand & the relevance of any information provided by the firm; and
(2) at which point in the sales process will the information be most useful to the customer to enable them to make an informed decision”
So – as we look at the further disclosure requirements, imposed by the IDD, we are talking about much more than bunging more stuff into your status disclosure 
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16. The new IDD disclosure requirements (1)
All Firms:-
must state what type of firm they are (an intermediary or an insurance undertaking);
must state whether they provide a personal recommendation or not
The concept of a “personal recommendation” under UK law is subject to review and potential change
FCA allude to this in its introduction to its Consultation Document and then, directly with regard to the above requirement, FCA say:-
“Our experience is that customers do not always understand the difference between information and advice. A well-worded and timely disclosure can help the customer understand the scope (and limitations) of the service of the firm”
That is good advice from the FCA!
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17. IDD disclosure requirements (2)
require that intermediaries must:-
state whether they are acting on behalf of the customer or the insurance undertaking;
disclose if they have 10% or more voting rights or capital in an insurer, or vice versa. Currently the requirement is “more than 10%”; and
disclose if they give advice based on “a fair and personal” analysis of the market (a concept imported from the IDD without further explanation by FCA)
Where an intermediary is contractually bound to place business with a specific insurer or insurers it must provide their names. 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, and 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. Again, currently this information need only be supplied on request by the customer
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18. Remember
If your firm is an authorised insurer or intermediary which is distributing products through an Out of Scope AII - new ICOBS 2.6 will place the delivery of these disclosure responsibilities on you
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19. The current position
The ICOBS fee and commission disclosure requirements are specific to fees charged to customers for insurance mediation activity and to commission disclosure for commercial customers and for pure protection contracts sold with retail investment products
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20. What changes under the IDD?
The IDD requires the following, pre-contract, disclosures:-
by insurance intermediaries - “the nature and basis” of the remuneration they receive in relation to the insurance contract;
by insurers - the “nature” of the remuneration paid to their employees in relation to the insurance contract
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21. Some challenging concepts
The new disclosure requirements contain some challenging concepts. FCA say that (so far as intermediary remuneration is concerned):-
‘nature’ requires intermediaries to disclose the type of remuneration they will receive. This could be a commission, bonus, profit share or any other kind of financial incentive;
‘basis’ requires intermediaries to disclose the source of the remuneration they receive
In the case of insurers, “nature” means the type of remuneration they pay
In all cases the disclosure only has to be made about remuneration which has a direct connection to the insurance contract being sold. FCA say this is likely to include bonuses for hitting a sales target (where the specific contract sold will count directly towards that target) but may not include measures such as rewards for adherence to quality standards
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22. FCA is interested in the outcomes
FCA say that the provision of disclosure on remuneration must take into account ICOBS 2.2.2R (as this will be amended) which provides that:-
“when a firm communicates information to a customer it must ensure that it is clear, fair and not misleading”
FCA emphasise that the purpose of remuneration disclosure is to highlight potential conflicts of interest and to promote transparency. It says that firms should ensure they disclose the information in a way that is useful to their customers in showing the relationship between firms in a distribution chain, and in highlighting potential conflicts of interest
These disclosures will have to be made “in good time” before conclusion of an initial contract of insurance – and, if necessary on its amendment or renewal
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23. How should disclosure be made?
The quick answer is that (apart from telephone sales which remain subject to the distance marketing rules) the information must be provided using paper, a “durable medium” other than paper, or via a website where “website conditions” are satisfied
The information must be communicated in a clear and accurate manner comprehensible to the customer and free of charge
Where a firm wishes to provide the information through a durable medium other than paper or a website FCA will expect firms to present the customer with a choice between the available options, rather than simply presenting the customer with one option and asking for their consent
If the information is communicated using a durable medium other than paper, or by means of a website, a firm must, upon request and free of charge, also send the customer a paper copy
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24. What are the “website conditions”
These are the criteria by which the provision of the information via a website can be judged to be appropriate or not. The conditions are that:-
the provision of information by means of a website is appropriate in the context of the business conducted between the insurance distributor and the customer;
the customer has consented to the provision of that information by means of a website;
the customer has been notified electronically of the address of the website, and the place on the website where that information can be accessed; and
it is ensured that that information remains accessible on the website for such period of time as the customer may reasonably need to consult it
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25. Demands and Needs
Here we are looking at the changes required to the demands and needs process as set out in ICOBS 5. We are going to focus on non-advised sales; because they encompasses the vast majority of GI sales processes
In that connection most firms have been able to be fairly relaxed about the current demands and needs process (see ICOBS 5.2.4G) where FCA says, e.g. that the following approach will be compliant:-
“producing a demands and needs statement in product documentation that will be appropriate for anyone wishing to buy the product. For example, "This product meets the demands and needs of those who wish to ensure that the veterinary needs of their pet are met now and in the future“
This requires no interaction with the customer, but is subject to the overriding provision in ICOBS 5.1.1G (which will remain unchanged) that:- 
“Firms should take reasonable steps to ensure that a customer only buys a policy under which he is eligible to claim benefits”
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26. What will change?
The IDD says firms must specify the customer’s insurance demands and needs based on information obtained by the firm from the customer. So firms must take an active role in identifying the customer’s demands and needs (through asking questions)
The emphasis is mine. So the IDD requires interaction with the customer. But FCA say that:-
“We recognise the need to retain a clear distinction between advised and non-advised sales. In relation to non-advised retail sales, we do not expect firms to carry out a detailed investigation of the customer’s circumstances, but they should identify their demands and needs, and ensure that the contracts proposed provide cover that meets those demands and needs”
So, FCA’s position seems to be (on non-advised sales) there must be some interaction with the customer but, as Paul Daniels used to say, “not a lot”. Where is FCA going on this?
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27. Where FCA is going on Demands and Needs
FCA say:-
“We have considered whether our existing guidance on the format of a statement of demands and needs remains appropriate in light of the IDD wording. We have amended the guidance to make it clear that firms must ensure that they identify and specify the demands and needs of the particular customer. For example, 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”
If you read that quickly it could lead you to believe that the current non-interactive “This product meets the demands and needs of those who wish to ensure that the veterinary needs of their pet are met now and in the future” might remain viable
It will not - let’s have a look at the proposed rules which FCA has drafted to cover this . .
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28. ICOBS 5.2.2R will state . . .
“Prior to the conclusion of a contract of insurance, a firm must specify, on the basis of information obtained from the customer, the demands and the needs of that customer“
There are no “ifs” or “buts” – it will be a required part of an insurance sale that “information is obtained from the customer”
FCA propose to “tweak” the existing ICOBS 5.2.4G example of an approach that “may be appropriate”, where a personal recommendation has not been given. Post tweak this will read:-
“producing a demands and needs statement in product documentation that will be appropriate for anyone [wishing to buy the product] [for whose demands and needs the contract is consistent]. For example, "This product meets the demands and needs of those who wish to ensure that the veterinary needs of their pet are met now and in the future”
That sounds like a little change – but it is a huge change. There will always have to be one to one interaction with each customer to establish their demands and needs
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29. Cross Selling?
The IDD approach to “cross selling” and the existing FCA approach to “add on” and “optional additional product” sales are not harmonious
The IDD cross selling provisions do not apply where one insurance is sold as “ancillary” to another insurance product. However FCA make it clear that this does:-
“not change our current expectations relating to the sales of multi-risk products or the sales of options/cover extensions offered within the one insurance product (such as accidental damage or baggage cover)”
So the IDD is not going to relieve you from all the awkward material and expectations regarding “optional additional products” now appearing in ICOBS 6A.2 - as arising from the Add-on Insurance Market Study
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30. The IDD on Cross Selling
The IDD requirements only apply wherever an insurance policy is sold in connection with, or alongside, other goods or services as part of a package, or the same agreement
So we are talking about insurance being sold alongside “something else” that is not insurance
That “something else” may be a primary product, with ancillary insurance also being offered, or a secondary offering to an insurance sale
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31. The IDD requirements
In packages where insurance is the primary product, the IDD requires that information must be given on whether the different components of the package can be bought separately. The distributor must also provide:-
an “adequate description” of the component products;
any interactions between the components, and
the separate costs and charges of each component
FCA give an example of this being car insurance sold with the option to buy a telematics device or private medical insurance sold with a wearable fitness device
In packages where insurance is ancillary to other goods or services, the IDD says that customer must be able to buy the primary product or service without the insurance
FCA give an example of insurance sold alongside mobile phones and cars
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32. The current position
Firms are required to establish, and maintain, systems and controls to ensure that:-
the firm employs personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them (SYSC 3.1.6R or SYSC 5.1.1R); and
when complying with this obligation, the firm must take into account the nature, scale and complexity of its business and the nature and range of financial services and activities undertaken in the course of that business (SYSC 3.1.7R or SYSC R)
Firms which are carrying on activities which are not subject to the Training and Competency Sourcebook (TC) (e.g. general insurance):-
“may nevertheless wish to take TC into account in complying with the competency requirements in SYSC”
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33. The IDD on Knowledge and Ability
The IDD requires that insurance distributors and their employees have appropriate knowledge and ability – no problem – this is a similar high level requirement to the current FCA position
The IDD then goes on to:-
require that this knowledge and ability should be demonstrated by employees completing a minimum of 15 hours per year of CPD
set out (in some considerable detail) criteria for this minimum knowledge, which include areas such as product and market knowledge
How will FCA go about implementing this?
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34. Implementation
FCA will implement these requirements by reference to “relevant employees”. The identification of who a “relevant employee” will be is to be set out in a new SYSC 23.1 which will state that the CPD requirements will only apply to:-
persons directly involved in the carrying on of the firm’s insurance distribution activities;
those, within the management structure, responsible for the firm’s insurance distribution activities;
persons responsible for the supervision of persons directly involved in the carrying on of the firm’s insurance distribution activities
FCA indicate that the above would not include a function such as HR, but would include persons who undertake non-advised script based call centre sales. The term “employee” will be widely construed to include contractors
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35. The overriding requirements
These will be set out in a new SYSC 23.2 – and they are extensive . . .
FCA accepts that such extensive requirements need to be applied proportionately, e.g. as between the call centre employee, on the one hand, and a product or sales manager on another hand. FCA say that it will issue guidance “so that the form and content of CPD can be modulated to the nature and complexity of the employee’s role”
Expect a new training industry to pop up to belt out 15 hours CPD to your employees! Be careful – nothing fundamental will change from what you should be doing already; other than need to demonstrate specific volume and coverage of training
The core and overriding requirement is, and will be, that the outcome of your training activity must be that your firm employs personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them
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36. How to demonstrate compliance
SYSC 23.3 will contain new requirements that your firm must:- 
establish, maintain and keep appropriate records to demonstrate compliance; and
be in a position to provide to the FCA, on request, with the name of the person responsible for this record keeping requirement
A firm must:-
make an up-to-date record of the continued professional training or development completed by each relevant employee in each 12 month period;
retain that record for not less than 3 years after the relevant employee stops carrying on the activity; and
be in a position to provide any version of the record to the FCA on request
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37. At first sight this is straightforward
The changes to complaints and redress required by the IDD are relatively brief, and pretty technical in nature – and add up simply to:-
the replacement of DISP 1.1.8R (that insurance intermediaries must have in place procedures to handle complaints from persons who are not eligible complainants) with a new DISP A which would extend that requirement to all those undertaking insurance distribution activity; and
some provisions to clarify the complaints handling responsibilities of EEA branches of UK firms
So what is not straightforward?
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38. This . . .
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39. What is going on?
The activity of Out of Scope AIIs is beyond the regulatory perimeter
DISP only applies to “firms” (i.e. regulated firms – see DISP 1.1.3) so DISP cannot (and the FCA cannot) regulate activity which is not regulated activity
Complaints about the selling of a connected contract are not matters within the scope of DISP
FCA recognise this at Para 6.16 of CP 17/07 saying:-
“We propose to maintain the current position that our DISP rules apply to the activities of all firms within the UK regulatory perimeter; including in-scope AIIs and CTI providers”
So, why are there those dirty great big ticks in Table 3 indicating that FCA intend to apply complaints arrangements and out of court redress to “Out of Scope AIIs”?
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40. What is going on?
Next to both the ticks under the DISP heading in the Table are cross references to footnotes respectively numbered 37 and 38 which both read:-
“Against the relevant authorised firm for those rules applying to the distribution done through the out-of-scope AII”
What does that mean? Does that mean that insurance distributors are to be responsible for handling (and notifying) complaints regarding an (unregulated) sale under the connected contract exemption (CCE)?
That cannot (directly) be the case, since we have seen that the DISP rules do not extend to such sales - and there is nothing equivalent to the proposed ICOBS 2.6.1R to directly apply responsibility for connected contract complaints handling on regulated firms up the distribution chain
So why the big ticks indicating that FCA intend to apply complaints arrangements and out of court redress to “Out of Scope AIIs”?
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41. The answer?
FCA propose to insert the new “customer’s best interest rule” as ICOBS 2.5-1R:-
“A firm must act honestly, fairly and professionally in accordance with the best interests of its customer”
This new ICOBS 2.5-1R is in the list of rules to which ICOBS 2.6.1R applies – meaning that an insurance distributor, relying on the CCE for sales, must ensure that the customer’s best interest rule is met by it
If an insurance distributor (as it will be required to do) provides a CCE customer with its identity, as a regulated insurance distributor responsible for ensuring that obligations are met – then to fail to handle any complaint received from a CCE customer, regarding the sales process, would be to fail to act professionally in accordance with the best interests of the customer
Hence why FCA are adamant that it can apply its complaints handling requirements “Against the relevant authorised firm for those rules applying to the distribution done through the Out-of-scope AII”
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42. “Other Professional requirements”
Professional Indemnity Insurance Requirements
FCA’s existing requirements for the maintenance of PII exceed the requirements which the IDD will impose. FCA proposes no change in its rules, other than to increase the base minimum level of required cover from €1,120,200 to €1,250,000, for a single claim, and from €1,680,300 to €1,850,000, as the aggregate sum
Restriction on the use of intermediaries
Under the IDD, insurers, reinsurers and intermediaries must only use authorised or exempt insurance intermediaries for insurance distribution services. FCA’s current rules only apply to insurers and reinsurers. FCA propose to amend guidance to reflect the fact that these requirements apply to insurance intermediaries as well
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43. Thank You