On 17 July 2015, the Council of the EU published the final compromise text of the Insurance Distribution Directive (“IDD”, formerly, the Second Insurance Mediation Directive (IMD2) or the recast IMD). The IDD is being introduced to amend and replace the Insurance Mediation Directive (2002/92/EC) (“IMD”).
Subject to any revisions to be agreed by the European legal draftsmen, the last stage before finalisation is the formal approval of the text by the European Parliament and the Council. So while further amendments do remain a possibility, these approvals should now be formalities and are expected soon (during the second half of 2015) with IDD likely to apply from the second half of 2017.
The implementation of IDD will not change the regulatory landscape for insurance mediation in the UK in relation to non-investment based insurance (IDD also covers investment based insurance but that is outside the scope of this blog). This is because a number of the regulatory requirements that are now being introduced by the IDD are already in place in the UK (eg the application of the regime to ancillary insurance intermediaries like banks, travel agents and insurers).
What are the highlights for UK general insurance distributors, intermediaries and insurers?
Insurance business in the UK is very broad, covering retail, commercial and reinsurance business with extensive domestic and international facets and so providing a full set of highlights here would be too protracted. So, here is a mix of highlights of the changes being implemented by IDD (each applies to all types of general insurance distribution unless specified):
Acting in the best interests of the customer
- There is a new conduct obligation to act “honestly, fairly and professionally in accordance with the best interests of the customer” (emphasis added). It is not clear how this new obligation will fit with the insurance market. On its face it appears straightforward for an insurance broker acting – in a traditional sense – for their client, the policyholder. But how does this apply to insurers, where the policyholder is their contractual counterparty? How does it apply to a broker when acting as agent of the insurer? Moreover, does the new rule require distributors to act in the best interests of customers separately from acting honestly, fairly and professionally or if (as of course they should) they act honestly, fairly and professionally, is that in itself in accordance with customers’ best interests?
Minimum training requirement
- It appears that IDD will require a minimum of 15 hours per year for continuous training and development for those involved in insurance distribution. But, firms will be allowed to “take into account the nature of the products sold, the type of distributor, the role that they perform and the activities carried out”. On its face, it is not clear whether the 15 hour requirement is a rigid minimum. The UK implementing legislation should clarify this.
Disclosure of remuneration
- While the original IDD draft (or IMD2 as it was then known) sought to introduce mandatory remuneration disclosure, that does not appear in the final text. IDD will require firms to indicate clearly to customers the basis/nature of their remuneration whether by way of fee, commission or any other form of economic benefit. The IDD does, however, expressly permit member state regulators to impose restrictions on specific types of fees, commission and other types of benefits.
- Passporting an insurance mediation license into or out of the UK should become less onerous from a compliance perspective as member states will be required to publish online all requirements applicable to incoming intermediaries.
Aggregators and comparison websites
- While IMD1 did not apply to aggregators and insurance comparison websites expressly, IDD expressly applies to such businesses and they will need to be authorised. For most comparison websites, this is probably already the case in the UK.
Providing prospective policyholder information to insurers
- IDD introduces a carve-out from regulation for the mere provision of data and information about prospective customers (eg. a ‘customer list’) to insurers. At present in the UK, that would be a regulated activity for which the provider of the information would need FCA authorisation if they were doing so by way of business. IDD could potentially reverse that position if the UK legislators adopt the same approach.
Connected Contracts Exemption (breakdown and travel cover)
- The IDD introduces an exemption for various forms of breakdown and assistance insurance like travel and breakdown insurance sold by travel agents and retailers respectively. The UK currently has the ‘connected contracts exclusion’ but the UK exclusion is narrower than the IDD exclusion. We will have to wait and see whether the broader exclusion (which could take travel agents selling travel insurance outside the scope of regulation) will be adopted in the UK. The IDD does, however, impose on an insurer distributing insurance through unregulated ancillary intermediaries (like travel agents within the scope of the exemption) certain minimum information disclosure obligations.
Cross-selling and packaged sales
- The IDD will require firms that sell insurance as part of a package with other goods or services to also offer the same insurance on a stand-alone basis (although certain exemptions will be available (eg. insurance sold with payment accounts)).
- For insurance that is sold as a part of a package with other goods or services (eg value added current accounts), IDD introduces a new requirement to disclose to customers whether the insurance can be bought separately and if so, certain information disclosure requirements will apply such as a description of the insurance as well as evidence of the separate costs and charges of the insurance.
Internal product approval controls
- Insurers (and intermediaries which manufacture insurance products) will be required to maintain an internal product approval process that specifically identifies the target market and the distribution strategy and, on an on-going basis, ensures that the demands and needs of the target market are being monitored and assessed against the product offering and whether the distribution strategy remains effective.