DPB Update Issue 10 - November 2017
Welcome to DPB Update Issue 10. This issue covers the implementation of the Insurance Distribution Directive and quality assurance findings – common pitfalls.
In this issue:
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The Insurance Mediation Directive (IMD) was transposed in the UK on 15 January 2005. Our DPB (Investment Business) Handbook applies the aspects of the Directive that are relevant for DPB licensed firms, primarily in Schedule 6 to the Handbook.
A new directive, the Insurance Distribution Directive (IDD), came into force on 23 January 2016. This essentially revises the IMD. The UK is required to comply with the IDD by 23 February 2018. We will update the DPB (Investment Business) Handbook in readiness for 23 February 2018.
This year, the Financial Conduct Authority (FCA) has been consulting on the way it will implement the IDD. On 25 September 2017 the FCA published its near-final Handbook text for FCA authorised firms. These are near-final rules because some of the rules proposed rely on domestic legislation that has not yet been made. It’s likely that their final rules will be published in January 2018.
Under Part XX of the Financial Services and Markets Act 2000, changes to the DPB (Investment Business) Handbook must be approved by the FCA. So knowing how the FCA is going to approach the implementation of the IDD and having sight of those near-final rules are important in preparing the changes to the DPB (Investment Business) Handbook. We are working with CAI and ICAS (co-owners of the DPB (Investment Business) Handbook) to implement the IDD. Our intention is to minimise as far as possible the impact of the implementation of IDD on DPB licensed firms while maintaining appropriate protection for consumers.
For now there’s nothing that DPB licensed firms need to do except to be aware of the timetable for the implementation of the IDD. We will provide further updates as the project progresses, and hope that subject to FCA approval, we will be able to publish the amended DPB (Investment Business) Handbook early in the new year.
The European Commission has proposed a delay to the application date of the Insurance Distribution Directive (IDD) to 1 October 2018. This proposal is currently under consideration by the European Parliament and European Council.
To provide certainty HM Treasury has announced the government will delay transposing the IDD into UK law until the outcome of this proposal has been confirmed. Therefore the changes being made to the DPB (Investment Business) Handbook won’t come into effect until October 2018. We will provide further updates during the year.
Here is a summary of our findings from quality assurance reviews at DPB licensed firms and guidance on where to find more information and support.
1. Referrals and commission
One of the most common Exempt Regulated Activities (ERA) is a regulated referral to a financial adviser. This is when a firm provides the adviser with the client’s contact details and the client wants advice on pensions or other long-term contracts of insurance.
When commissions arise from a regulated activity, firms need to ensure their procedures to disclose the commission include the following:
- Inform the client they have the right to require the firm to give them the commission.
- Obtain written consent from the client for the firm to retain the commission on a case-by-case basis (a clause in the engagement letter is not enough).
- Maintain evidence that the client is aware of the amount and frequency of the commission.
These rules exceed FCA requirements for their authorised firms. This means DPB licensed firms can’t rely on disclosures made by the adviser and the firm needs to have its own procedures in place. Our DPB Helpsheets contain more guidance on introductions to financial advisers.
2. Compliance reviews
An annual compliance review is a requirement for all licensed firms, even if your firm hasn’t carried out any activities under the licence. This review will enable your firm to assess its procedures and review the scope of client services to check it has identified all activities that fall within the scope of the DPB (Investment Business) licence.
Client file reviews are an important part of the annual compliance review. We recommend firms plan these reviews to look at:
- client files where the firm has provided ERAs; and
- a sample of client files to cover client types and work where the firm might have ‘crossed the boundary’ (eg, corporate finance activity, referral to IFAs).
This will enable your firm to check that it hasn’t inadvertently provided ERAs and take appropriate mitigating action where necessary. An investment business compliance review checklist is available in our DPB Helpsheets
3. Disclosure to clients
Required disclosures range from some standard status disclosures that apply to all ERAs to more tailored demands and needs statements if your firm is engaged in insurance mediation activities (for example offering tax fee protection insurance where clients are themselves insured).
The DPB (Investment Business) Handbook and ICAEW engagement letter template provide example wording for the standard status disclosures. Insurers that offer tax fee protection insurance for your clients normally provide all of the standard documentation that the firm needs for demands and needs statements and other client communications. More information is available in the DPB (Investment Business) Handbook