DPB Update Issue 11 - June 2018
An update on ICAEW’s approach to implementing the Insurance Distribution Directive and five key changes DPB licensed firms need to start planning for now.
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Legislative changes that implement the Insurance Distribution Directive (IDD) in the UK come into effect on 1 October 2018. Changes to the DPB (Investment Business) Handbook will apply from that date. We are in the final stages of agreeing these changes with the FCA and plan to publish the amended handbook in the summer.
The IDD aims to ensure harmonisation of insurance regulation across the EU, creating a consistent regulatory framework to raise conduct standards and improve consumer protection. The IDD applies to insurers, insurance intermediaries, price comparison websites/aggregators and ancillary insurance intermediaries. Brexit will not affect UK (or ICAEW) adoption of the IDD.
ICAEW’s approach to implementing the IDD
The full requirements of IDD place significant additional burden on FCA authorised firms including an annual mandatory 15 hours CPD requirement for all those involved in insurance distribution activities. Alongside the other largest Designated Professional Bodies, ICAEW reviewed the activities of its licensed firms and has decided to adopt the ‘lighter touch’ requirements for ancillary insurance intermediaries. Amongst other relaxations, these requirements do not require the additional CPD. This approach minimises the additional burden of regulation and reflects the nature of the insurance distribution activities carried out by our DPB licensed firms.
Part XX allows an activity to be complementary or to arise out of a professional service. Firms need to be aware that the scope for acting as an ancillary insurance intermediary under the IDD is narrower and only permits the distribution of complementary insurance products whose cover complements the good or service. It will enable DPB licensed firms to continue to offer common products such as tax fee protection insurance, but will prevent them from engaging in any regulated activities relating to insurance based investment products (IBIPs) and products relating to large risks from 1 October 2018 (see below).
The updated handbook will require some changes to your standard terms of engagement covering insurance distribution activities. It will also clarify some other requirements including the need to provide information in a ‘durable medium’ (paper or another format that cannot be changed). In general we believe these changes will be administrative in nature and we will explain further in a DPB Update later this summer.In the meantime, DPB licensed firms need to assess the implications and plan for some key changes now.
Five key changes you need to know
- Minimum cover required for insurance distribution activities will increase from 1 October 2018
For any service where you are advising or arranging insurance contracts, you must have an aggregate amount of PII of €1,850,000 and a per-claim amount of €1,250,000 or the equivalent amounts in sterling.
The amounts that apply until 1 October 2018 are €1,680,300 and €1,120,200 respectively.
If your only activity in relation to insurance contracts is to make an introduction to an insurance broker, there’s no need to arrange this additional PII cover.
- In good time before the conclusion of a contract of insurance you need to provide the client with all details of the nature of the remuneration received by you in relation to the contract of insurance.
All details includes the amount of any administration, service fee or commission whether you get this remuneration through the retention of part of the client’s premium, or a separate rebate, commission or any other payment from the insurer or another insurance intermediary.
We recommend that you give this information in your initial correspondence about the cost of the insurance and in renewal documentation.
- For a contract of general insurance (such as fee protection) you must provide a standardised insurance product information document (IPID), on paper or on another durable medium, drawn up by the manufacturer of the contract of general insurance.
An IPID is a short summary of a policy and presents relevant information about the insurance policy in a standardised format. If you would like to find out more, the information which must be included in an IPID is included in the FCA Policy Statement PS 18-1 (starting at page 210 of 399). Licensed firms are not manufacturers of insurance products so you need to request the IPID from the insurance company.
You must provide the IPID in addition to demands and needs information.
- When carrying out insurance distribution activities, you must ensure that your remuneration, incentives or other performance measures do not in any way conflict with the best interest of your clients.
There must be no arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to the licensed firm or its employees to recommend a particular insurance product to a client when the licensed firm could offer a different insurance product which would better meet the client’s needs.
For the purposes of insurance distribution activities only, remuneration is defined widely and includes any commission, fee, charge or other payment, including an economic benefit of any kind or any other financial or non-financial advantage or incentive offered or given in respect of insurance distribution activities.
- You must not advise or arrange contracts for insurance based investment products (IBIP) or products relating to large risks
Licensed firms will be aware that their activities relating to qualifying contracts of insurance (such as pensions and life insurance) are restricted to referrals and then activities where their client is taking the clear advice and guidance of an appropriately regulated financial adviser.
From 1 October 2018 licensed firms will no longer be able to undertake any activities relating to IBIPs. IBIPs include various complex insurance-related products of which the simplest are endowments and with-profits investment products. These are products where the associated risks are difficult for customers (and DPB licensed firms) to understand. IBIPs do not include most pension contracts so these changes should not be significant for the activities of most licensed firms.
This IBIP prohibition covers all regulated activities including dealing, making arrangements for a person to deal, introducing to third parties, assisting in administration and performance, and any sort of advising.
Large risks will be defined in the handbook but include amongst other things risks relating to railway rolling stock and shipping.
If you wish to be involved in these activities you will need to obtain direct FCA authorisation and cease to be DPB licensed.