DPB Update Issue 12 - August 2018
The revised DPB (Investment Business) Handbook that applies from 1 October 2018 has been approved by the FCA and is now available on the ICAEW website. This update seeks to identify the main implications of changes to the handbook for all DPB licensed firms.
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The handbook is being changed to implement the Insurance Distribution Directive (IDD) and enable DPB licensed firms to continue to offer common products such as tax fee protection insurance.
We have chosen to implement the IDD via the ancillary insurance intermediary (AII) route. Using the AII route meant that the changes needed were less extensive and the impact on DPB licensed firms less onerous. An AII may only distribute complementary insurance products whose cover complements the good or service being provided.
The majority of the changes to the handbook only apply to firms which provide insurance distribution activities. However, some of the changes needed to implement the IDD will have implications for all DPB licensed firms.
This update should not be used as a substitute for those involved in governance, compliance and provision of exempt regulated activities reading and familiarising themselves with the handbook itself.
Application for a licence and ongoing duties of licensed firms
There are some minor changes to applications for a licence. These include a new declaration that will need to be provided by a firm that shareholders with more than 10% holding or other persons connected with the firm, will not prevent the exercise of supervisory powers by ICAEW (2.04c).
A change of greater significance is that licensed firms must now inform ICAEW within 10 business days of any change in shareholders or other individuals or entities with close links to the firm (2.07 diii) as you would with a change to the firm’s principals for example. Close links is a defined term in Part 9 of the handbook.
Firms would previously have notified ICAEW of connections with other individuals and entities through the annual return, but this needs to be timelier in future. Registered audit firms will already be familiar with the requirement to notify changes in shareholders.
Additional guidance on regulated activities
Schedule 4 to Part 3 of the handbook provides guidance on professional services that are not regulated activities. We have added some additional explanation to the sections about provision of information and claims handling to help firms identify when such activities are unregulated, and where the service becomes an exempt regulated activity.
Conduct of business including how to deal with complaints
An addition to regulation 4.02 clarifies that all communication with clients must be clear, fair and not misleading.
More significant additions are to the requirements in 4.08 and 4.09 in the event that a licensed firm receives a complaint relating to exempt regulated activities.
The handbook now requires that complaints are acknowledged and complainants receive written replies. Where the complainant is a consumer, you must signpost the client to an appropriate certified alternative dispute resolution provider, and tell the client whether or not you intend to use that provider. If you and the client cannot reach a mutually acceptable solution to the problem, you should remind the client of their right to refer the matter to ICAEW.
For further information the handbook refers you to other ICAEW guidance and The Alternative Dispute Resolution for Consumer Disputes Regulations 2015.
We identified five key changes in DPB Update 11 that will potentially have the greatest impact on DPB licensed firms that distribute insurance. These are:
- an increase in minimum PII cover for insurance distribution activities;
- clients to be provided with all details of remuneration before the conclusion of a contract of insurance;
- a standardised insurance product information document (IPID) to be provided to clients;
- remuneration, incentives or other performance measures must not conflict with the best interests of clients; and
- licensed firms must not advise or arrange contracts for insurance based investment products (IBIP) or products relating to large risks.
For more information on these key changes, please refer to DPB Update 11.
An IBIP is an insurance product that offers a maturity or surrender value that is exposed to market fluctuations. Examples include endowment policies and insurance bonds. The IBIP definition in the IDD excludes most term life assurance, general insurance and pension products.
As a result, firms can continue to distribute term life assurance and general insurance products (such as tax fee protection, and key man insurance where there is no surrender value), providing these are products whose cover complements the good or service being provided.
The restrictions on firms from advising and arranging investment in individual personal pension products remain consistent with previous versions of the Handbook.
If you are uncertain whether a product is an IBIP or not, you should ask the insurer or promoter of the product for clarification. Firms that wish to be involved in distribution of insurance bonds or other IBIPs need to apply to the FCA for regulation.
Ongoing duties of licensed firms
In addition to the new requirement to notify ICAEW of changes in shareholders or other individuals or entities with close links to the firm, you must also ensure that anyone involved in insurance distribution activities is and continues to be a fit and proper person.
Many licensed firms will already obtain annual declarations including fit and proper forms from all principals and staff, and firms should already have suitable procedures in this area to comply with the Money Laundering Regulations 2017.
Conduct of business including method of communication
- In addition to the existing status disclosures required by 4.03 of the handbook, you will also need to inform clients that you are an ancillary insurance intermediary (4.03 g).
- Regulation 4.05 (competence) now includes an explicit reference to all principals and staff involved in insurance distribution needing to comply with the handbook. This is not a substantive change as we would already expect firms to be competent but we recommend that licensed firms ensure that a current copy of the handbook is readily available to all involved in insurance distribution (and other exempt regulated activities).
- Regulation 4.26 clarifies that if your firm uses the services of insurance intermediaries, these must be appropriately regulated.
- The handbook now includes detailed guidance on the use of paper or another durable medium when conducting insurance distribution activities. Durable medium is defined in Part 9 definitions and in practice will include emails and pdf documents
- In essence, paper communication is the default. However, information can be provided on a medium other than paper or on a website if the client has been given a clear choice and has chosen not to receive the information on paper.
- Firms that conduct most of their business via client portals and email should review these requirements in the introduction to Part 4 of the handbook carefully. The FCA has also issued detailed guidance on what constitutes a durable medium which includes some more innovative options such as the use of mobile apps.
Insurance packaged with other services
Regulation 4.27 in the handbook deals with ‘cross selling’. This relates to insurance products that you may distribute as part of a package with unregulated professional services. Examples might be tax fee protection insurance with corporate or personal tax compliance services, or key man / other business insurance with a full business accounting and advisory service.
If you offer this sort of package, there are detailed requirements to fully explain the different components and costs, and you must allow clients to purchase the service without the insurance product(s).
Passporting, PII and other changes
The last category of more significant changes relate to cross-border services with the EU. We have updated Schedule 8 to clarify the definition of a ‘branch’ and explain circumstances where firms that wish to operate outside the UK will need to notify the FCA.
Similarly, if firms undertake insurance distribution activity outside the UK, the minimum PII cover (explained in DPB Update 11) must include cover for claims from other EU member states. As explained in 2.07 of the handbook, PII that complies with ICAEW minimum policy wording will satisfy this requirement.
Most of the other changes to the handbook are changes in terminology.
Firms should ensure that the wording of demands and needs statements sent to clients reflect the template provided in Schedule 2 to Part 4. This includes reference to a personalised explanation of why the particular contract of insurance best meets the client’s demands and needs.
We have updated the suggested wording for engagement letters (Schedule 1 to Part 4).
If you have any questions about the impact of the revised Handbook or the Insurance Distribution Directive on your firm, please contact Technical Advisory Services on 01908 248250.