The Insurance Distribution Directive (IDD) will repeal the Insurance Mediation Directive (IMD) and must be transposed by 23 February 2018. With less than a year to go until the implementation deadline, the government has issued a consultation paper on the implementation of the IDD into UK domestic law.
How will the IDD be implemented in the UK?
The IMD came into force on 14 January 2005 and was transposed into UK law by virtue of the FSA's (as it then was) rules and amendments to the Financial Services and Markets Act 2000 (FSMA), the FSMA (Regulated Activities) Order 2001 (RAO). The government envisages that the transposition of the IDD will take effect in a similar way.
As with the IMD, the IDD is a minimum harmonising directive. This means the directive sets the minimum standards required and member states are then free to add further requirements for their respective territory. In the consultation paper the government seeks views on the minimum standards and the additional requirements it is proposing to implement the IDD.
What about Brexit?
The consultation paper remarks that during the period of Brexit negotiations and while the UK remains a full member of the EU, the government will continue to apply EU legislation. The government intends to transpose and implement the IDD to schedule, and by 23 February 2018.
Connected contracts exclusion
For products sold as part of a package or add-ons by firms whose main business is other than the distribution of insurance products, Article 72B of the RAO currently provides an exclusion known as the "connected contracts" exclusion. Where a "provider" (that is, a person who supplies non-motor goods or travel-related services in the course of a business which does not otherwise consist of regulated activities) carries out insurance mediation activities in relation to a contract which is complementary to the provider's service and meets all of a number of set criteria, then the provider does not require authorisation under FSMA to carry out these activities. Common examples are retailers who sell insurance cover on white goods that they supply. Because of the limitations of the exclusion (in particular that it does not apply if the contract covers liability risks), it is safe to rely on it only in narrow circumstances.
The changes to the connected contracts exclusion under the IDD are as follows:
- allowing long-term insurance to be sold under the exclusion
- removing the restriction that meant that the contract could not cover liability risks
- removing the condition that the insurance products must require no more than knowledge of the policy coverage in order to be sold
- the inclusion of non-services products (eg cancellation cover for music festival or train tickets)
- the removal of the requirement for the duration of the insurance contract to be 5 years or less
- increasing the permitted annual premium so it must not exceed €600, or if the contract is equal to, or less than three months in length, €200.
The government seeks comments on whether it should incorporate all of the above changes, and in particular questions whether including life cover within the exclusion is appropriate for the UK market. The government's preference is to exclude life insurance and liability risk products from the connected contracts exclusion as it did when the IMD was implemented. The basis for the continued regulation of such products is that the government considers these products to be complex and could lead to significant consumer detriment if mis-sold.
The IDD does not require the regulation of travel insurance products where they are sold as part of a package eg alongside holiday arrangements. However, the government's intention is to continue to regulate beyond the requirements of the IDD with respect to travel insurance products sold as add-ons.
Extended warranties for motor vehicles
No changes are proposed in respect of motor warranties – all motor warranty products will continue to be regulated.
Insurance distribution definition
The IDD will cover the sale of insurance products directly by an insurer, whereas the IMD applied only to intermediaries. In the UK, the government does not anticipate that this will have a significant impact as it chose to apply the IMD to insurers as well as insurance intermediaries. Additionally, the IDD includes in its definition of 'insurance distribution' the activities of insurance companies and price comparison websites, but such activities are already subject to regulation in the UK.
Widening of the introducer exemption?
One way in which the IDD provides greater flexibility for firms is in respect of providing information. The mere provision of data and information on potential policyholders to insurers and insurance intermediaries (and vice-versa) is removed from the IDD's definition of regulated insurance distribution activities (provided the firm does not take further steps to assist in the conclusion of the contract). The government does not consider that the deregulation of such firms whose activities are limited in this way would cause detriment to consumers. However, the government is not inclined to legislate for a broader exemption for introducers. It believes that some firms acting as introducers do more than providing information and broadening the exemption could result in more firms becoming involved in the conclusion of the contract without regulation.
When an EEA firm operates in the UK on a freedom of services basis it is the responsibility of the EEA firm's home state regulator to ensure the firm is compliant with the IDD. Alternatively, if an EEA firm operates on a freedom of establishment basis the IDD permits the responsibility for compliance to be split between the home state regulator and the PRA or the FCA. In both instances the IDD permits the host state to intervene and the government proposes amendments to FSMA to enable the PRA or FCA as the appropriate host state regulator to intervene in the event of a breach in specified circumstances.
FCA can act as home state regulator
Article 7 of the IDD permits the appropriate UK regulator to enter into an agreement with that firm's home state regulator to act as if it were the home state regulator where the insurance distributor's primary place of business is in the UK. The government is seeking to effect this by way of amendments to FSMA and for the appropriate regulator to publish any article 7 agreement it enters into. However, given the novelty of the provision it is unclear how often it will be used.
Regulatory Impact Assessment
As well as the consultation paper and the Annex B draft statutory instruments, the government seeks views on the costs benefits analysis to businesses, particularly small firms, and consumers of the proposed amendments to legislation. This is set out at Annex C.
The FCA will be consulting separately on its IDD proposals and the government plans to draft legislation implementing IDD later this year following a consideration of responses to this consultation. The Treasury asks for comments by 22 May 2017.