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FCA outlines Insurance Distribution Directive changes for life and investment insurance

Out-Law Legal Update | 21 Aug 2017 | 10:35 am | 5 min. read

LEGAL UPDATE: The Financial Conduct Authority (FCA) has published a second consultation on the Insurance Distribution Directive (IDD), this time focusing on the impact on life and investment insurance firms.

Information and Product Disclosure Requirements - IBIP firms

The IDD requires IBIP firms to provide appropriate information and adequate periodic reports to customers and to keep a record of customer agreements.

The FCA proposes implementing these new requirements alongside their MiFID II counterparts in new chapters of the Handbook that were introduced as part of MiFID II implementation and that contain requirements similar to those introduced by the IDD. Disclosure requirements will apply in relation to all customers purchasing or receiving advice on an IBIP, including professional clients and eligible counterparties. But the FCA is not proposing to prescribe a standardised format for these disclosures. Instead it encourages firms to consider its Smarter Consumer Communications initiative when updating disclosure documents.

Although it says that it does not expect any significant differences in its approach, a third consultation will pick up any additional proposals arising out of its review of the Level 2 draft delegated regulations published by the Commission.

Suitability assessment requirements for advised sales by IBIP firms

For advised sales the IDD requires that the customer is given a 'suitability statement' on a 'durable medium', which must specify the advice given and how it meets the customer's preferences, objectives and other characteristics. The FCA's current rules on suitability are set out in COBS 9 and apply to firms when giving a personal recommendation on all life policies, including IBIPs.

The FCA proposes integrating the IDD suitability requirements for IBIP firms into the new COBS 9A, which contains the equivalent MiFID II requirements, while COBS 9 will continue to apply to other life policies.  It also proposes exercising a derogation available to it under the IDD that IBIP firms advising professional clients do not have to provide a suitability statement, but a demands and needs statement will still be required. The regulator says that this will provide greater flexibility about how to communicate the outcome of an assessment to professional clients.

Appropriateness assessment for non-advised sales and execution-only requirements for IBIP firms

For non-advised sales the IDD requires that the customer’s investment knowledge and experience should be assessed to determine whether the IBIP provided is appropriate for them. The FCA's current rules on appropriateness are set out in COBS 10 however do not currently apply in relation to the sale of life policies, including IBIPs.

The FCA proposes integrating the IDD appropriateness requirements for IBIP firms into the new COBS 10A, which contains the equivalent MiFID II requirements. It also proposes exercising the derogation available to it under the IDD to allow non-complex IBIPs to be sold under the execution-only process. These execution-only requirements will also be integrated into COBS 10A. A range of other IDD requirements will still apply to execution-only sales, including enhanced requirements around demands and needs and the customer’s best interest duty .The FCA considers that these other IDD requirements are sufficient to secure an appropriate degree of consumer protection for the risks of execution only business.

The FCA said that if the Level 2 delegated regulations or Level 3 EIOPA guidelines provide EU member states with discretion on the criteria for assessing product complexity it will consider how this might be used maximise the scope for execution-only sales of IBIPs. It would look at that issue in its third consultation. Associated record-keeping requirements in relation to both suitability and appropriateness assessments will be integrated into part 9 of the Senior Management, Systems and Controls (SYSC) section of its Handbook for intermediaries and into SYSC 3 for insurers.

Inducements requirements for IBIP and life insurance firms

The IDD requires that "firms must ensure that the payment of any fee, commission or non-monetary benefit by any person except the customer or a person acting on behalf of the customer

(a) does not have a detrimental impact on the quality of the service provided and

(b) does not impair compliance with the duty to act honestly fairly and professionally in the best interests of customers."

These requirements will be added to the new COBS 2.3A, a new rule added to the Handbook as part of MiFID II implementation, that will apply to IBIP firms from 3 January 2018.

Existing requirements in COBS 2.3 will continue to apply to other life policies without change.

Existing adviser charging rules in COBS 6, introduced through the Retail Distribution Review, will also continue to apply although the FCA notes that it has consulted on amending these rules from 3 January 2018 to apply more widely than at present. Rather than merely covering personal recommendations, the rules will apply to advice to retail clients more generally, whether or not it amounts to a personal recommendation.

Conduct of Business Sourcebook (COBS) requirements for life insurance firms

These proposals are very similar to those dealt with in the FCA's first consultation and applicable to the Insurance Conduct of Business Sourcebook (ICOBS). COBS 7 contains many of the previous Insurance Mediation Directive (IMD) requirements and the FCA is proposing to move away from this structure.

IDD general principles

The IDD introduces overarching general principles that are like the FCA’s 'principles for business'. Although they are very similar, there are some differences:

  • insurance distributors must act honestly, fairly and professionally in the best interests of their customers. This is the 'customer’s best interests' rule;
  • communications must be fair, clear and not misleading;
  • marketing communications must be clearly identifiable as such;
  • remuneration and performance management practices that would conflict with the 'customer’s best interests' rule are prohibited.

Proposed Implementation: COBS 2.1.1R (customer's best interest rule); COBS 4.2.1R (communications); COBS 4.3.1R (marketing communications); SYSC 19F (remuneration).

Remuneration disclosure

The FCA proposes introducing new rules in COBS to cover disclosure requirements from intermediaries about the ‘nature and basis’ of remuneration they receive and by insurers about the ‘nature’ of remuneration paid to their employees. It refers to detailed analysis of this aspect of the IDD that was included in its first consultation paper.

Proposed Implementation: no rule specified.

Information Requirements

The IDD requires that more information be provided to the customer by a greater number of firms and the FCA will be amending its rules to reflect this. In particular, the IDD requires provision of information by paper, website or other ‘durable medium’.

Proposed Implementation: new rules will replace rules in 7.2.6R

Pre-Contract Disclosure Requirements

Firms will be required to make pre-contract disclosures concerning the firm’s identity, scope of service, complaints process and include new rules to cover the obligations on insurers that distribute products directly to customers.

Proposed Implementation: rules in 7.2.1R will be amended and moved to 6.1.ZA

Advised and non-advised sales

Firms will be required to make an assessment of demands and needs based on customer information prior to relying on generic statements and should only present policy options that meet those demands and needs. For advised sales, the FCA is proposing a new requirement for firms which provide a personal recommendation to provide a personalised explanation why the proposed product best meets the customer’s insurance demands and needs. Where advice is given on the basis of a fair and personal analysis of the market, the firm must base this on a sufficiently large number of products to enable it to make a personal recommendation.

Proposed implementation: New rules in COBS 7.3 for non-advised sales; COBS 9A for advised sale of IBIPs; COBS 9 for advised sale of other life policies, and  COBS 6.1ZA in relation to fair and personal analysis of the market.


In packages where insurance is the primary product, information must be given on whether the different components of the package can be bought separately. In packages where insurance is ancillary to other goods or service, the customer must be able to buy the primary product or service without the insurance.

Proposed implementation: New rule in COBS 6.1ZA

A previously unplanned third implementation consultation will deal with three further matters:

  • the FCA's approach to the Level 2 draft delegated regulations recently published by the European Commission;
  • the HM Treasury consultation on implementation; and
  • issues relating to alignment of the IDD with the revised Markets in Financial Instruments Directive (MiFID II) standards.

The third consultation will be published in late September before the second consultation comes to a close on 20 October. A Policy Statement is expected in December.