Third FCA consultation on IDD proposes 'detrimental impact' test for inducements

Out-Law News | 28 Sep 2017 | 4:42 pm | 2 min. read

Advisers recommending insurance-based investment products (IBIPs) must make sure that any inducements will not have a "detrimental impact" on the quality of the relevant service from next year, the Financial Conduct Authority (FCA) has said.

The new test forms part of the FCA's approach to implementing the EU's Insurance Distribution Directive (IDD), which comes into force on 23 February 2018, into UK law. It is set out in a third IDD-related consultation paper, on which the FCA is seeking feedback until 25 November 2017.

The test is slightly different to the inducement rules applicable to any other investment products governed by the EU's recast Markets in Financial Instruments Directive (MiFID II), which comes into force on 3 January 2018. The MiFID II rules state that any inducement must "enhance the quality of the relevant service" to the client.

The FCA said that its intention was to apply a "broadly consistent regulatory regime" for IBIPs and MiFID II investments. However, this was not possible where the inducements test was concerned, given the different approaches taken by the underlying EU legislation.

"[W]here the IDD requirements differ from those in MiFID II or our current rules, we intend to copy out the IDD requirements in addition to the COBS [Conduct of Business Sourcebook] 2.3A requirements for MiFID II," it said in the consultation paper. "We believe this is necessary for the 'detrimental impact' test ... as, while the concepts are broadly aligned, they could be viewed as setting different standards."

The regulator is still seeking feedback on its second IDD consultation paper, which it published in July. The second paper covered matters including changes to the conduct of business requirements for life insurance firms, including those selling IBIPs; conflict of interest requirements, product governance and oversight requirements for all insurance firms; and the introduction of the new Insurance Product Information Document (IPID), which will be provided to general insurance consumers but not to commercial customers under the new regime.

Once in force, the IDD will revise and update the EU's framework for regulating EU insurance brokers, agents and other intermediaries, currently contained in the 2002 Insurance Mediation Directive. EU countries have until 23 February 2018 to transpose the IDD into national legislation. The UK intends to implement the IDD despite its impending exit from the EU. However, the new regime will have less impact for UK firms because it replicates many provisions that are already in force in the UK as a result of its 'gold-plated' approach to IMD implementation.

The FCA intends to maintain the existing rules without change for life insurance business other than IBIPs, according to the latest consultation. It will also retain the existing retail distribution review (RDR) rules on adviser charging, information and product disclosure, as these already go beyond what is required under the IDD. These will also be extended to mandatory occupational pension schemes for the first time.

The regulator intends to fold the IDD's improved consumer protection and suitability rules into its existing rules for insurers and advisers. It will do so by 'copying out' parts of the IDD regulation into COBS and "translating" some of the words and phrases used into glossary terms as part of a new COBS 1.3. The effect of this will be that certain IDD requirements will be applied as regulatory rules to non-IDD firms, something that the FCA said would "ensure appropriate consumer protection and that all firms are subject to consistent requirements".