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Burges Salmon, Bristol
The Insurance Distribution Directive ((EU) 2016/97) (IDD) is designed to improve European Union regulation on the sale of insurance products. The IDD came into force on 22 February 2016 and was originally required to be transposed into Member State law by 23 February 2018. However, implementation was delayed due to concerns that Member States and firms needed more time to prepare and implement the required changes. As such, Member States had until 1 July 2018 to transpose the IDD. The deadline for its application, and the time by which all firms must comply, is now 1 October 2018.
The IDD is designed to improve regulation of the sale of insurance products in the EU and replaces the previous Insurance Mediation Directive (IMD) and, as the IMD, it is a minimum harmonising directive, allowing Member States to go farther than its requirements, should they wish to do so.
The IDD applies to all participants in the sale of insurance products and extends the scope of the IMD which applies only to agents and brokers. The IDD also applies to:
· those selling insurance directly to customers (ie, insurers and reinsurers – so-called ‘direct writers’);
· those selling insurance on an ancillary basis (‘ancillary insurance intermediaries’ or ‘AII’), such as travel agents, unless they fall within a limited exemption; and
· providers of after-sales services (eg, loss adjusters and claim handlers).
Transposition into UK law
HM Treasury has transposed the IDD into British law by way of new regulations under the Financial Services and Markets Act 2000. The Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Order 2018 (SI 2018/546) amends a number of pieces of existing legislation and was made on 30 April 2018.
However, the majority of the IDD provisions will be transposed in the United Kingdom by changes to the Financial Conduct Authority’s (FCA) Handbook of Rules and Guidance. The FCA’s new requirements were finalised on 24 May 2018. The FCA is the UK’s conduct regulator, which regulates all firms selling insurance in the UK. The UK’s prudential regulator, the Prudential Regulatory Authority (PRA), which is responsible for the prudential supervision of insurers, is making only minor or administrative changes to its rulebook and forms.
The FCA’s approach
In implementing the IDD, the FCA has aimed to build on the rules and guidance already in place. The FCA is introducing the minimum IDD standards through so-called ‘intelligent copy-out’; that is, incorporating the text of the IDD direct into the relevant part of its handbook. However, in some places, the FCA’s new rules go beyond the IDD minimum standards:
· the FCA is applying the IDD requirements to a wider range of firms than is strictly required by the IDD. This is with the aim of promoting competition and avoiding arbitrage by putting in place consistent regulatory standards; and
· where current UK regulatory standards go beyond the IDD minimum requirements, these have been retained (eg, the FCA’s current training and competence regime goes beyond the IDD minimum employee competence standards).
In addition, higher standards have been introduced in order to align the UK IDD regulation with the requirements of the Markets in Financial Instruments Directive (‘MiFID II’), which applied from 3 January 2018. MiFID II applies to investment firms, including those producing and distributing investment products. Insurance-based investment products (IBIPs), such as investment bonds and pensions, are within the scope of the IDD and are generally viewed as being in the same market as (and, therefore, substitutable for) certain MiFID II investment products. As such, many of the FCA’s requirements which are derived from MiFID II are now also applied to insurers and insurance intermediaries selling IBIPs and the two regimes will be broadly aligned. Where the FCA has discretion as to the requirements applying to pensions, it has decided not to introduce additional requirements above the IDD minimum standards, given the significant changes to the UK pensions industry in recent times (and further planned regulated changes).
The FCA recognises that there will be cost implications for firms as a result of the new rules going beyond the IDD minimum requirements but believes that the benefits outweigh the costs. The FCA believes that its approach should provide an enhanced regime that meets the IDD’s objectives and will also ensure a level playing field for sellers of insurance and better protections for consumers.
Impact of Brexit
On 23 June 2016, the UK voted to leave the EU and the UK will cease to be part of the EU on 29 March 2019. Presently, the precise legal implications of Brexit, including for UK insurers and insurance intermediaries and those selling insurance in the UK on a cross-border basis, are unclear. Currently, as the UK is still a member of the EU, all rights and obligations of EU membership remain in force and, therefore, the IDD must be implemented as scheduled and its provisions must apply to all those selling insurance in the UK from 1 October 2018.
Like the IMD, the IDD continues to require insurance intermediaries to be registered by an authority in their home state. Once registered, a firm will be able to exercise the right to passport (on a branches or services basis) into other Member States. However, the IDD does not contain any equivalent third-party rights. In the absence of a specific equivalence regime in a particular area or an alternative arrangement, when the UK withdraws from the EU, UK insurers and intermediaries would only be able to gain access to the single market in that area if they obtain local authorisation from the relevant competent authority of the Member State in which they wish to do business, subject to that Member State’s requirements (and vice versa, for those currently passporting into the UK).
The Brexit negotiations will determine what arrangements apply in relation to the IDD, and other EU legislation, including as to the provision of services on a cross-border basis, once the UK has left the EU.
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