Insurance Distribution Directive – What you need to know

Fincancial Conduct Authority

The Financial Conduct Authority (FCA) already holds a register of firms carrying out insurance distribution activities, so if you are already registered, then there is no further registration action required.

The SRA Handbook is due to be replaced in its entirety in 2019. However, on 1 October, 2018, the twentieth version of the SRA Handbook was published containing a number of changes to the Insurance Distribution Directive (IDD). This article will cover what you need to know about the key changes.

What changes came into force on October 1, 2018?

The aim of the Insurance Distribution Directive is to impose new requirements for firms carrying on insurance distribution activities. This replaced the Insurance Mediation Directive and aims to strengthen client protection with regards to:

  1. Professional and organisational requirements
  2. Conduct of business requirements
  3. Information requirements
  4. Demands and needs of clients

Why have the SRA rules been updated?

The IDD seeks to reinforce and enhance the knowledge of those involved in insurance and to ensure that the correct suitable checks are being made in relation to the customer as well as internally. The aim is to ensure that the most appropriate insurance service is being provided to the client.

The SRA is a designated professional body (DPB) for financial services and was therefore required to update their rules to be IDD compliant.

Who is affected by these rule changes?

The rules apply to all UK and EU businesses. Therefore, it applies to law firms that carry out insurance distribution activities under the scope of the SRA regulations. Law firms involved in personal injury, conveyancing and probate will most likely be carrying on insurance distribution activities. For example, they may arrange for clients’ after the event insurance in a personal injury matter or insurance for a defective title in a conveyancing matter. There may also be other insurance products that firms advise on or arrange for their clients.

Which SRA Rules have been updated?

The SRA has updated the SRA Financial Services (Scope) Rules 2001 and the SRA Financial Services (Conduct of Business) Rules 2001 and the SRA Handbook Glossary 2012, all of which can be found on the SRA website.

How do you register as a firm dealing with insurance at the Financial Conduct Authority?

The Financial Conduct Authority (FCA) already holds a register of firms carrying out insurance distribution activities, so if you are already registered, then there is no further registration action required. If you are already registered and have a change in information which you provided, then you will be required to notify the SRA and complete a new FA8 Form.

If you are about to start insurance distribution activities, then you will need to notify the SRA using an FA8 form. The SRA will then transfer the information to the FCA on your behalf.

Are you required to appoint an insurance distribution officer?

All firms who are registered or require registration with the FCA must appoint an insurance distribution officer.

Are there any other organisational requirements?

You must ensure that all relevant people within the management structure of the firm who are involved in insurance distribution activities, and all staff directly involved in insurance distribution activities hold the appropriate knowledge and ability to perform their duties.

What are you required to tell your clients?

  • Before signing a contract with a client, you must disclose that you are regulated by the SRA for the work and scope of your services to the client.
  • You must give your clients information about the remuneration you receive for arranging the insurance together with any additional fees which the client may be required to pay.
  • You must disclose to your clients the nature and basis of the remuneration which you receive for the insurance contract.
  • If your client paid a fee, then you must disclose the exact fee amount, if the exact amount is not known, then you must show the method which can be used to calculate the fee in the future.
  • You should try to give your clients the most useful information possible at the most useful time possible, so they can make an informed decision.
  • You need to use a “durable medium” to share information with your clients. The SRA Handbook Glossary defines a durable medium as means any instrument which:
    • Enables the recipient to store information personally addressed to them in a way accessible for future reference and for a period of time adequate for the purposes of the information
    • Allows the unchanged reproduction of the information stored
  • You must give the client information about the status of the firm including the fact that you are an insurance intermediary and not an insurer (clearly stipulating that you cannot manufacture insurance products).
  • You must inform the client if you have a personal recommendation regarding the insurance products which they are being offered.
  • You must explain to the client whether you are acting on behalf of the client, the insurer or both the client and the insurer. If you act for both client and insurer, then you are required to clearly explain to the client the circumstances where you can act for each party.
  • You must inform your client if you have 10% or more of the voting rights in an insurer. For example, if you hold 10% or more of the shares in the insurance company you recommend.
  • If you have a specific contract with one insurer or a few insurers, then you will need to tell the client the names of these insurers upfront. If you work with many different insurers, then you are required to inform the client of all the insurers you work with. This is to allow the client to make an informed choice about the insurers that they would like to use.

How are you required to transfer information to the client?

All information which is provided to the client must be in a manner which can be clearly understood by the client. This may include written information, an oral explanation or answering questions as may be necessary according to the client’s needs.

What is the new conduct of business requirement?

The new business requirement states that firms must act in an honest, fair and professional manner, and the client’s best interests must be at the forefront of all insurance decisions. Furthermore, firms must maintain a record of a documentary evidence which shows that the firm is meeting this requirement.

Failure to act honestly, fairly and professionally while considering the client’s best interests would be a breach of the SRA Code of Conduct.

Marketing materials should also be fair, clear and not misleading.

What changes have been made regarding the demands and needs of the client?

There is a new explicit requirement that all proposed contracts must meet the clients’ demands and needs. Therefore, if a firm advises on a specific product, they must provide the client with a personalised recommendation explaining why the specific product which has been recommended specifically meets the clients’ needs.

The insurer has the responsibility to draw up an Insurance Policy Information Document (IPID) which will set out the key information which the client can rely on to make an informed decision about the specific insurance product. As a firm, you will need to have a full understanding of the IPID as you may be asked by the client to explain the contents of the document. It is important to note, however, that it is unlikely that insurers will be able to alter the appearance or format of the IPID.

Where can I get more training on this and other changes?

VinciWorks will be releasing a new course on the SRA changes which are taking place over the next year, including modules on the Insurance Distribution Directive, Pricing Transparency and the New SRA Handbook. You can find more information about this course or any other compliance courses offered by VinciWorks by browsing our compliance training catalogue.