Consultation outcome

Transposition of the Insurance Distribution Directive

Updated 30 May 2018

1. Introduction

The European Union (EU) introduced certain minimum requirements for the regulation of insurance mediation activities when the Insurance Mediation Directive (2002/92/EC) (IMD) was adopted in 2002. IMD sought to remove the barriers to a single market for insurance and reinsurance intermediation. IMD principally covered the activities of insurance agents and brokers selling insurance and reinsurance products, but did not cover direct sales by insurers and reinsurers. IMD was a minimum harmonising directive setting a minimum standard, but giving member states the flexibility to introduce additional provisions in order to protect consumers.

IMD came into force on 14 January 2005 with the UK government having transposed the directive into law using the Financial Services and Markets Act 2000 (FSMA) architecture. Amendments were made to the FSMA (Regulated Activities) Order 2001 (RAO) to ensure that the relevant activities were captured in domestic law. Much of the transposition of IMD was achieved through Financial Services Authority (FSA) rules (the FSA was replaced by the Financial Conduct Authority (FCA) on 1 April 2013).

In transposing IMD the UK Government gave responsibility to the FSA for regulating various activities relating to the sale and administration of insurance and reinsurance (from this point on referred to simply as ‘insurance’) products. The government took the decision that these regulations should be applied not just to intermediaries, as required by IMD, but insurers and reinsurers (from this point on simply ‘insurers’) directly selling insurance products. Thus the government established a level playing field for the regulation of insurance product sales.

Last year the EU updated the regulatory framework for the sale of insurance by introducing the Insurance Distribution Directive (2016/97/EU) (IDD) which will repeal and replace IMD. On 23 June 2016, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation. The outcome of these negotiations will determine what arrangements apply in relation to EU legislation in future once the UK has left the EU. In line with this policy the government intends to transpose and implement IDD to schedule, and by 23 February 2018.

IDD seeks to further harmonise how insurance distribution activities are regulated across the single market to improve consumer protection standards and promote a single market for insurance sales. A significant change from IMD, is that the provisions in IDD will cover the sale of insurance products directly by an insurer. It is estimated that as a consequence IDD will cover 98% of the market compared to the 48% covered by IMD. As mentioned above, in the implementation of IMD the UK chose to apply the conduct regulations to insurers as well as insurance intermediaries and so this change will not have a significant impact domestically.

As with IMD, IDD is a minimum harmonising directive giving members states the ability to introduce additional provisions, or to bring additional activities into scope of regulation as appropriate for domestic markets. The UK has one of the most sophisticated and competitive insurance markets in the EU. According to data compiled by the Association of British Insurers (ABI), the UK insurance and long term savings industry had a premium income of c.£276 billion in 2014, and contributed c.£29 billion to UK GDP in 2012. In implementing IDD, the UK government needs to ensure that regulation is appropriate for this large and diverse market.

IDD will be transposed in the UK primarily through the FSMA architecture in the same way as the transposition of IMD. This will involve a combination of legislation and FCA rules. In this consultation the government is inviting respondents to comment on its proposals for amending legislation to give effect to the implementation of IDD. The government also invites comment on the draft statutory instruments set out in an annex to this consultation. The government’s intention is to make this draft legislation in the later stages of this year, following consideration of responses to this consultation and any amendments it consequently thinks appropriate.

Amongst the changes introduced by IDD with a bearing on the UK, are the removal of requirements to regulate certain activities which were required under IMD. These include changes to exemptions from regulation for market participants whose principal business is not selling insurance products, but who sell insurance products on an ancillary basis as part of package. Additionally, IDD removes the requirement in IMD to regulate those carrying out activities which consist of the mere provision of data or information on insurance products or potential policyholders. The government has considered these changes in the context of the UK insurance sector and makes proposals for appropriate changes to legislation in this consultation document.

Whilst amendments to the RAO made by the government will change which activities are subject to regulation, the FCA is responsible for authorising and supervising firms carrying out those activities. As such, the FCA will be responsible for implementing the majority of IDD through its rules, and will be consulting separately on its proposals alongside this government consultation.

1.1 How to respond

Responses are requested by 22 May 2017. The government cannot guarantee that responses received after this date will be considered.

The government invites feedback on the draft statutory instruments in Annex B to this consultation, in addition to the specific questions raised in this consultation document.

Responses can be sent by email to insurancedistributiondirective@hmtreasury.gsi.gov.uk. Alternatively, they can be posted to:

Insurance Distribution Directive Consultation
Insurance, Pensions and Regulators
Financial Services Group
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding, please state whether you are doing so as an individual or representing the views of an organisation. If you are responding on behalf of an organisation, please make clear who the organisation represents and, where applicable, how the views of members were assembled.

1.2 Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 and the Environmental Information Regulations 2004.

If you would like the information that you provide to be treated as confidential, please mark this clearly in your response. However, please be aware that under the FOIA, there is a Statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidence.

In view of this, it would be helpful if you could explain why you regard the information you provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. In the case of electronic responses, general confidentiality disclaimers that often appear at the bottom of emails will be disregarded unless an explicit request for confidentiality is made in the body of the response.

2. Which insurance contracts will be in scope of regulation?

The Insurance Distribution Directive (IDD) requires the regulation of insurance distribution activities in relation to most contracts of insurance. However, IDD provides for limited exemptions in relation to products sold as part of a package, or as an ‘add-on’, by firms whose principal business is other than the distribution of insurance products. This mirrors the overall approach in IMD, but with some difference in the specifics of these exemptions. This chapter discusses these changes in the context of the UK insurance sector.

This chapter also seeks views on those add-on products which the government previously decided to bring into regulation which were not required by IMD, namely travel insurance and extended warranties for motor vehicles. Changes to exemptions under IDD

IDD exempts from regulation firms who sell insurance as an add-on product to their principal good or service, provided the premium does not exceed a certain amount and the risks covered by the product are limited. The existing exemption for add-on products is given effect by Article 72B of the RAO, and is known as the ‘connected contracts’ exemption.

In order for their distribution to qualify for an exemption from regulation under IDD, the risks that can be covered by add-on products are limited to

• the risk of breakdown, loss of, or damage to, the good or the non-use of the service supplied by that provider; or
• damage to, or loss of, baggage and other risks linked to travel booked with that provider

IMD stated that life insurance products and liability risk cover could not qualify for this exemption, and the government intends to continue to exclude such products from the connected contracts exemption. This is because these products are complex and if mis-sold could lead to significant consumer detriment. As such the government believes their distribution should continue to be regulated.

Q1. Do you agree with continuing to regulate life and liability products sold as an add-on to a non-insurance product? If not, which such products do you believe should not be regulated?

The inclusion of non-use of services products is an extension on this exemption relative to IMD, and the government has considered if this is appropriate for the UK market. Such products might include cancellation cover for tickets (e.g. for a music festival, theatre performance or train travel). The government believes that these products are usually simple, low cost and often provided by firms who are out of scope of financial services regulation. As such the government believes it is appropriate that these products are exempt from regulation.

Q2. Do you agree to extend the existing exemption for insurance products sold as an add-on to cover ‘non-use of services’ products? If not, do you have evidence of consumer detriment which would warrant their regulation?

IDD removes a requirement under IMD that to qualify for this exemption the insurance products must require no more than knowledge of the policy coverage in order to be sold. By removing this requirement IDD potentially brings more complex products into the scope of the exemption. The government believes that, with the exception of travel insurance products which are dealt with below, products sold in relation to this exemption are inherently simple. Therefore in practice this change is unlikely to have much impact and the government intends to remove this caveat from legislation.

Q3. Are there complex insurance products provided as an add-on to a good or service (except those in relation to travel) that should be brought into scope of regulation? What potential is there for consumer detriment in relation to these products?

IMD limited the add-on products qualifying for this exemption to those providing cover for 5 years or less. IDD removes this caveat. The government has not identified risks unique to add-on products with a term of more than 5 years and so intends to extend the exemption to cover such products.

Q4. Do you agree with removing the caveat that products must have a term of less than 5 years to qualify for the connected contracts exemption? If not, which such products introduce a significant risk of consumer detriment?

Under IMD to qualify for the connected contracts exemption the annual premium of the products sold must not exceed €500. This condition is amended by IMD so that the annual premium must not exceed €600, or if the contract is equal to, or less than, three months in length €200. Making this amendment in legislation would be marginally deregulatory and the government believes it is unlikely to lead to consumer detriment.

Q5. Do you agree with increasing the threshold for premiums below which products are eligible for the connected contracts exemption?

2.1 Travel insurance

IDD requires the regulation of travel insurance as a standalone product, but does not require regulation where these products are sold as part of a package alongside a holiday or similar travel arrangements. This replicates the approach taken by the IMD. However, in the UK in the majority of cases these products are regulated. The limited cases where travel insurance provided as an add-on qualifies for the connected contracts exemption are set out in article 72B(1)(d)(ii)(aa) and (bb) of the RAO.

The UK adopted this position to ensure a level playing field between insurers/insurance intermediaries who sell travel insurance as standalone products and those selling insurance as part of a travel package. Additionally, the government were concerned by evidence of mis-selling and complaints in relation to travel insurance products sold as part of a package. The government has not seen evidence that these products should be de-regulated and intends to continue to regulate beyond the requirements of IDD with respect to travel insurance products sold as an add-on.

Q6. Do you agree insurance products sold as an add-on to travel products/services should continue to be regulated?

2.2 Extended warranties for motor vehicles

Extended warranties which are contracts of insurance and sold as an add-on to a product are outside the scope of IDD provided the cost is less than €600 per year, or less than €200 if the warranty cover period is three months or less.

When the UK government transposed IMD, it excluded motor warranties from the connected contracts exemption so that all motor warranty products were subject to regulation regardless of their cost. The government took this position to avoid the market distortions that might arise if some warranties were regulated and others were not. The government does not propose to change this position.

Q7. Do you agree that all motor warranties which are contracts of insurance should remain subject to regulation by the FCA?

3. Which activities will be regulated

In the implementation of IMD the government gave the FSA (now the FCA) the responsibility for regulating the following activities:

• introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance
• concluding contracts of insurance
• assisting in the administration and performance of such contracts, in particular in the event of a claim

However, regulation did not extend to claims handling on behalf of insurance companies, expert appraisal and loss adjusting. These activities remain outside the scope of IDD, and the government does not intend to bring them into the scope of regulation. Insurers are FCA regulated, and therefore the systems and controls relating to insurers’ claims handling processes, whether in-house or outsourced, are already subject to regulation.

IDD captures the same activities, with the exception that there is no longer a requirement to regulate firms whose activities are limited to the mere provision of information. In defining ‘insurance distribution’ activities, IDD specifically refers to the activities of insurance companies and price comparison websites. These activities are already subject to FCA regulation in the UK.

3.1 Firms providing information

IMD included the act of ‘introducing’ in its definition of insurance distribution activities to be regulated. This definition did not include providing information on an incidental basis in the context of the performance of another professional non-insurance related activity. However, it did include providing information in other circumstances (i.e. when not incidental to another activity), for example providing information about potential customers to authorised firms, or providing information on insurance products/insurance distributors to potential customers. In the UK, firms whose insurance distribution activities are limited to the provision of information are largely introducer appointed representatives (IARs) ^{[footnote 1]} under FCA rules.

The FCA does not directly regulate these IARs which are instead regulated through their principal insurer/broker. For example, a pet insurer that remunerates a vet for providing product leaflets to its customers would need to register the vet as an introducer. If a firm operating as an IAR were to take any further steps in bringing about an insurance contract then they would be acting beyond their appointment and conducting unauthorised business. The alternative to IAR status is appointed representative (AR) status. However, the time, effort, and cost associated with being an AR rather than an IAR makes this an unattractive option for the vast majority of firms whose activities are limited to the mere provision of information.

IDD removes from its definition of regulated insurance distribution activities the mere provision of data and information on potential policyholders to insurers or insurance intermediaries (and vice-versa) - provided no further steps are taken to assist in the conclusion of an insurance contract. This gives the government greater flexibility over the regulation of such firms than allowed for under IMD.

Where a firm’s activities are limited to the mere provision of information the risk of consumer detriment is limited. This is because their role in bringing about an insurance contract is minimal, and the majority of any sale is conducted by an authorised firm. Consequently, the government does not believe that deregulating firms whose activities are limited to providing information would give rise to consumer detriment. In any case, the FCA would continue to have oversight through their supervision of the authorised firm to whom the introduction was made.

Q8. Do you agree that firms who merely provide information in relation to insurance products or potential policyholders should no longer be regulated? If not, what risks of consumer detriment arise from these activities?

In order to give effect to removing those firms who merely provide information from regulation, the government has considered whether it is appropriate to make a broader exemption for ‘introducers’ available to the insurance sector. However, the government is concerned that this could allow firms to become more involved in the conclusion of an insurance contract without regulation, perhaps by attempting to influence customers into purchasing. For example, this could cover cases where firms have cold-called customers to persuade them into purchasing extended warranties on electrical goods.

The government is also concerned about the potentially distorting effect a blanket removal of all introducing activities from regulation could have on the business structures of insurance distributors. Such an approach would likely lead to those firms able to restructure to use the exemption having a competitive advantage over other firms.

Overall, whilst the government has not seen evidence of consumer detriment where the only activity is providing information, it believes there is sufficient evidence that some firms acting as introducers do more than this, e.g. actively seeking to persuade customers. The government believe that such firms should be regulated and is minded not to legislate for a broad exemption for introducers. Instead the government intends to amend the RAO so that arrangements which involve only the provision of information are out of scope of regulation. This language replicates that used in IDD.

Q9. Do you agree that where firms do more than just provide information in order to conclude an insurance contract, e.g. attempting to persuade a customer, these activities should remain in scope of regulation?

3.2 Advisors

IDD introduces a definition of advice that is absent from IMD but is consistent with the definition in the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). The definition of regulated financial advice in the UK captures a wider range of activities than the minimum standard required by MiFID.

The Financial Advice Market Review recommended that the definition of regulated financial advice be amended to bring it in line with the MiFID definition. A government consultation on this proposal recently concluded, and the government is currently reviewing the responses and will set out its next steps shortly. This definition shall not be revisited in this consultation document on the transposition of IDD.

4. How will firms be regulated?

Firms with their head offices in the UK carrying out regulated insurance distribution activities in the UK will continue to be regulated by the FCA with respect to the conduct requirements of IDD.

FSMA will be amended to give effect to the following IDD requirements on the appropriate UK regulator:

• to determine applications for authorisation to carry out insurance distribution activities within 3 months rather than the current 6 months
• to publish the details of any sanctions or other measures it has taken
• to inform the European Insurance and Occupational Pensions Authority (EIOPA) of any supervisory action (sanctions or other measures) it has taken, and any appeal against those actions

Q10. Do you have any comments on the draft statutory instrument in Annex B which set out the requirements of the appropriate UK regulator with respect to the determination of applications and in the event of it taking supervisory action?

For firms operating cross-border, whether EEA firms engaging in insurance distribution activities in the UK; or UK firms engaging in insurance distribution activities elsewhere in the EEA; IDD simplifies the procedure for cross-border entry and makes changes to the passporting notification processes.

4.1 Responsibilities with respect to UK firms operating elsewhere in the EEA

IDD makes minor changes to the process by which UK firms can exercise their right to establish a branch or provide services elsewhere in the EEA. Amendments to FSMA are proposed to set out these processes. IDD also sets out the process for a UK firm intending to change the details of its branch or the services it is carrying out in the EEA, e.g. giving the appropriate UK regulator notice of the intended change. Amendments to FSMA will give effect to these minor changes.

Q11. Do you have any comments on the draft statutory instrument in Annex B setting out amendments, required by IDD, to the processes for UK firms intending to exercise passporting rights in the EEA?

4.2 Responsibilities of the FCA as a ‘Host State’ regulator of EEA firms

The responsibility for ensuring that EEA firms operating in the UK under the freedom to provide services are compliant with the requirements of IDD principally lies with the EEA firm’s home state regulator. IDD sets out the circumstances where the appropriate UK regulator (the Prudential Regulator Authority (PRA) or the FCA), as the host state regulator, can intervene in the event of a breach, and the conditions that must be met and steps that must be taken to do so. The government proposes amendments to FSMA to give effect to this right to intervene and its conditions.

Q12. Do you have any comments on the draft statutory instrument in Annex B setting out the UK regulator’s powers to intervene with respect to an EEA firm, operating under the freedom to provide services, contravening the Directive?

Where an EEA firm is operating through a UK branch under the freedom of establishment, IDD deems it appropriate for the responsibility for compliance with the Directive to be split between the home state regulator and the UK regulator. IDD requires the FCA to have responsibility for enforcing compliance with rules on the provision of information and conduct of business. IDD also sets out the circumstances where the appropriate UK regulator can intervene in the event of a breach with respect to requirements in the Directive for which the home state regulator has supervisory responsibility. The government proposes amendments to FSMA to give effect to this right to intervene.

Q13. Do you have any comments on the draft statutory instrument in Annex B setting out the UK regulator’s powers to intervene with respect to an EEA firm, operating in the UK under the freedom of establishment, contravening the Directive?

In the case where an insurance distributor’s primary place of business is located in the UK rather than its home member state, Article 7 of IDD allows the appropriate UK regulator (which will usually be the FCA) to enter into an agreement with that firm’s home state regulator to act as if it were the home state regulator. This is a new provision with respect to financial services regulation, and it is unclear at this stage how often it is likely to be used. The government proposes giving the appropriate regulator the powers to enter into such an agreement through amendments to FSMA.

Where a UK firm’s primary place of business is elsewhere in the EEA it may, in limited circumstances, be appropriate for it to be regulated by the host state regulator in the relevant EEA member state. Article 7 of IDD requires the government to provide the appropriate UK regulator with powers to enter into an agreement to give effect to this option where it sees fit. The government is proposing appropriate amendments to FSMA.

Finally, the government proposes requiring the appropriate regulator to publish any Article 7 agreement it enters into. This should be done to inform the relevant firm and any persons or firms who are, in the regulator’s opinion, likely to request a similar arrangement. The government proposes stipulating that the appropriate regulator does not have to publish this information if it deems it inappropriate, and to set out in legislation the factors the regulator must consider in reaching a decision of whether to publish or not.

Q14. Do you have any comments on the draft statutory instrument in Annex B giving the appropriate UK regulator powers to enter into Article 7 agreements with regulators in EEA member states?

Q15. Do you have any comments on the draft statutory instrument in Annex B that set out the circumstances in which the appropriate UK regulator is required to publish details of any Article 7 agreements it enters into?

5. Annex A - Summary of questions

5.1 Which insurance contracts will be in scope of regulation? (Chapter 2)

Q1. Do you agree with continuing to regulate life and liability products sold as an add-on to a non-insurance product? If not, which such products do you believe should not be regulated?

Q2. Do you agree to extend the existing exemption for insurance products sold as an add-on to cover ‘non-use of services’ products? If not, do you have evidence of consumer detriment which would warrant their regulation?

Q3. Are there complex insurance products provided as an add-on to a good or service (except those in relation to travel) that should be brought into scope of regulation? What potential is there for consumer detriment in relation to these products?

Q4. Do you agree with removing the caveat that products must have a term of less than 5 years to qualify for the connected contracts exemption? If not, which such products introduce a significant risk of consumer detriment?

Q5. Do you agree with increasing the threshold for premiums below which products are eligible for the connected contracts exemption?

Q6. Do you agree insurance products sold as an add-on to travel products/services should continue to be regulated?

Q7. Do you agree that all motor warranties which are contracts of insurance should remain subject to regulation by the FCA?

5.2 Which activities will be regulated? (Chapter 3)

Q8. Do you agree that firms who merely provide information in relation to insurance products or potential policyholders should no longer be regulated? If not, what risks of consumer detriment arise from these activities?

Q9. Do you agree that where firms do more than just provide information in order to conclude an insurance contract, e.g. attempting to persuade a customer, these activities should remain in scope of regulation? How will firms be regulated? (Chapter 4)

Q10. Do you have any comments on the draft statutory instrument in Annex B which set out the requirements of the appropriate UK regulator with respect to the determination of applications and in the event of it taking supervisory action?

Q11. Do you have any comments on the draft statutory instrument in Annex B setting out amendments, required by IDD, to the processes for UK firms intending to exercise passporting rights in the EEA?

Q12. Do you have any comments on the draft statutory instrument in Annex B setting out the UK regulator’s powers to intervene with respect to an EEA firm, operating under the freedom to provide services, contravening the Directive?

Q13. Do you have any comments on the draft statutory instrument in Annex B setting out the UK regulator’s powers to intervene with respect to an EEA firm, operating in the UK under the freedom of establishment, contravening the Directive?

Q14. Do you have any comments on the draft statutory instrument in Annex B giving the appropriate UK regulator powers to enter into Article 7 agreements with regulators in EEA member states?

Q15. Do you have any comments on the draft statutory instrument in Annex B that set out the circumstances in which the appropriate UK regulator is required to publish details of any Article 7 agreements it enters into?

5.3 Regulatory Impact Assessment (Annex C)

Q16. The government would welcome views on this Regulatory Impact Assessment. It would be helpful to receive views on both the costs and benefits to businesses and consumers of the proposed amendments to legislation. The government would also be grateful if respondents were able to monetise, wherever possible, these costs and benefits.

Finally, we would particularly like to receive views on the likely impact of these amendments on small firms.

1. An IAR is an appointed representative for the purposes of section 39 of FSMA. ↩