This blog may appeal to those of you who like me are a little lost when someone talks to you about the Insurance Distribution Directive. Let’s start from the basics, The Insurance Distribution Directive (IDD) is a new European directive that has replaced the Insurance Mediation Directive (IMD). It applies to Firms who conduct insurance distribution activities and its introduction will change the way relevant firms work. The SRA recently announced the approval by the Financial Conduct Authority and the Legal Services Board of its rules to comply with the directive, reflected in the changes made to the SRA Handbook 2011on 1 October 2018.
In summary the Directive aims to enhance consumer protection when buying insurance – including general insurance, life insurance and insurance-based investment products (IBIPs). It also focuses on supporting competition between insurance distributors by creating a level playing field. Like the IMD, the IDD covers the authorisation, passporting arrangements and regulatory requirements for insurance and reinsurance intermediaries. However, the application of the IDD is wider, covering organisational and conduct of business requirements for insurance and reinsurance undertakings. It’s also important to mention in order the demonstrate firms and employees possess appropriate knowledge to perform their duties, CPD of at least 15 hours are required to complete this.
In practical terms the definition of 'insurance distribution' in the new directive has been defined as the activities of advising on, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance, of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim. That means Law firms involved in personal injury, conveyancing and probate will most likely be carrying on insurance distribution activities e.g. arranging for clients' after the event insurance in a personal injury matter or insurance for defective title in a conveyancing matter.
Another important reference are the SRA rules particularly regarding the SRA Financial Services (Scope) Rules 2001 (Scope rules) and the SRA Financial Services (Conduct of Business) Rules 2001 (COB rules). The specific requirements which relate to insurance distribution activities are set out in Appendix 1 of the COB rules.
Here are 10 steps you may consider when you deal with insurance distribution:
Step 1 - notify the SRA using a FA8 form if you propose to conduct insurance distribution services. The SRA will inform the FCA on your behalf who maintains a register of firms which includes those that are carrying on insurance mediation activities. Before submitting the completed form be sure to provide some basic information like details of your firm's insurance distribution officer, the identities of shareholders or members that have a holding in your firm that exceeds 10%, and the amounts of those holdings, the identities of persons who have close links with your firm as per close links definition under Article 13 point 17 of Directive 2009/138/EC and information that those holdings or close links will not prevent you exercising your supervisory or regulatory functions. Failing to register when required to do so is likely to be breaching the general prohibition which is a criminal offence under section 23 of the Financial Services and Market Act 2000 and you may find that the contracts of insurance arranged for clients are invalid.
Step 2 - When appointing an insurance distribution officer, you must make sure that they are competent and understand the terms and conditions of policies offered, laws covering the distribution of insurance products, claims and complaints handling requirements, how to assess a customer's needs.
Step 3 - Make sure that you do not carry on any insurance distribution activities unless you have in place a policy of qualifying professional indemnity insurance. More information about the obligations on you can be found in the SRA Indemnity Insurance Rules 2013.
Step 4 - Consider Rule 3 of the COB rules setting out the sort of information that you must provide about you, your firm and the services you can provide when arranging insurance e.g. inform the client you are regulated by the Solicitors Regulation Authority for this work and the scope of your services, i.e. that you can only carry on insurance distribution activities limited to those not prohibited by your Scope Rules.
Step 5 - Set out information that you will need to give to your clients about any remuneration you receive for arranging the insurance and any fees that might be payable by the client in accordance with Part 8 and 9 of Appendix 1 of the COB rules.
Step 6 - If you collect a fee from a client, you must disclose the exact amount of that fee (not an estimate or range). If the exact amount is not known, then the method of calculation must be provided. Any information you give to the client must be in a “durable medium” being fair, transparent and not misleading.
Step 7 - In addition to providing information about the status of your firm, you must provide your clients with information confirming, that you are an insurance intermediary, as opposed to an insurer and that you cannot manufacture insurance products; whether you provide a personal recommendation in respect of the insurance products offered; whether you act on behalf of the client and/or the insurer. If you act for both you will need to explain in what circumstances you can act for each party, and if you have "10% or more" of the voting rights in an insurer (for example, as a shareholder).
Step 8 - You must in comply with chapter 1 SRA Code of Conduct 2011 “honestly, fairly and professionally in the client's best interests”.
Step 9 - Comply with outcomes in Chapter 8 of the SRA Code of Conduct 2011 by making sure that your marketing communications, addressed to clients or potential clients are fair, clear and not misleading. Marketing communications should always be clearly identifiable as such.
Step 10 - Ensure you have sent the client a summary document for general insurance products in the form of an Insurance Product Information Document (IPID) before you conclude a contract. The insurer is required to draw up the IPID and must set out the key information a client will need to make an informed decision about the product.
If you have any questions at all about the IDD or insurance generally then get in touch at firstname.lastname@example.org. An initial call is always free.