Firms must change initial disclosure documents before the 1 October deadline
This year has already been a challenging one for advisers, but with the delayed implementation of the Insurance Distribution Directive taking effect on 1 October, further regulatory change is just around the corner.
New rules introduced by the IDD include upfront disclosures that firms distributing non-investment insurance products will have to make. Non-investment insurance includes pure protection such as term assurance, critical illness and income protection. It also extends to general insurance products.
Key changes on initial service disclosures include the following:
1. Firms must provide pre-sale information in good time
Pre-sale disclosure items must be provided “in good time” before the conclusion of an insurance contract. Currently the requirement is only “prior to” the conclusion of a contract.
This change increases the focus on firms to tailor the timing of their disclosures to the needs of their clients, with extra time given where necessary (for example, for certain types of vulnerable client).
2. Remuneration disclosures
Firms’ disclosures must be clear on the “nature” and “basis” of the remuneration they receive:
- Nature means the type of remuneration: i.e. if it is commission, fees or any other financial incentive.
- Basis means the source of the remuneration: i.e. if it is from the insurance provider, from the intermediary firm or from a third party, such as an introducer.
The main change here is that firms will be required to disclose any financial incentives schemes it operates in relation to the distribution of insurance contracts. This includes any remuneration provided by way of a bonus paid to the firm by the insurer or another firm, or provided by the firm to its employees, where this bonus is contingent on the achievement of a target to which the distribution of the particular insurance could contribute.
3. Conflicts of interest
There are stricter requirements for dealing with conflicts of interest. Firms must have measures in place to identify and prevent conflicts of interest, including a relevant policy they should review at least annually.
Where firms are unable to prevent a conflict of interest occurring, they will be required to disclose a specific description of the conflict in question. The firm will also be required to explain the risks to the client and the steps undertaken to mitigate those.
4. Scope of service
The disclosure will need to confirm whether the firm provides a personal recommendation or not. This is as a result of the changes to the advice definition introduced by the government on 1 January. Where an intermediary offers insurance products from a wide range of providers, the description will need to be amended from a “fair analysis” of the market, as it is currently, to a “fair and personal analysis” where a personal recommendation is being offered.
5. Who is the firm representing?
An intermediary will now be required to state if they are acting for a client, the insurer, or both. For instance, some intermediaries may be representing the insurer where they have the regulatory permission to assist them with claims handling activities.
6. Cross-selling insurance with non-financial products
Where insurance is the primary product, firms must inform the client whether it is possible to buy the elements of the package separately, including the costs and charges of each element: for example, where gym membership is offered alongside insurance.
Where insurance is sold alongside another non-financial product or service, the client must be able to buy it without the insurance and told the costs and charges of each element.
7. Means of communication
There are also new rules on the media in which information should be provided to clients. Any information the firm is required to disclose to clients must be provided free of charge.
Information must be provided in a paper format unless the client chooses to receive it via another durable medium. If they select another, the firm must also provide information in paper format if this is subsequently requested.
This is a brief summary of the main changes likely to impact advice firms’ initial pre-sale disclosures. However, there are other relevant disclosures relating to the sales process to consider, including those for demands and needs, along with marketing activity.
Firms will need to change their initial disclosure documents for non-investment insurance business in readiness for the 1 October deadline. The IDD changes also affects disclosures for some other life policies, such as insurance policies with an investment content, although some firms may have already accounted for these when they were amending their disclosures for Mifid II.
Linda Preston-Todd is head of bespoke solutions at Bankhall