Regulators promise clarity on definition of insurance advice

The Financial Conduct Authority is set to provide more clarity this year on how the European Union's incoming Insurance Distribution Directive (IDD) is to be implemented, and what will constitute 'advice' under it.

The FCA's first consultation on how providers and brokers should implement the directive closed on 5 June this year.

It is shortly to consult again, following which a policy statement is set to be published in September this year, setting out how FCA-regulated firms are to implement the IDD by February 2018, and what will be considered as 'advice' under the directive.

The main point of concern so far, according to City law firm CMS, has been around getting clarity on defining what constitutes financial advice.

The IDD includes the activity of advising on insurance products as a separate regulated activity.

All that is needed is a clear demarcation - if you are an adviser you advise, if you are not then you don’t. Alan Lakey

According to a research note from CMS, the IDD: "Defines advice as the 'provision of a personal recommendation to a customer, either upon their request or at the initiative of the insurance distributor, in respect of one or more insurance contracts."

However, the definition of advice in the UK is still complicated, with the Financial Advice Market Review consulting on additional definitions, Mifid II tightening up on what constitutes investment advice, the IDD attempting to tidy up what constitutes advice and the end client trying to work out whether they've been given information or advice.

According to the FCA, currently, there are no plans to adjust the approach it has taken in the first consultation, with regards to 'personal recommendations' and 'other advice' and guidance, unless the FAMR consultation triggers an amendment.

However in January 2018, the government will bring in the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2017 (Statutory Instrument 2017 No. 500). 

This legislation, which follows an HM Treasury consultation earlier this year on what comprises insurance advice, means the advice definition will be restricted to be in line with Mifid II and the IDD for the purposes of regulated firms, but will keep a broader definition for unregulated firms providing 'information' or 'data' only.

These will be called Category A and Category B firms respectively.

Essentially, the impact of SI 2017 No. 500 on UK firms is that the new narrow definition of advice will only impact certain authorised firms (Category A) who will cease to be regarded as giving regulated financial advice where no personal recommendation is involved.

Category A are authorised firms or individuals with permission to conduct a regulated activity. If they give a personal recommendation, they will be considered to have given advice.

These firms, however, can now provide unregulated guidance, without being subject to the stricter regulatory requirements associated with regulated advice.

According to CMS: "This change will reduce the risks of regulated firms carrying on a regulated activity without the proper authorisation and enable them to provide customers with more accurate information in their financial decision making."

There will be no change, however, for other firms and individuals falling into Category B firms and these firms may be regarded as giving regulated advice even though no personal recommendation is involved.

There has been more clarity in that IDD exempts from regulation firms who sell insurance as an add-on product to their principal goods or service, provided the premium does not exceed a certain amount and the risks covered by the product are limited.

However, the directive states that life insurance products and liability risk cover could not qualify for this exemption.

The UK government intends to continue to exclude such products from the connected contracts exemption.

This is because these products are complicated, and, if mis-sold could lead to significant consumer detriment. As such the government believes their distribution should continue to be regulated.

Alan Lakey, founder of CI Expert, says advisers should not need to worry too much about changes to the definition of advice under the IDD, despite the plethora of consultations and regulatory discussion about what constitutes advice.

He comments: "There doesn’t appear to be much requiring alteration. However it does highlight the futility of trying to micro-manage the process when all that is needed is a clear demarcation - if you are an adviser you advise, if you are not then you don’t."

simoney.kyriakou@ft.com