Danger IDDApril 3, 2019
I used to watch the 1970’s television series Danger UXB – starring an angst-ridden Anthony Andrews as a young WWII Royal Engineer defusing unexploded bombs (UXBs) – with my eyes scrunched and my fingers in my ears. As the muddy pliers hovered between the red wire and the blue wire, trembling with indecision, I found myself shouting aggressive instructions at the telly – much as I do now during Only Connect.
The Insurance Distribution Directive (EU) 2016/97 (IDD), which impacted UK law on 1 October 2018, may not have red and blue wires attached to it but it certainly has explosive potential for those law firms carrying on insurance distribution activities. The penalties and consequences arising from a breach are just as mission critical.
The IDD has relevance to firms advising on or arranging insurance for clients, most commonly those handling personal injury and commercial litigation (e.g. after the event insurance), property transactions (e.g. defective title indemnity and environmental liability insurance), corporate transactions (e.g. keyman, warranty & indemnity, tax liability and lost share certificate insurance) and trust and estate administration (e.g. missing beneficiary and early distribution insurance).
The rules giving effect to the IDD, as far as SRA regulated firms are concerned, are set out in the SRA Financial Services (Scope) Rules 2001 (as amended on 1 October 2018) and the SRA Financial Services (Conduct of Business) Rules 2001 (as amended on 1 October 2018). In effect, the amended rules are designed to increase protection for insurance buyers by enhancing lawyers’ insurance knowledge, the provision of product information and the redress that is available in the event of a complaint.
In our role as advisers to law firms across the UK, we have found a good level of awareness of the IDD itself but a much higher level of uncertainty about how best to comply with it in practice. So, for those of you leading your firms through this particular minefield, here is our FIVE STEP PLAN to minimise the financial and reputational risks associated with your insurance distribution activities:
STEP ONE – TAKE CONTROL OF ALL INSURANCE DISTRIBUTION ACTIVITIES
We are surprised that some law firms have little or no record of the insurance distribution activity that is being carried on in their name. Given the consequences of non-compliance, we strongly recommend you conduct a comprehensive audit of everyone in the firm to find out everything that has been going on. It would be wise to offer a firm-wide amnesty as it is often the most senior lawyers who have the most interesting confessions. It is really important to dig deep to discover what types of insurances are being advised on or arranged, how this is being done and which insurance brokers and others are being relied on or recommended. Having this information in one place will enable you to determine the extent to which the firm has been compliant with its IDD status and help you put systems and controls in place to arrest the free-for-all.
STEP TWO – CONSIDER INDEPENDENT ADVICE (PREFERABLY A LAWYER)
Armed with your audit findings, you may want to consider taking independent legal advice on the most appropriate status your firm needs to adopt to enable it to carry on its required insurance distribution activity. Most law firms wish to carry on their insurance distribution activity under scope of SRA regulation as an Exempt Professional Firm (EPF), but this will depend on the extent of the firm’s involvement in the distribution process. An EPF is restricted to insurance activity that arises out of, or is complementary to, and is incidental to the provision of a particular professional service to a particular client and this restriction may be too limiting for some law firms. Securing a legal opinion and guidance from a lawyer (as opposed to a consultant) should provide the added benefit of legal advice privilege.
STEP THREE – COMPLY WITH THE SRA’S REGISTRATION REQUIREMENTS
The Financial Conduct Authority (FCA) maintains the register of law firms carrying on insurance distribution activity, based on information supplied to the FCA by law firms via the SRA. It is imperative that the information you notify to the SRA about your firm is complete and up to date, including details of the firm’s ownership and nominated insurance distribution officer. Carrying on insurance distribution activity without proper authorisation is a criminal offence and any contracts of insurance arranged for clients may be invalid.
STEP FOUR – COMPLY WITH YOUR INTERNAL RESPONSIBILITIES
As well as appointing an insurance distribution officer, it is also necessary that all management and staff involved in insurance distribution activity have the knowledge and ability to perform their duties. This will involve a fair degree of ‘reflection’ on the part of the individuals concerned and the provision of training on policy terms and conditions, the laws of insurance distribution, claims and complaints handling and how to assess a client’s demands and needs. The firm will also need to have arrangements in place to source information about suitable insurance products for clients and their key features.
STEP FIVE – COMPLY WITH YOUR RESPONSIBILITIES TO CLIENTS
The Conduct of Business Rules require every firm to make some important pre-contract disclosures to its clients concerning its insurance distribution activities. These disclosures include the firm’s regulatory status and role, what insurance matters the firm can and can’t advise on, the nature of the firm’s relationship with any recommended insurer, any related remuneration the firm is likely to receive and any related fees a client might have to pay. The detail and timing of such disclosures needs to be sufficient to enable a client to make an informed decision on using the firm for insurance matters. The IDD also introduces new requirements around assessing and satisfying the clients demands and needs, which accounts for the new knowledge and ability training requirements.
If you are reading this and thinking that the burden of compliance for law firms under the IDD is a significant step up from that under the Insurance Mediation Directive (IMD) it replaces, you’d be correct. That said, all the IDD is seeking to do is ensure that firms act honestly, fairly, professionally and in the client’s best interests. Isn’t that what we have to do under the SRA Code of Conduct anyway?