On the 1st of October 2018 new Law Society of Scotland practice rules on incidental financial business came into force in order to ensure the profession's compliance with the Insurance Distribution Directive (IDD). The IDD, which has now replaced the Insurance Mediation Directive, was introduced to allow a consistent approach by all distributors of insurance products.
The main changes to the Law Society's IFB Practice Rules can be found at Part IV of Rule C2 and firms will need to adjust their internal procedures to make sure they remain compliant. These new rules will only impact Scottish firms who are involved in the administration, advice or sale of contracts of insurance such as ATE or defective title insurance.
The changes are driven by the need to strengthen protection for consumers and require:
- Increased transparency on the pricing (and related costs) of insurance products;
- That consumers be provided with a standardised insurance product information document (IPID);
- That where insurance products are offered in a package with another product or service the consumer is given the option to buy that related product or service without having to buy the insurance product in addition;
Enhanced rules on transparency and business conduct to help consumers avoid purchasing insurance products which do not meet their needs.
The aim of strengthened consumer protection is addressed by introducing new rules affecting, among other areas, registration requirements for insurance distribution work, standards of general business principles, provision of information to consumers and means of communication with consumers. For example, with regard to registration, a firm must identify on its IFB licence application a solicitor within its practice who will be the insurance distribution officer (IDO) to oversee how the firm conducts its general insurance business. Details of the IDO are then registered on the Law Society's database. The Law Society will then pass those details to the FCA which then registers that information on the Financial Services Register.
A further example relates to remuneration and the requirement for firms to disclose the nature of any remuneration they receive in relation to insurance contracts. For example, firms are required to disclose whether (i) any commission payable to the firm forms part of the overall premium (ii) whether a fee is payable by the client for the general insurance work (to be disclosed before the conclusion of a contract of insurance) or (iii) whether the remuneration is a combination of both.
In addition to detailed guidance on the new practice rules the Law Society of Scotland has provided a useful style information letter and style terms of business on its website. The guidance and style wording can be found here.
Although it is appreciated that further regulation creates additional work for firms, it is vitally important that the changes required by the IDD and The Law Society practice rules are considered and implemented if they have not already been. Should you have any questions on the IDD or if we can be of any assistance to you then please do not hesitate to contact your Lockton representative.