The new rules will start coming into effect from 1 January 2018. Some of the largest life companies operating in international markets are based on the Isle of Man, so the new rules represent a major development for the industry. The purpose of this article is to explain what is changing and what it will mean for life offices, advisers and customers.
Q. Why are the FSA introducing new rules?
The FSA follows a continual process of refining its regulatory standards to ensure it maintains a robust regime for the regulation and supervision of insurance business. The new rules reflect developments in international standards, particularly in relation to providing transparency to customers and ensuring products are suitable for customer needs.
Q. What are the new rules?
From 1 January 2018, Isle of Man life companies will need to abide by the following set of new regulatory requirements:
- The fair treatment of customers is to be embedded into the policies and procedures of life companies.
- Customers are to only access assets in life policies that are suitable for them.
- Customers are to be afforded 30-day cancellation rights on initial premiums, top-ups and increments on regular premiums.
- Customers are to be provided with a generic Key Information Document (KID) describing the nature and main features of the product, the risks, the maximum commission payable, the procedure for taking money out and complaint procedures.
Further requirements will be phased in as follows:
- From 1 July 2018, advisers will need to ensure they maintain all necessary licences, authorisations and registrations.
- From 1 January 2019, the KID is to include a statement explaining the commission payable that is specific to the policy.
Q. What if a certain country has similar or the same requirements?
The FSA’s requirement to provide a KID will not be required in Hong Kong or the European Union as there are already (or will be) local rules in place for insurers to provide a similar disclosure document to the customer.
Q. How will advisers be impacted?
We see advisers being impacted in three main ways:
- Going forward, advisers will need to ensure they only recommend retail funds to retail clients. Clients are likely to be required to provide additional consent if they want to access professional-investor type assets.
- Commission will be disclosed in generic terms from 1 January 2018 and then in policy-specific terms from 1 January 2019. Advisers will still be able to choose a remuneration model that works best for them and their customers, be it commission or fees or a combination of both. Ultimately, there will be greater pressure placed upon advisers, by the increased transparency, to justify their remuneration based on the value they bring to their customers.
- There will be greater vetting in place to ensure advisers maintain all necessary licences, authorisations and registrations in the jurisdictions they operate and give advice in.
Q. What process has the FSA followed to devise the new rules?
The FSA started discussions with the Isle of Man life industry back in 2014. The FSA then issued a consultation paper to insurers outlining their new Conduct of Business regulatory proposals. This consultation paper was issued in July 2015 and the industry was given two months to respond.
Taking into account the feedback received, the FSA issued a second draft of their proposals as well as a further consultation paper containing proposed regulations for insurers to manage conflicts of interest in the sales process. The industry was also given two months to respond on the Conflicts of Interest regulatory proposals. The industry is now awaiting the final set of regulations for both, which are expected to be issued in April 2017.
Q. What was Old Mutual International’s response during the consultation process?
Old Mutual International (OMI) has been fully supportive of the FSA’s proposals and the business as a whole was actively engaged throughout the consultation processes, led by Paul Smith (Chief Risk Officer for OMI). OMI believes that in the long-term, these changes will help strengthen and grow the international life industry. When the new regulations come in, they will complement the work OMI is doing to support advisers through its Future Fit adviser programme.
Q. What will be the likely impact of the new FSA rules in the industry?
The FSA’s new rules will lead to an improvement in transparency levels and the suitability of asset choices for customers choosing Isle of Man life policies. This is good news for customers and will support those advisers who focus on delivering good customer outcomes.
The new FSA rules are very much in line with regulatory developments elsewhere in the world and will provide a further catalyst for advisers to strengthen their business models with a move to create more sustainable, client-centric, advice businesses. The advisers who add true value to their customers will ultimately thrive and fuel the growth of the industry.