Insurance distribution is a regulated financial service. Solicitors involved in insurance distribution activities need to adhere to specific rules and regulations set by the SRA and FCA.
What is ‘insurance distribution’?
Insurance distribution refers to a range of activities that include advising on, proposing, or carrying out work preparatory to the conclusion of contracts of insurance, concluding such contracts, or assisting in the administration and performance of these contracts, especially in the event of a claim.
This definition encompasses a broad spectrum of actions, from the initial advice and proposal phase to the finalisation and ongoing administration of insurance policies.
Law firms engaged in personal injury, conveyancing, and probate are likely to be involved in insurance distribution activities. This includes arranging clients’ insurance in personal injury matters or insurance for defective title in conveyancing matters.
Notification requirements
Part 20 of the Financial Services and Markets Act (FSMA) provides the mechanism for regulated law firms to avoid having to be directly authorised by the FCA.
Firms beginning to carry out insurance distribution activities must notify the SRA using the FA8 form. This information is then provided to the Financial Conduct Authority (FCA) for their register. The firm will be identified as an ‘exempt professional firm’.
Staff qualifications and knowledge requirements
Relevant management and staff involved in insurance distribution must have appropriate knowledge and ability.
Firms need to understand the terms and conditions of policies offered, laws covering the distribution of insurance products, claims, complaints handling, and how to assess customer needs.
Training on insurance distribution is therefore required for file handlers, managers and insurance distribution officers.
Insurance
Firms must have a policy of qualifying professional indemnity insurance in place before carrying out insurance distribution activities.
Client disclosure and transparency
Information about remuneration received for arranging insurance and any client fees must be disclosed.
Honest and fair conduct
Firms must act honestly, fairly, and professionally in the client’s best interests, retaining documentary evidence to demonstrate compliance.
Client demands and needs
Contracts proposed must be consistent with the client’s demands and needs, with personalised recommendations provided for advised products.
Insurance Product Information Document (IPID)
This document, which must be provided to clients before concluding a contract, sets out key information about the product.
Does a solicitor’s firm need to appoint an Insurance Distribution Officer (IDO)?
Yes, a firm that undertakes insurance distribution activities must appoint an insurance distribution officer. This person, who should be within the management of the firm, is responsible for overseeing the firm’s insurance distribution activities. This is a requirement for compliance with the SRA Financial Services (Scope) Rules.
Summary of SRA rules for exempt professional firms
(1) SRA Financial Services (Scope) Rules
The ‘Scope Rules’ enable law firms to undertake certain regulated financial services activities, including insurance distribution, without being regulated by the FCA, provided they adhere to the outlined conditions and restrictions:
The rules apply to firms not regulated by the FCA, including their managers and employees.
Firms must ensure activities are complementary to professional services and not prohibited by any FCA order or the rules themselves. Certain activities are explicitly prohibited, including specific financial services activities defined under section 327(6) of FSMA, like entering into certain credit agreements as a lender or engaging in insurance distribution related to insurance-based investment products.
Firms can only conduct insurance distribution activities as ancillary insurance intermediaries. They must be registered in the Financial Services Register and appoint an insurance distribution officer. Firms must notify the SRA using the prescribed form if they are carrying on, or propose to carry on, insurance distribution activities.
(2) SRA SRA Financial Services (Conduct of Business) Rules
The SRA Financial Services (Conduct of Business) Rules build on the Scope Rules, providing comprehensive guidelines for solicitors engaging in regulated financial services activities, including insurance distribution. Key parts include:
- Firms must disclose in writing to clients that they are not FCA authorised, their regulatory status with the SRA, the nature of their regulated financial services activities, and information on complaints and redress mechanisms.
- Transactions must be executed as soon as possible unless delaying is in the client’s best interest.
- Firms must keep records of transactions, including client names, terms, dates, and details of any third-party instructions.
- Records of commissions related to regulated financial services activities and how they’ve been accounted to the client must be maintained.
- Firms must operate systems for the safekeeping of assets, including obtaining written instructions and acknowledgments when passing assets to third parties.
- For transactions arranged on an execution-only basis, firms must confirm in writing the client’s decision and instructions.
- Records made under these rules must be retained for at least six years.
- All information, including marketing communications related to insurance distribution, must be clear, fair, and not misleading.
- Firms must disclose to clients whether they provide personal recommendations, details about complaints procedures, and any representation of clients or insurers. They must also disclose any significant holdings in insurance undertakings.
- Firms should disclose the basis of their insurance distribution, including whether they are under contractual obligations to specific insurers and if they provide personal recommendations based on a fair and personal analysis.
- Firms must specify the client’s demands and needs based on obtained information before concluding a contract of insurance and ensure any proposed insurance is consistent with these needs.
- Firms must ensure that any intermediaries used for insurance distribution are appropriately authorised or exempt under FSMA.
- Firms must have effective procedures for handling complaints from non-clients.
- Remuneration or employee performance assessment must not conflict with the duty to act in the client’s best interest.
- Firms must disclose the nature of their remuneration related to insurance contracts before their conclusion, amendment, or renewal.
- Firms must inform clients about any fees before they are liable to pay, or before the conclusion of the insurance contract.
- Information must be communicated on paper or another durable medium, ensuring clarity, accuracy, and appropriate language usage.
For more information, or to arrange training for your team, please contact us.
