First it was 9th October 2004 for distance marketing directive compliance by FSA-governed financial services sellers and insurance sellers who elected to be under ‘ICOB’ before insurance gets the full FSA regulatory treatment on 14th January 2005. But now it looks like it’s going to be 31 October, or a bit earlier if insurance sellers want. Pardon?
Topic: Financial services
Who: Financial Services Authority
When: September 2004
In its latest set of amendments to its rules bible, the euphemistically entitled "Handbook", (which in hard copy form would be difficult to hold in ten hands let alone one) the Financial Services Authority ("FSA") has changed its tune on the dates by when many distance sellers of financial services must comply with new rules courtesy of the EU Distance marketing of consumer financial services Directive ("DMD").
9 October or 31 October?
The DMD obliged all member states to have the new rules in place by 9 October 2004. So the FSA, in its "made" rules published in April 2004, indicated that 9 October would be the required compliance deadline for all distance sellers of financial services who were regulated by the FSA at that time.
But this was not the whole story. This is for two reasons. First, the FSA does not regulate the selling of all financial services in the UK. It will only start to regulate the selling of general insurance products, for example, on 14 January 2005 (subject to one exception which we will explain below).
Financial services not regulated by FSA
Even after that date it will not regulate insurance for non motor goods supplied by the provider (for example electrical goods extended warranties sold by retailers) or travel insurance provided at the same time and by the same supplier when booking a holiday. Nor does it regulate consumer loans and credit, debt management services or, until 31 October 2004, first charge mortgages and even after that date it will not regulate second or subsequent charge mortgages.
As reported in August 2004's updates on marketinglaw, the regulator with primary responsibility in these "gap" areas will be the Office of Fair Trading and the relevant rules for distance sales of these financial products will not be the FSA Handbook, but the Financial Services (Distance Marketing) Regulations 2004 ("The Regulations").
Getting back to the "in force" date shift, there is another reason why the 9 October deadline was not the whole story. It relates to general insurance products.
14 January 2005 is the magic date upon which all those selling general insurance in the UK will have to have prior authorisation to do so from the FSA. Outside a distance sales context, all their advertising and marketing will also have to comply with the FSA Handbook from that date. In a distance sales context, however, the position is different.
The default position is that between 31 October 2004 and 13 January 2005, distance sales of general insurance products will, subject to one caveat, be governed by the Regulations, although the enforcement authority during this period will be the FSA.
Insurance providers' right to "elect"
The caveat is that insurance providers will be able to choose to be governed by a different set of regulations in their distance sales activities up to 14 January 2005 if they so wish. This is made clear by the transitional provisions in the FSA's "Distance Marketing Directive Instrument" of 2004. These state that general insurance providers may "elect" to be governed, between 9 October 2004 and 14 January 2005, not by the Regulations but by the parts of the FSA Handbook that implement the DMD.
22 day hiatus
Still with us? OK, back at the deadline for DMD compliance, the FSA must have started to wobble on its 9 October in-force date when it discovered that HM Treasury planned to require compliance with the Regulations from 31 October 2004, 22 days later.
So at that stage the financial services industry faced a position in which all distance sellers of financial services products under the FSA regulatory umbrella as of 9 October 2004 would have to comply with the DMD, 22 days earlier than the rest of the industry. It was also open to distance sellers of insurance to elect, if they thought it best for them, to be governed by the DMD on that earlier date.
Oh dear: hardly a simple seamless transition for the industry from one regulatory regime to another. And fortunately the FSA got the message also and has now, at close to the eleventh hour, changed its tack.
"Handbook Notice 36," published 17 September 2004, now shifts the default DMD compliance deadline for all FSA-governed distance sellers from 9 October to 31 October.
But there is one last wrinkle. Insurance distance sellers can, if they so wish, still elect to be governed by the Handbook instead of the Regulations with effect from any date between 9 and 31 Ocxtober. Two things they cannot do, however, are elect after 31 October 2004 or go back to the Regulations once they have made their "FSA Handbook" election.
Why this matters
It is little short of extraordinary that up to this very late stage before DMD implementation was due, the regulators should have been making an already complex regime, with two slightly differing sets of rules applying depending on the product, still more challenging by contemplating different "in force" dates.
Now at least this potential source of confusion has been removed, although there may be residual claims that the DMD should apply from 9 October 2004 anyway by way of the EU "direct effect" doctrine.
There is also the continuing enigma of the insurance "election" situation. Insurers who have quite understandably not spotted the "election" option before now will no doubt be seeking advice from marketing compliance specialists such as Osborne Clarke as soon as possible on whether it will suit them to "elect."