This article follows on from our previous article about implementing the Insurance Distribution Directive (IDD) which concentrated on the issues surrounding complex and non-complex products, whereas we now explore the implications of all other key areas within the Directive and provide guidance for firms.
- Staff knowledge and ability
- Product oversight and governance (POG) arrangements for manufacturers
- Product distribution arrangements for distributors
- Insurance Product Information Document (IPID) and other product information disclosure
- Demands and needs
- Insurance-based investment products (IBIPs)
- Remuneration disclosures
- Complaint handling
- Conflicts of interest
- Conduct of Business requirements – general principles including acting in customers’ best interests
The IDD replaces the Insurance Mediation Directive (IMD2) and has been passed by the EU legislative process. Like its predecessor, it allows member states to set higher standards ('gold plating') if they see fit. This means, for example, the UK can maintain its rules for retail investment advisers.
The IDD applies to all those who sell, advise on, or conclude insurance contracts, and also those who assist in administering or performing them. Our interpretation of this is that it applies to insurers and reinsurers, insurance brokers, banks and building societies that sell insurance, financial advisers and claims management companies, as well as aggregators and other price comparison websites, and in-scope ancillary insurance intermediaries (eg car dealers).
As notified in our first article, and as expected, the EU Council has delayed the application of the new rules to 1 October 2018.
Staff knowledge and ability
Brokers and employees of insurance companies that sell insurance are to undertake at least 15 hours of training and continuing professional development each year. Where staff are not already subject to this in the TC Sourcebook (35 hours of CPD at the moment), the FCA will apply the 15 hours minimum. Minimum requirements apply to employees with responsibility for insurance distribution. This will include call centre staff whose role may be limited to conducting non-advised, script-based sales, but the CPD can be tailored to allow for the nature and complexity of the employee’s role.
Minimum knowledge criteria cover areas such as products, the claims process, complaints procedure, and insurance regulation. The FCA expects insurers to train their employees in these areas.
Employers must establish, maintain and keep appropriate records to demonstrate compliance with employee knowledge and ability requirements. Employees of insurance distributors do not need to obtain a qualification, but firms must consider employees’ compliance with their IDD training and development when assessing their competence and when certifying employees under the FCA "significant harm" function.
Does not apply to roles such as those in HR or IT.
Product oversight and governance (POG) arrangements for manufacturers
The directive introduces new product governance requirements, which mostly are in line with the FCA’s product governance requirements. Requirements include identifying a target market, carrying out product analysis and reviews to check product performance and potential consumer detriment, identifying relevant distribution channels, monitoring distribution channels and providing appropriate information on the product to distributors.
Product distribution arrangements for distributors
These firms are subject to rules about product distribution arrangements, which include establishing processes and procedures for the products they intend to distribute, obtaining all relevant information from the manufacturer and defining a distribution strategy.
Insurance Product Information Document (IPID) and other product information disclosure
General insurance firms in the retail and small corporate market must provide customers with standardised “Insurance Product Information Documents”, similar to Key Features Documents, prior to the conclusion of a contract. The IPID should provide standardised information about non-life insurance products before the conclusion of the contract. New FCA rules for firms to consider product governance arrangements when producing product information – firms should provide the information when it will be most useful to customers and should consider the need to provide a short summary of the policy even for commercial customers. They should also cooperate with all the partners in the distribution chain to ensure the customer information needs are met.
Demands and needs
Firms should offer customer products that are consistent with their insurance demands and needs. Although similar to previous requirements, the IDD requires a stricter approach to the process of identifying the customer’s specific demands and needs and firms should then only offer products that are consistent with those.
Insurance-based investment products (IBIPs)
The IDD includes specific requirements for the distribution of IBIPs. Current relevant FCA rules are already IDD compliant but the FCA is extending MiFID II requirements to the distribution of IBIPs as follows:
- Information requirements such as all costs and charges, risk warnings and information on periodic suitability assessments, record keeping of client agreements, reports on the firm’s service provided in durable medium.
- Suitability requirements including the need for periodic suitability assessments (at least annually).
- Appropriateness assessments for non-advised sales of complex products.
- Inducements: under MiFID II inducements must be designed to enhance the quality of the service – under IDD they must not have a detrimental effect. FCA will apply the MiFID test to IBIPs.
- Professional clients do not need to be provided with a suitability assessment on IBIPs.
New requirements for pre-contract disclosure of information about distributors’ remuneration. Must disclose nature and basis of the remuneration received relating to the insurance contract.
Current DISP requirements meet the IDD’s requirement for insurance distributors to have in place procedures for handling complaints with appropriate out-of-court redress procedures. However, the requirement to have a complaints procedure for eligible complainants will extend to all insurance and reinsurance distributors when carrying on distribution activities.
The FCA has consulted on widening the definition of an eligible complainant from just micro-enterprises to include all SMEs (although this is not an IDD requirement) but has decided not to change its approach to this issue as part of IDD implementation. However, the FCA is currently consulting separately on proposed new rules to allow larger small and medium sized enterprises to refer complaints to FOS. The consultation ends on 22 April, and a policy statement is expected in the summer.
Firms must provide the procedures allowing customers and other interested parties to register complaints about the firm with the firm and the Financial Ombudsman Service or, if the Financial Ombudsman Service does not apply, information about the out-of-court complaint and redress procedures available for the settlement of disputes between the firm and its customers.
Conflicts of interest
In CP17/23, the FCA proposed to implement the IDD requirements in relation to conflicts of interest to all types of insurance, rather than just to IBIP business. The basis for this proposal was to maintain the current scope of its rules and existing consumer protections, and this still remains its approach.
It believes that the benefits of a consistent consumer protection and regulatory regime are significant and outweigh concerns expressed regarding applying the same rules to different types of firms. It does not consider there is a need for further guidance at this time, as it should be clear to general insurance firms what the conflicts rules require and how they apply to them.
Conduct of Business requirements – general principles including acting in customers’ best interests
The IDD requires that distributors must always act honestly, fairly and professionally in accordance with the best interests of their customers. This is not just about acting in the customers’ best interests, but also being able to demonstrate that you are doing that. FCA has confirmed that the "customers' best interests" applies to all firms in the distribution chain. This means that even firms in the middle of a distribution chain will have to meet and be able to demonstrate that they are meeting this principle.
Section 5 is a useful reference within FCA PS17/21 ("Insurance Distribution Directive implementation – Feedback to CP17/7 and near-final rules") for:
- General principles (ICOBS 2).
- General pre-contract disclosures (ICOBS 4).
- Disclosures relating to conflicts of interest and transparency (ICOBS 4).
- Means of providing information (ICOBS 4).
- Standards for advised and non-advised sales (ICOBS 5).
- Cross-selling (ICOBS 6A).
How we can help you
In addition to our first article, the above represent the main points to be considered when implementing the requirements of the IDD. If you need help, or clarification on any point above, or any other feature of the IDD, please contact us.
We are in the process of finalising the details of an “IDD readiness audit” which we will be offering to clients in good time in the run-up to the implementation date. If you think you might be interested in this, we would be delighted to provide you with more information.
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- OAC Article: "Implementing the Insurance Distribution Directive" [Part 1] - 14 March 2018
- OAC Article: "Are with-profits products complex or not under the IDD? FCA says not" – 19 January 2018
- OAC Governance, Risk & Compliance Services
- OAC Actuarial & Redress Calculations
For more information
Implementing the Insurance Distribution Directive - Part 2
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