The Insurance Distribution Directive

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This is just another of the tsunami of rules being introduced in 2018, alongside MIFID II, GDPR and SM&CR, which will hit financial services firms in the UK in 2018.

The IDD consultation is now in its third iteration. We have had CP 17/7, CP 17/23 and most recently CP 17/33. The documents seem to have been getting longer with CP 17/33 running to 256 pages. The consultation from CP 17/33 closed on 25th November with the policy document due to be produced in January 2018 in time for adoption in February 2018.

There is a lot of confusion around whether the FCA is going to announce acceptance of the European proposal to delay the application date of IDD from 23 February to 1st October 2018.

As this proposal has been put forward by the EU institutions, it is therefore not something over which the FCA has any control, so no official announcement will come from them.

The FCA has advised that it will continue to work to ensure the UK meets its legal obligation to implement the IDD, and will consider in due course whether amendments are required to its published consultations and policy statements. The FCA advises regulated firms and their advisers should continue to monitor the FCA website for further information.

So, what is it about?
The Insurance Distribution Directive (IDD) is revision of the Insurance Mediation Directive (IMD), which was introduced by the FSA in 2005. It will come into force in February 2018.

Like the IMD, the IDD covers the authorisation, passporting arrangements and regulatory requirements for insurance and reinsurance intermediaries. However, the application of the IDD is wider, covering organisational and conduct of business requirements for insurance and reinsurance undertakings. The IDD also introduces requirements in new areas. These include product oversight and governance (POG), and enhanced conduct rules for Insurance Based Investment Products (IBIPs), where its stated intention is to more closely align the customer protections with those provided by the Markets in Financial Instruments Directive II (MiFID II).

The directive applies to all those who sell, advise on, or conclude insurance contracts, and those who assist in administering or performing them. Customers of these firms “range from individual consumers to large multinational corporations.”

Now Europe is going through a similar process with MIFID II and IDD to get consumers a fair deal and bring in some uniformity of practices throughout Europe in financial services.

Outcomes the FCA is seeking
The FCA’s proposed approach builds on the rules and guidance already in place and is consistent with the approach taken when implementing IMD. Generally, it has sought to introduce the minimum standards of the IDD into the FCA Handbook. However, in some places it has gone beyond the minimum standards.

This proposed approach should provide an enhanced regime that ensures a level playing field for sellers of insurance, helping to prevent arbitrage with competing products and providing better protection for consumers when buying insurance. This should ultimately result in:

  • consistent consumer protections across different distribution channels, preventing regulatory distortions of competition
  • products being sold to consumers that better meet their needs, alongside improved product information, enabling consumers to have greater confidence in their insurance purchasing decisions

Main provisions

  • requires brokers and employees of insurance companies that sell insurance to do at least 15 hours of training and CPD per year
  • introduces new product governance requirements, which are largely in line with the FCA’s product governance requirements
  • requires firms that sell insurance on a non-advised basis make sure that the product they are selling fulfils the customers most fundamental needs
  • imposes new duties on insurance companies that are selling products through companies that are not authorised by the FCA
  • requires general insurance firms in the retail and small corporate market to provide customers with Insurance Product Information Documents, which are similar to Key Features Documents.

Professional standards
The IDD requires firms to ‘possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately’.

  • At least 15 hours of professional training or development per year”.
  • There are specific areas in which the practitioner must be able to demonstrate knowledge:
  • the insurance market, applicable laws governing insurance distribution;
  • claims handling, complaints handling, assessing customer needs, appropriate financial competency; and business ethics standards/conflict of interest management.

Ancillary Insurance Intermediaries
The IDD introduces this concept for firms who meet the following requirements:

  • The firm’s principal professional activity is not insurance distribution;
  • The firm only distributes insurance products which are complementary to goods and services they provide as their primary professional activity; and
  • the insurance products concerned do not cover life assurance or liability risks, unless that cover complements the good or service which the intermediary provides as its principal professional activity.

The FCA sets out how the IDD requirements will apply, considering the three categories of AIIs:

  • “In-scope AIIs” – Firms who meet the definition of being an AII and are within the UK’s regulatory perimeter. This includes firms within scope of the Directive and firms such as motor vehicle dealers whose insurance distribution activities may be outside of the IDD but who are within the UK regulatory perimeter.
  • “Connected travel insurance (CTI) providers” – Firms whose primary business is to make travel arrangements for customers, but who distribute insurance that is complementary to those services, such as travel agents, tour operators and airlines.
  • “Out-of-scope AIIs” – Firms who are outside the UK regulatory perimeter by virtue of the CCE. Common examples include electronic goods and furniture retails.

At the moment, the FCA is requiring that in-scope AIIs and CTI providers to comply virtually the same requirements as insurance intermediaries. This is because:

  • It is important that services are provided to customers by competent employees. This is a key customer protection, and it should be in place regardless of the category of firm.
  • Staff working for AIIs and CTIs usually have a primary responsibility that is unconnected to insurance (for example, to sell cars or electrical goods which are the firm’s primary business). Finally, It is appropriate to continue with the existing requirement for in-scope AIIs to hold the same level of PII cover, or comparable guarantee, as insurance intermediaries.

Is it going to work?
So, the IDD is running alongside MIFID II in trying to promote fairness to consumers and transparency of charges within products and the suitability of products to their target market. IDD brings general insurance products and practices much more in line with regulated financial sales.

I found it surprising that in the UK we went through the Retail Distribution Review (RDR) to get a fair deal for customers. Now Europe is going through a similar process with MIFID II and IDD to get consumers a fair deal and bring in some uniformity of practices throughout Europe in financial services.

As the UK has been through most of this already, the impact on UK advisers is lessened. Some of the disclosure issues will be tightened in the future, but most advisers are already complaint.

The main difference in the UK will be for general insurance providers and distributors. The additional burdens will relate to staff training and knowledge. This is very positive for consumers as they should be much better protected by dealing with knowledgeable sales people.

Of course, there will be the usual gripes from advisers about undertaking CPD. They should understand that this is to improve their skills. They will be more capable of completing better quality sales, as they will understand more about the products and their application to the lives of their customers.

15 hours of CPD is a little over one hour per month. This would probably be the amount of time that they would spend familiarising themselves with products anyway. So, the only difference is that they will get a certificate showing that they have received training. I am not sure what there is not to like about that. Their only new problem is to set up a file to keep their certificates in.

Providers will need to ensure that their products are suitable to their target market. Surely, they would have been doing this already. They just need to produce Insurance Product Information Documents. Which they had probably already been producing. They just need to make sure that they are given to customers. Should not be too difficult to organise.

The practitioners need to be able to demonstrate knowledge of assessing customer needs, claims handling and complaints handling. The attainment of appropriate financial knowledge will increase the ability to assess customer needs. This, in turn, should enable claims handling to dealt with better. This appropriate financial knowledge should also lead to a greatly reduced need for complaints handling, but also ensure that any complaints arising are handled better.

This can only be positive for consumers in the future.

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