The Insurance Distribution Directive – An April 2018 Update

The FCA has issued no fewer than three detailed consultation papers on the subject since March 2017 and these have culminated in a 444-page Policy Statement – PS18/1 – that provides us with the ‘near-final’ rules which will come into force on 1 October. These will become ‘final’ once the UK enacts the Directive into domestic law in July, but the FCA has advised that it does not envisage making any changes to the rules in the meantime.

The UK’s approach to implementing minimum conduct standards emanating from Brussels has, traditionally, involved a healthy amount of ‘gold-plating’. This means that a number of IDD’s requirements, whilst being new to many of our European neighbours, are already familiar to those operating within the UK’s regulatory framework – complaints handling, client money and professional indemnity cover are particular examples that spring to mind. Some reworking of the FCA Handbook is required to rationalise, reinforce and clarify existing requirements in these areas, but their implementation in the UK is likely to be somewhat less troublesome than will be the case elsewhere in Europe.

Taking-a-closer-lookHowever, this is certainly not a time for the UK insurance sector to be complacent as there are still key areas needing to be addressed before 1 October. For example, firms should be looking closely at their product oversight and governance arrangements with the attendant concerns around formalising roles and responsibilities along distribution chains.

Those distributing non-life insurance should already be well on their way to ensuring that their retail customers will be provided with the standardised Insurance Product Information Document (IPID) and at the same time, the FCA expects firms to be considering what information commercial clients will require to help them make informed purchasing decisions.

Unsurprisingly, the IDD places considerable emphasis on the importance of customers being sold insurance products that best meet their individual demands and needs. Nothing new there you may think and, indeed, a UK firm currently selling on an advised basis should already be well-versed in demonstrating that it addresses customers’ demands and needs effectively. However, those firms operating on a non-advised basis should now be thinking carefully about how they will be able to demonstrate that they are taking a customer’s demands and needs into account to ensure that only appropriate products are being offered.

And what of IDD’s impact on the life industry in view of the specific requirements for firms selling investment-based insurance products (IBIPs)? Well, the FCA has sought to align IDD requirements with those falling out of the more stringent MiFID II regime, where it is appropriate to do so – examples being inducements, conflicts of interest and assessing appropriateness.

Life firms will also need to determine whether their products will be categorised as ‘complex’ under IDD’s definitions and where they are, it will be necessary to ensure that an appropriateness assessment is incorporated into the sales process with execution-only sales of such products being banned.

Product governance is another area that life firms should be looking at closely, although the FCA has stated that the rules will only apply to new products brought to market, or existing products that are significantly altered, from 1 October onwards. Understanding product lifecycles and their associated review points will be crucial for firms in this sector.

Generally, we must not overlook the fact that IDD introduces a minimum of 15 hours, per year, continuing professional development (CPD) for customer-facing staff whose firms are not subject to the more detailed stipulations of the FCA Training and Competence sourcebook. The requirement will be applied only to those employees with direct involvement in insurance distribution, including those who have responsibility for it – for example, sales directors and product managers – but not the likes of those engaged in IT, HR or facilities management.

So, the bottom line is this – firms should already be well down the road of preparing for IDD-Day. If you’ve yet to begin the journey, start by familiarising yourself with PS18/1 – at the very least – and then do a gap analysis to determine where your biggest issues lie. From there you’ll need to build a time-bound action plan to address these issues and test your solutions prior to 1 October. Above all else, start now!

Our 2 hour briefing on the IDD is the perfect way to make sure that you are up to speed with everything surrounding the implementation. To discover the course agenda and book your place please visit the course page here.

Richard Galley