Phil Lewis (pictured) is compliance manager at Source Insurance
The FCA has today published its consultation on the European Insurance Distribution Directive.
The Insurance Distribution Directive (IDD) is the long-delayed update/review of the Insurance Mediation Directive – the EU law which arguably led to FSA regulation of the GI industry.
Despite the Brexit vote, the UK Government has decided to implement the IDD and it must be transcribed into UK law by 23 February 2018.
Like all good film franchises, this consultation will come with at least one sequel – part one has been published today with part two following later this year.
Matters to be more fully considered in part two include the detail of the Insurance Product Information Document (IPID) – which will likely replace the existing policy summary document, product oversight and governance arrangements, and the potential removal of “pure” introducers from the scope of regulation.
Below I’ve tried to pull out the main parts with a potential to have some impact on our marketplace.
The IDD introduces a minimum of 15 hours continuing professional development (CPD) for virtually all staff working in an insurance firm.
CPD will usually cover areas such as product knowledge, market knowledge, the claims process and insurance regulation – so coaching on soft skills and the like probably can’t be included.
These requirements won’t apply to ancillary functions such as HR, facilities management and IT.
Firms will need to create and keep records of staff CPD for a minimum of three years.
Under the IDD the minimum levels of Professional Indemnity Insurance (PII) are also rising.
This increase may impact many of our brokers who currently hold the minimum level of PII and will see a resultant increase in premium.
The IDD also introduces a new “the customer’s best interests rule” which is distinctly different from the current TCF regime, which it seems to update.
The FCA specifically mentions that this new rule will specifically apply to Price Comparison Websites (PCWs), so they may have some work to do on this.
It essentially means that a firm’s own commercial interests should be subservient to the customer’s interests.
There are some changes to the disclosure requirements – many of which are fairly subtle but will still require document changes.
One change which was mooted early on in the life of the IDD was full commission disclosure.
This has not been implemented but there is a mandatory requirement for intermediaries to disclose the nature (type) and basis (source) of remuneration.
So, for example, an intermediary should say something like: “We arrange the policy with the insurer on your behalf. You do not pay us a fee for doing this. We receive commission from the insurer which is a percentage of the total annual premium.”
In addition, where intermediaries do not use a “fair and personal analysis of the market” they must list the insurers with whom they deal (currently intermediaries only need to provide this list upon request). These requirements apply to both advised and non-advised sales.
There is also a significant potential impact on electronic documents implemented within the IDD.
The consultation paper states that where information is provided through a medium other than paper, the option to have the information on paper must be available and free of charge.
The FCA go on further to say that: “Where a firm wishes to provide the information through a durable medium other than paper, we expect firms to present the customer with a choice between available options, rather than simply presenting the customer with one option and asking for consent.”
A new requirement in the IDD means that firms should only offer contracts which meet the customer’s demands and needs.
For example, the FCA have stated that they would expect firms to ask the customer questions about the level of cover they require, the amount of excess etc, and then should limit the products they offer to those which would meet these specified demands and needs.
This will completely change the way that PCWs operate as this example suggests they can no longer load the front of their results pages with policies which carry a far higher excess than that stipulated by the customer during the data capture process. This should work to the intermediaries’ advantage.
The IDD also introduces a new category of insurance intermediary – the Ancillary Insurance Intermediaries (AIIs).
The IDD does not require direct regulation of AIIs, but current UK regulation (via the Connected Contracts Exclusion), does.
HMT is currently consulting on this question as part of its wider consultation which may also take insurers out of the scope of regulation. If HMT decides not to register AIIs.
From what initially appeared to be a fairly innocuous piece of legislation, there are some things in the IDD that could have an impact on the market.
At this stage it is still a consultation paper however, so it is worth remembering that some things could change or be clarified in your favour between now and the publication of the final rules.