Following the publication of the policy statement (PS18/1), it is now clear, after first sight of a consultation paper in July 2017, that the Insurance Distribution Directive (IDD) legal instrument will largely come into force 1st October 2018.
The changes significantly raise standards in a number of areas with the aim of ultimately improving consumer protection and effective competition.
Changes will affect most distribution channels, including insurance companies, insurance intermediaries, aggregators, and ancillary providers.
The requirements vary depending on the type of customer and distribution channels and some of the areas changing include:
Introduction of a formal Product, Oversight and Governance (POG) regime; this is where firms (including co-manufacturers) develop new products (or make significant adaptations to existing products), such as material changes to policy cover, limits and pricing, all of which must meet new requirements.
Principal distributors (e.g. a wholesale broker) must ensure individuals who are part of its distribution chain have the necessary knowledge, experience or competence to understand the product and the target market. Products must be assessed to ensure they remain consistent with the needs of the identified target market and whether the intended distribution strategy remains appropriate, including taking account of any direct distribution.
There are some instances whereby existing activities will now fall outside the scope of IDD and therefore FCA regulation (Article 33b).
Within the IDD we see a more pre-scribed approach towards how firms should achieve employee competence. FCA 3.1.6R states that a firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them, and 5.1.5R states that a firm must take into account the nature and range of financial services and activities. This is not straightforward to achieve as there are six disciplines which must be demonstrated:
- Minimum knowledge of terms and conditions of policies offered;
- Minimum knowledge of applicable laws;
- Minimum knowledge of claims handling;
- Minimum knowledge of assessing customer needs;
- Minimum knowledge of the insurance market;
- Minimum knowledge of business ethics standards;
- Minimum knowledge of financial competence.
FCA Systems and Controls (SYSC 28) now contains rules and guidance about minimum knowledge, ability, and good repute requirements.
Importantly, amongst other requirements, we also see new requirements by rule, in the following areas:
- Customers best interests, requiring insurance distributors to act honestly, fairly and professionally in the best interests of their customers, this extends to all distributors in the chain.
- Conflict Management now requires all firms to have a written policy, however, there are some specifics that must be met including at least an annual review, the production of regular management information and a rule requirement to address any deficiencies.
- Ensuring any performance management practices or remuneration scheme is assessed so that it does not conflict with the customer’s best interests rules.
- Higher Professional Indemnity Insurance (PII) Requirements.
This is a very brief overview of some of the main changes that the IDD will bring. For more detailed guidance and support, please liaise with the team at RWA.
We will be publishing additional IDD learning material on the Development Zone in the coming weeks.