At a high level the IDD seeks to achieve three primary objectives – undistorted competition, consumer protection and market integration, for both retail and commercial customers.
The European Commission deferred the original application date and the FCA issued its latest IDD Policy Statement in March confirming UK compliance was required by 1st October 2018.
The directive seeks to bring a consistency to the current COBS and ICOBS rules simplifying regulatory compliance. At the root of the changes is a clear requirement for firms to improve their efforts to always act in their clients’ best interests.
If you believe you are an affected firm you should have been preparing for IDD for some time. If not, you need to take urgent positive action now. Ignorance will be no defence.
The directive requires that insurance distributors and their employees have appropriate knowledge and ability, demonstrated by completing a minimum of 15 hours continuing professional development (CPD). Where insurance distributors are subject to the more detailed requirements of the Training and Competence Sourcebook, 35 hours of CPD are required. Know which affects you.
The IDD does not prescribe time limits for record keeping but suggests a minimum of three years. I would suggest doubling that.
When it comes to professional indemnity insurance, existing FCA rules are more detailed than the IDD requires in some respects, at 10 per cent of annual income up to £30m.
As to complaints handling and out of court redress, the FCA proposes to introduce a requirement for insurance distribution business conducted by EEA branches of UK insurers and intermediaries to adhere to an Alternative Dispute Resolution entity in the EEA state in which they are established to resolve consumer disputes.
There is also a requirement for non-life insurance distributors to provide customers with a standardised Insurance Product Information Document (IPID) although their precise nature is still under consultation.
The IDD requires firms to state whether they are an ‘intermediary’ or an ‘undertaking’, whether they provide a personal recommendation and whether they act on behalf of the customer or the insurance undertaking.
Intermediaries must state if they have 10 per cent or more voting rights or capital in an insurer or vice versa and must disclose if they give advice on a “fair and personal” analysis of the market.
Where an intermediary is required to place business with a specific insurer or insurers it must provide details, and where an intermediary does not provide advice on the basis of a fair and personal analysis of the market it must name the insurers with whom it may place business.
The IDD requires insurance intermediaries to disclose the nature and basis of the remuneration they receive in relation to an insurance contract. There is an obligation upon insurers to disclose the “nature” of remuneration paid to employees.
Where the remuneration is by way of a fee the amount must be disclosed. In exceptional circumstances firms can disclose the method of calculation, but only where the amount cannot be calculated at that time.
‘Nature’ is the type of remuneration, including commission, bonus, profit share or other financial incentive. ‘Basis’ is the source of remuneration received.
Firms should pay careful attention to the way in which they describe the disclosure of remuneration as there are clear guidelines as to what is, and is not acceptable.
Where a firm provides advice it must explain why the contract is consistent with them, with a clear distinction established whether any offering is being provided on an advised or non-advised basis.
Firms must not use a generic demands and needs statement. Additionally, they must identify and specify the demands and needs of the particular customer.
New criteria apply in relation to cross sales and the sales of ancillary products. Where insurance is the primary product, information must be given whether the different components of the package can be bought separately for example, health insurance bought with a wearable fitness device.
Most firms who have dedicated risk and compliance teams should be well prepared for IDD with no surprises at this stage. Smaller intermediaries and sole traders must make sure they really understand the impact and implications of IDD because the onus is clearly on them to demonstrate their understanding and compliance.