It is now six months since the Insurance Distribution Directive (IDD) came into force, charged with improving competition in the insurance market, enhancing consumer protection and harmonising sales standards in the insurance industry. While the benefit of a harmonised EU sales regime remains in question for UK advisers, experts argue the IDD is contributing to a raising of standards across the sector.
This directive, the implementation of which was significantly delayed, is the latest piece of EU-driven legislation to spring from an earlier 2005 directive targeting competition, consumer protection and market integration.
As these aims suggest, this is a wide-reaching directive, and applies to both providers and intermediaries. This includes those dealing with both retail and commercial customers.
The FCA required that all firms had to be compliant with the new rules by October 1 2018.
Six months on and the Association of Medical Insurers and Intermediaries says the impact has been significant in both the group risk and health insurance sectors.
The trade body has recently announced it will be holding a compliance event on the subject for intermediaries working in the sector, to ensure all are fully up to speed with this new regime.
AMII executive chairman Stuart Scullion says: “Firms should have been preparing for these changes for some time now. Ignorance of these rules will be no excuse for non-compliance.”
However, he adds: “The introduction of this legislation was delayed, so we want to ensure that it hasn’t dropped off ntermediaries’ radar.
“This is also an opportunity for ntermediaries to ‘sense check’ where they are against the IDD’s requirements. As a trade body we are still getting a lot of questions from members about this directive, which should have been addressed by now.”
He reports that when it comes to talking to intermediaries working n the sector the most common question that AMII are asked is how does this affect me?’.
Scullion says: “These changes affect intermediaries across the financial services sectors. The challenges for health insurers and intermediaries are fundamentally no different to those working in other sectors of the insurance industry.”
But he adds that AMII hopes to address these concerns by demonstrating how these regulatory changes specifically apply to the group risk and medical insurance sector.
Vitality Health senior compliance manager William Leigh says: “It’s easy to underestimate the scale of changes the directive introduced – these were wide ranging and included areas such as complaints and conflicts of interest, as well as sales.”
He says: “There has been a significant impact on intermediaries in terms of standards for advised sales, information disclosures and training.”
But he adds that there are no specific impacts for the health insurance market, beyond these more general requirements. He says: “In fact, PMI is an area where the broker can add value with an understanding of individuals’ cover requirements and the provision of more personalised advice.”
In other words, these new requirements should serve to enhance the service provided by intermediaries working in the sector.
Scullion says that it is the smaller intermediary firms that are likely to have seen the biggest impact on their business.
“Larger firms who have dedicated risk and compliance teams should have been well prepared for these changes. and there are unlikely to have been any last minute surprises.”
In contrast smaller firms must make sure that they fully understand the impact and implications of the IDD. The onus is on individual firms not only to demonstrate they understand these new requirements, but to evidence compliance with these new rules.
That said, Scullion is keen to stress that overall these regulations are “about evolution not revolution”.
He says: “Overall the approach appears to be balanced and considered and is focused on the interests of consumer protection. In many instances the current FCA regulations go beyond what is expected under this directive.”
As a result he says the impact for some firms will be more limited.
Scullion says there are a number of key requirements, and intermediaries will need to demonstrate that they have taken positive action on these issues.
The first regards training and competence. This requires insurance distributors and all of their employees to have appropriate knowledge and ability, and this has to be demonstrated by completing a minimum 15 hours continuing professional development (CPD) a year.
Where insurance distributors are subject to the more detailed requirements of the Training and Competence Sourcebook, 35 hours of CPD are required. Scullion says it is important intermediaries know which of these requirements they need to meet.
There is also a new requirement on keeping records – a minimum of three years is recommended – and ensuring adequate professional indemnity insurance is in place. But Scullion points out that most intermediaries already keep records for longer, and FCA rules are already more detailed when it comes to professional indemnity. Another key change is that intermediaries, as well as insurance and reinsurance providers, must only use authorised or exempt insurance intermediaries for insurance distribution services. Leigh points out that this is a change from previous regulatory standards. The IDD also sets out in far more detail what information intermediaries need to disclose to clients, both prior to making a sale and at the point of making a recommendation.
For example, intermediaries are now required to disclose the nature and basis of the remuneration they receive in relation to an insurance contract. In other words they must state whether this is a fee, commission bonus payment, profit share or any other financial incentive.
The directive sets out clear guidelines on how these different payments are to be described, so intermediaries must ensure they are disclosing this information correctly.
The IDD also requires advisers and consultants to establish an insurance client’s demands and needs. Of course the most successful firms in the health market will be doing this already, but this directive requires them to evidence this clearly.
When providing advice or selling a product, firms must explain why the recommended contract is consistent with these specified needs. Scullion says firms should not rely on a generic demand and needs statement here. They must also make a clear distinction between whether this is an advised or non-advised sale. Intermediaries must also state clearly from the outset whether they are acting on behalf of the customer or insurer, and they must disclose if the advice they give is on a “fair and personal” analysis of the market. Intermediaries who do not use the whole of the market must name the insurers with whom they may place business.
Leigh says: “There have been substantive changes to pre-contract disclosures to clients and enhanced requirements for providing advice. For insurers – and intermediaries with a role in product design or manufacture – there are also new and more onerous product governance requirements in particular the Insurance Product Information document.”
He adds: “Intermediaries should already have reviewed their sales processes and documentation to ensure the required disclosures are made and advice meets the enhanced standard and is the customer’s best interests.”
Many in the sector will already by up to speed with these new requirements, but Scullion stresses that it is important for firms to demonstrate their compliance with these new rules. “Evidence is king!” he points out.
Getting to grips with regulatory change is something that intermediaries working across the insurance industry have had to get use to. Alongside this latest EU directive, intermediaries are also facing enhanced regulatory requirement on a range of issues including GDPR, and the senior manager certification regime (SMCR) becoming applicable to all regulated firms.
Today’s regulatory environment can present challenges for intermediaries, but many firms are already meeting these higher regulatory standards, and for those that aren’t, doing so will lead to better business practices.