The IDD, which replaces the 2005 Insurance Mediation Directive, is due to come into force on the 23rd of February 2018. There are far reaching and important changes in the IDD which insurance firms and others distributing insurance need to comply with which I wrote about in a previous article last year. This paper follows up that article to see where we are and what is changing.
Current Position
At this point the FCA has issued two Consultation papers the first of which has now been transposed into Policy Statement 17/21 and the second, CP 17/23 which closed to responses in October with a Policy Statement due to be issued in December 2017. A third Consultation Paper has also yet to be issued which will cover important topics such as changes to the FCA PERG requirements and product governance. It was expected to be issued while the second consultation paper was open but this has not happened. It is not clear what the timeframe for that Consultation Paper is but it will not be leaving a great deal of time for compliance before the go live date in February and while insurers and intermediaries have had notice of what is coming they have not had the full details. There remains the question of the UK enabling legislation. This is in draft at this point and there is further work to be done because the EU legislation was only issued in draft in July 2017 so there is further uncertainty. This has led the MGAA to issue a suggestion to the EU to delay the date for commencement. It seems that the only countries which are even close to having final draft enabling legislation or regulations prepared or ready to be in place by the proposed February date are the UK and Germany where BaFin has been active. In addition to the MGAA suggestion, ECON, the European Parliament Committee dealing with economic and monetary affairs, has recommended a delay for the application of the regime that all the trade bodies have supported as have a number of others including The Netherlands. The proposal is that all EU member states have their legislation in place by 23rd February but that the regime not start to be applicable until 1st October. Given this position it would seem appropriate to delay but the EU has yet to make any announcement or respond and the sense within the trade bodies is that a delay seems unlikely. What is clear however is that businesses, marketing, communications, HR, compliance and risk departments are going to be very busy over the next few months. If GDPR and SMCR were not enough, many firms are also dealing with Brexit reorganisations. To also have to make significant changes to marketing, distribution and product documentation to comply with the IDD just seems to be adding insult to injury by having to comply with expensive and pervasive new EU regulations when the government is negotiating an exit from the EU. This is the case even if, in most cases, those new regulations make sense and offer greater protection and clarity to policyholders. It is also clear that the FCA is not going to maintain the minimum standards laid down in the IDD but will be introducing or maintaining higher standards in some cases to promote effective competition.
Policy Statement 17/21
The focus of the first and most substantial consultation paper and subsequent Policy Statement was training and competence requirements, complaints and out-of-court redress, ancillary insurance intermediaries, professional indemnity requirements and conduct of business requirements. We will look at each in turn.
1. Training and Competence
The IDD introduces a minimum of 15 hours continuing professional development (training) for those involved with distribution of insurance products. The FCA is not going to enhance this requirement, (though the minimum of 35 hours remains in place for those subject to the current FCA Training and Competence Sourcebook – advisers and others in relation to certain life, mortgage and investment products) so all those who are directly engaged in the distribution of insurance products will need to do at least 15 hours of training every year. This includes those involved in the distribution of insurance products, those who supervise them and those within the management structure with responsibility for the firm’s distribution activities. This is a requirement applying up the management chain and will cover those who sell or advise on insurance products whether they be for example an underwriter, an individual working in telesales on sold and/or advised products or a broker giving professional advice on a bespoke policy. Arguable it also applies to those who are engaged in the development of the products being sold (think of your product oversight group) and those who assist in servicing customers with queries about the products they have bought where for example they may be involved in changing the terms and conditions. Firms distributing insurance products including direct insurers and brokers will also need to maintain an up to date register of the individuals concerned and of the CPD undertaken by each. The responsibility for this is placed on the firm not the individual. There is no set agenda as to what each should be taught but the FCA guidance is that it should be appropriate to ensure the employees have the required knowledge and competence so it will change as between individuals with difference roles and different places within the management chain.
2. Professional Indemnity
The IDD raises the minimum requirements for PI for all intermediaries to 1.25 million Euros per claim per year and 1.85 million Euros per year in aggregate for all claims. The FCA will adopt these new limits and firms need to ensure that their PI cover is adjusted accordingly. Because the IDD uses Euros firms are in any event required to take reasonable steps to ensure that the policy has an adjusting mechanism to account for the fluctuation in the exchange rate between the policy denomination and Euros.
3. Complaints and Out-of-Court Redress
The IDD requirements for complaints handling essentially brought the rest of Europe into line with the FCA complaints requirements laid out in DISP and utilising the existing FOS jurisdiction. However, the IDD made two important changes. First it lays responsibility at the door of the Home State regulator which, while having the closest connection to the senior management and oversight of the firm, has possibly the least connection with where a breach of any conduct requirements may have arisen. That being the case UK firms are going to be required by the FCA to ensure they have an appropriate complaints process and adhere to an ADR (alternative dispute resolution) entity in those EU states where they are established. The latter is designed to ensure compliance with the second new change brought about by the IDD which has built in requirements for firms to be a member of a suitable ADR forum or procedure so that policyholders may utilise ADR rather than go to litigation if they wish. Of course, it also means that insurers and intermediaries must now ensure that from February the documentation they distribute in the EU contains the relevant information of their complaints and dispute resolution arrangements, something not previously required in the EU. This will be a costly but necessary exercise for firms and the work needs to start soon to ensure IT systems and policies are ready for distribution by February.
4. Conduct of Business
As with the changes required to meet Complaints requirements the changes needed to meet the new Conduct requirements will result in changes to product and distribution documentation. The areas covered here include:
• The introduction of general principles
• Pre-contract disclosures
• Conflicts and transparency disclosures
• How information may be disclosed
• Standards for advised and non-advised sales and
• Cross selling requirements
Some of these are more far reaching than others as they go beyond current FCA requirements and will result in material changes to practices within firms distributing insurance products. General Principles: In my last article, as with the presentation I did to MEPs before the last trialogue discussions finalising the wording of the IDD, I argued that the introduction of a duty to act in the customers’ best interests was not in line with and significantly changed UK law in so far as it applied to insurers selling products direct. The duty is consistent with the duty owed by an intermediary acting for a customer as their agent but not to an insurer who does not act as the agent of the insured it is selling a product to. This rule, now known as the “customers best interests” rule will apply to all distributors of insurance products as a general and overriding principle when dealing with policyholders and prospective policyholders whether they be insurers selling direct, wholesalers in the chain of intermediaries or direct intermediaries. The requirement is that “remuneration of a firm or its employees, and performance management of employees, must not conflict with the duty to act in accordance with their customers best interests”. This will operate at numerous levels and apply to, for example, how an insurer might remunerate a wholesaler, how a wholesaler remunerates a retailer and how all of them remunerate their staff. It is also likely to have other significant impacts when looking at the handling or payment of claims and the terms and conditions offered. It also opens the door to the possibility of mass class style litigation against direct insurers and consequently is likely to increase the cost of the insurance to the insured. As the risk increases to the insurer so does the price. After the 2004 and following Spitzer issues the UK and London insurance markets undertook a lot of work to review remuneration arrangements and conflicts of interest issues but time has taken its path and with time it is possible that the lessons of the past may have been forgotten or lost entirely. There may be significant work required by insurers and brokers in distribution chains to review their approach to remuneration of third parties as well as staff if they have not done so in recent times. In the UK at least, aspects of these issues are likely to be reviewed by the Financial Conduct Authority during its’ already announced market review into the wholesale insurance market. On another note there is a new requirement that all marketing material must be clearly identifiable as such. This will require a significant amount of work to determine what is marketing material as no definition is provided and to then declare such material to be such. ICOB 4: There are some new disclosures which are required. All of these will require documentary changes and it would appear that regulators are not entirely aware of the significant impact that changes to documentation have on insurers and intermediaries. Only small changes can still cost significantly in time and both financial and human resources. Some such as the requirement that the Insurance Product Information Document (IPID), a pre-contractual document, contain start date of the contract may be almost impossible for the insurer to provide as is the requirement, though this particular issue is not the subject of this article appearing as it does in the more recently closed consultation process. Intermediaries are going to have to ensure that there is even greater clarity about when they are acting for an insurer or the policyholder particularly as there are many instances still where the broker may act under a binder for the insurer while also acting for the policyholder for the placing of the insurance and when a claim comes in may again be acting for the insurer. To lay this out in a manner which will be simple for a policyholder to understand may be harder than it seems as the policyholder should not be confused at the end of the process. It may be best that those brokers who hold binders now seek to split themselves into separate companies for a simpler understanding of responsibilities. Again, an area to be no doubt considered in some detail by the FCA in its wholesale market review. These rules are designed to enhance customer understanding and reduce conflicts. They go further than simple disclosure of roles. They now also include disclosure of any ownership interests from insurers and the nature of the remuneration (including non-monetary benefits) in relation to the insurance product being distributed
- To their employees and
- The fees payable by the insured in cash terms.
ICOB 5: An all-encompassing change in approach is the need to now ensure that all policies must be consistent with the customers’ demands and needs whether the sale is advised or non-advised. There is room for interpretation on the operation of these requirements and it may be a while before there is detailed clarification. The proposal will however have a significant impact on arrangements for non-advised retail consumer and micro and SME commercial business and may increase customer success rates on complaints on non-advised sales. It will also drive greater focus on the product development stage. Businesses will need to be reasonably certain that the product they are designing and the distribution channel chosen ensures that the product is only bought by individuals for whom the product is designed. Product Governance is going to be one of the subjects of the final consultation paper still to come. It might also lead to greater product variety as firms develop specific policies for specific customer categories. For comparison websites it could result in a loss of sales as they are required to ask more questions of their customers. The general rule in on-line sales being the less clicks the more sales. For advised sales a personalised written recommendation is going to be required in many cases bringing general insurance closer to life business and potentially increasing the cost and time required to sell a product. ICOB 6A: the FCA has decided to implement the new cross-selling rules as outlined in their consultation paper meaning that further disclosures are required where insurances are sold together with other products and the insurances must be available to the customer separately from the non-insurance goods or services. This includes insurances currently distributed as “free” because the cost is built into the package. These rules are in direct response to the PPI scandal and are all encompassing. They may not entirely destroy a variety of products which are sold as packaged products but they certainly will change the sale process significantly and should change a lot of poor practises which have historically not been to the benefit of potential policyholders. The rules will sit alongside rather than replace existing rules on GAP insurance and packaged bank accounts.
5. Ancillary Insurance Intermediaries
The FCA has chosen to treat all ancillary insurance intermediaries (AIIs) as within the full scope of the IDD requirements. In future therefore, motor dealers and others who sell insurance alongside their primary products are subject to the full FCA regime. They will either need to be an Appointed Representative or they will need to be authorised themselves. Given the focus by the FCA on upgrading firms’ oversight of their AR networks it is quite likely that many AIIs may not be able to find a firm prepared to accept responsibility for their activities. On the other hand, there are many intermediaries who are heavily financially reliant on AIIs. To continue they will have to upgrade their oversight of the AIIs they oversee as Appointed Representatives. This has far reaching issues for distribution of certain products and we may not see the impact on the market as a whole for some time yet. AIIs as a class does not include those businesses operating under the connected contracts exemption or Designated Professional Bodies under Part XX of the FSMA. Another category under the spotlight as a result of the IDD are CTI (connected travel insurance) providers. These firms are now going to be subject to the General Principles, demands and needs requirements, cross-selling rules and some of the pre-disclosure requirements but not all ICOB requirements. They will also be required to hold PI insurance at the minimum levels.
Consultation Paper 17/23
Responses to this consultation paper were due Friday 20th October 2017. The FCA will review the responses and issue a Policy Statement likely to be December 2017 leaving something near two months to implement. History suggests that the FCA will make few changes to the proposals which it has set out in the Consultation. There are a number of important areas covered by the consultation which deal with handbook changes for purely life business, life and non-life business and purely non-life business. The subject matter covered includes general obligations, disclosure, inducements, suitability, appropriateness, conflicts of interest, product governance and oversight, CASS and the good repute of distributers’ employees. We do not propose to go into these in detail as we anticipate some though not significant changes before the Policy Statement is issued in December. Some of the proposals are in any event subject to the EU IDD Delegated Acts which have not been dealt with yet and will therefore be covered by the due to be released third IDD Consultation Paper. For example, the present consultation paper covers product governance and oversight at a high level leaving detail until the third consultation paper is released. The changes proposed in this consultation paper are not complex but may lead to some confusion in the life sector. This is not the fault of the FCA or the UK government but the EU where the IDD does not mirror or match directly the MiFiD requirements. In some cases, the FCA have concluded that while the language in each is not identical the substance is. For example, IDD Articles 27 and 28 and their MiFiD equivalent. In others the differences are sufficient for the FCA to adopt an approach which sees the two being as closely harmonised as possible by bringing the requirements of the lower level of protection up to the higher standard set in the other. Not all the new requirements will for policy reasons apply to life and non-life products. For example, the inducement and conflict rules will be different meaning that insurance brokers will continue to have more flexible remuneration rules not permitted within the life sector to IFA’s. Overall, what will result is a complex set of rules which means that product distributors will need to be careful about ensuring that they are aware of which rules apply to which products. There will also be circumstances where different sets of rules will apply to competing products within the life sector depending on which rules, MiFiD or IDD are to apply to the product. The FCA appears to have set out to make it as least confusing as possible but the result is complex.
Conclusion
Even if the next Policy Statement were issued in the next couple of weeks contemporaneously with the final consultation paper there is scant time for all those impacted by the IDD to have all the required changes in place by February. Most compliance and risk departments are already dealing with the GDPR, SMCR and in many cases will shortly engage with implementation of their Brexit plans. Most regulators and legislators have not been diligent in issuing the detail of their implementing legislation for the IDD. It would appear therefore that the best thing that could happen at this point in time for insurers and brokers would be for a delay to the commencement of the IDD. That does not mean that a delay will be forthcoming. Even if it is it will only be a temporary stay of the work required at a time when a number of the other significant market issues remain in play. Plans should therefore be prepared and put in place to make the changes required as soon as the detail is available. Regardless of when the IDD takes effect, one conclusion which can already be drawn is that the cost of compliance is not reducing but continuing its upward trend. With recent losses and premium rates continuing a downward trend the question may be asked whether the insurers and brokers will bear this increasing cost or their customers. The suspicion is that if you ask a customer whether they want a more detailed pre-contractual document setting out who does what which provides a partial breakdown of what they are being charged or would prefer cheaper cover, they may request the latter rather than the former. After all, whoever reads all of the paperwork sent each time you renew your house/boat/car insurance? Do not misunderstand me. I am not saying transparency is wrong. I am a very strong supporter of transparency. I just question whether documentary overload is the best way to achieve it.
Kenneth Underhill
Director
