Lloyd’s will this month commence a Thematic Review of whether Managing Agents have fully and properly implemented the IDD. Later this year the FCA is proposing very similar work.
We thought it might be beneficial to remind everyone what they needed to consider by 1st October 2018 and provide something like a checklist.
There were many new requirements introduced by the IDD and some changes to the perimeter around who must be authorised and who remained outside of the paddock fencing and peripheral. For the purposes of this article we will focus on the changes which are required by those who now need to be authorised and not focus on those new entrants to the world of FCA authorisation. I suspect that if they are not authorised by now, they may never receive that accolade, whereas if the new entrants have joined the paddock, they will also be interested in ensuring they are meeting the FCAs requirements under the IDD.
However, for historically regulated firms there is the requirement to ensure that when dealing with third parties which are undertaking regulated activities they are properly regulated.
- Have you reviewed the new perimeter and understand which firms are now caught?
- Have you updated your internal procedures and manuals to ensure that all new third-party arrangements with distributors and outsourced service providers are with entities, which if they are now required to be regulated, they have their authorisation?
- Have you informed all staff, including those in corporate, sales and distribution development, underwriting or claims activities of the new perimeter?
For many in the sector governance of products is not new. In Lloyd’s the Minimum Standards contained product governance requirements long before the IDD was finalised and many insurers were already turning their attention to how to control their product development and oversight in a way that ensured appropriate outcomes for customers.
The IDD however, introduced the concept of product manufacturer and co-manufacturer and made it the responsibility of the manufacturer to ensure appropriate governance over the product including in distribution. That approach, along with the also introduced “Customers’ Best Interests” rule meant that brokers, MGAs and other distributors of insurance products could be responsible for product governance either alone or in conjunction with others.
In our world the four stages of a products’ lifecycle involving Development (and testing), Sales and Distribution, Claims and Servicing and finally Feedback and Review neatly match the approach a firm should be taking to product governance. To oversee the lifecycle there I a need to have a process which involves the right individuals. This is generally occurring at a Product Oversight Group (POG ) often involving a mix of underwriting, claims, complaints, compliance and risk personnel to ensure all aspects are considered. Depending on the nature of the products and the size of the organisation this may also be a Committee with Board Directors sitting on it.
This requires that the product is designed for it’s target market which intrinsically means that the manufacturer has to have identified that market. The manufacturer may also want to test the product but whether or not it does it must ensure that the distribution methods adopted ensure that the product reaches its target market.
Having identified the distribution approach action should be taken to ensure that the distributors are aware of the intended market for the product and are distributing accordingly. Where the product is new or new to the distributor the manufacturer should ensure that their distributors are sufficiently experienced or trained in the product to be able to undertake the distribution process properly. This requires clear communication from the manufacturer to their distributors. Often the distributors may also be a co-manufacturer, particularly if they are an MGA. Where that is the case the parties should agree on which elements of the product development process each is prepared to be responsible for. The reason for this will, I suspect become very clear as the FCAs’ work on pricing continues during this year.Distribution should also result in Management Information (MI) which can be used to provide signs that the product has reached its target market. For example, cancellation rates, pricing and sales complaints MI. This information should be monitored by the manufacturers and any outliers or indicators that all is not well reported to the POG.
3. Claims and Servicing
As with sales and distribution the manufacturer needs to ensure that anyone, including their own staff, who are involved in the claims and servicing of customers understands the product and has the experience required to manage the process.
The Manufacturer must also ensure that appropriate MI is being created from these processes to identify any issues with the product (or the sales and distribution of the product) in order that any issues may be identified through Root Cause Analysis. That MI again should be monitored and issues raised with the POG.
4. Feedback and Review
All of the MI which is being collated should be monitored. If there are identified issues these need to be brought back to the POG which should be empowered to make decisions on either withdrawing or adjusting the product or ensuring that whatever aspects of the lifecycle are not working to ensure appropriate outcomes for customers are adjusted. Where the product design is not at fault, that may for example mean training for those involved in any stage of the lifecycle or it may mean changing those involved.
- Do you have an appropriate process for governance of your products?
- Have you mapped all of the relevant products?
- Are your procedures manuals including Compliance Manual updated?
- Has your version of the POG:
- Reviewed all your products to ensure:
- The sales and distribution, claims and servicing and feedback and review are all appropriate;
- The MI is appropriate (and here you may wish to think about the latest FCA Consultation Paper (CP19/8) dealing with the publication of value metrics)
- Root cause analysis of sales, claims and complaints information is taking place and appropriate
- Been empowered to make the appropriate decisions about products
- Developed an effective reporting line in to your full governance structure either via a Risk and Compliance Committee or similar ultimately to the Board of Directors.
- Reviewed all your products to ensure:
- Do you have agreements in place with all of your co-manufacturers or potential co-manufacturers for the products you are distributing?
- Is it all operational and effective?
- If you are in Lloyd’s are you meeting all of their Minimum Standards on Product Governance?
Best Interests Rule
With the introduction of the IDD into FCA rules came the requirement that all distributors of insurance products must act in the best interests of their customers. Interestingly it is not a high-level principle, principally because it does not have universal application for all FCA firms.
However, the impact of the introduction of this rule is to advance TCF and its later version, conduct risk, into a principle which applies to all distributors in the chain. This is likely to have the greatest impact on MGAs and coverholders who may traditionally have seen their duties to be towards their principal the insurer who has granted them the binding authority under which they distribute their products. This created a direct conflict between the duty to act in the best interests of the insurer and the duty to act in the best interests of the insured.
Consequently, MGAs and other distributors in a similar position are likely to find an increase in potential conflicts of interest.
- Has your conflicts of interest policy been reviewed/updated?
- Has the conflicts register been reviewed/updated?
- Are conflicts being reported regularly to the Board of Directors?
- Has your risk register been reviewed and updated?
- Have all staff been trained on the potential increase in conflicts of interest, particularly in areas such as underwriting and pricing, the latter of which the FCA is focusing closely on this year and claims management?
Transparency and the IPID
The IDD introduced greater transparency requirement for commissions and other income and a new product disclosure document, the IPID (Insurance Product Information Document) the lattere having quite strict format and content requirements.
A number of UK firms were caught unaware by the extent of the IPID requirements because of the different approach taken in the UK to that taken by in the EEA. In the UK, firms were only required to use the IPID for consumer business but had the option to use IPIDs for any risks which were not defined as Large Risks. In the EEA most, if not all countries, applied the IDIP requirements to all risks excluding defined Large Risks resulting in a number of UK firms utilising EU passporting rights to find themselves caught out at the last moment.
- Have the new transparency rules been applied by your firm so that appropriate disclosure is being made as required?
- Is your firm issuing IPIDs in all circumstances where required?
- Are your distributors doing so?
- Do your IPIDs comply with the strict requirements of the FCA/IDD?
- Do you have in place an appropriate process for ensuring that IPIDs are issued where required?
- Have you updated all relevant procedures, compliance and other manuals?
The IDD and the FCA implementation saw the introduction of new professional standards for all staff involved in the distribution of insurance products and their managers. One of the key requirements introduced was a minimum training requirement of 15 hours per year with specific issues to be covered including knowledge of the regulatory environment and the products being distributed.
- Has your firm implemented appropriate processes and procedures including:
- A process for identifying your relevant staff?
- Adding training requirements to the annual objectives for relevant staff;
- Administration and other procedures to ensure staff meet and document meeting their requirements?
- Updating HR and Staff manuals?
- Adding monitoring of training requirements to the Compliance Departments’ annual monitoring plan and Manual?
- Are the training modules meeting the FCA/IDD content requirements?
There were many changes introduced in October 2018 and as is often the case, firms will implement them utilising a risk based and proportionate approach. However, some firms have a higher likelihood of coming to the attention of the FCA than others at the time when the FCA undertakes Thematic Review. If your firm is in Lloyd’s there is a higher likelihood of review as you have both the annual affirmation coming up soon and there is a limited number firms.
The checklists we have prepared are designed to be helpful so that you can undertake a quick review of where you have got to with your implementation of the IDD.
We hope you find you are where you need to be. If not, we would be more than happy to help.