A look at the key issues from the new Insurance Distribution Directive rules due to take affect from 1 October
The Insurance Distribution Directive will be introduced on 1 October. It will apply to all firms that undertake insurance distribution activities, including in relation to insurance based investment products such as bonds, as well as pure protection and general insurance activity.
Here are some of the key issues advisers should be aware of:
- Suitability. Suitability assessment requirements introduced for other investment business through Mifid II have largely been adopted for IBIPs. There are also changes relating to the circumstances in which a suitability report must be issued and its timing. Where you provide an ongoing service to clients you will also have to undertake periodic suitability assessments. When providing a personal recommendation for insurance products that are not IBIPs, you must provide the client with a personalised explanation of why it would best meet their needs.
- Product governance. Product governance refers to the systems and controls for design, approval, marketing and ongoing management. There will be new product oversight and governance arrangements for manufacturers and distributors of insurance products. You will need to have documented distribution procedures which are endorsed and overseen by your senior management team and reviewed regularly to check they are still valid and up to date (for example, making sure they are getting to the right target market). You will also need to take all reasonable steps to obtain information from the product provider about the product itself, the approval process and the identified target market.
- Training and competence. There is a new minimum knowledge requirement, although no mandatory qualifications for non-investment insurance advisers. The requirement will apply to any staff involved with insurance distribution, such as advisers, supervisors and whoever is responsible for insurance intermediation. For these individuals a minimum of 15 hours annual CPD in relation to insurance distribution activities will be required.
- PI insurance. The required minimum limit of indemnity on a firm’s PI cover for a single claim per year will be €1,250,000 (currently €1,120,200). The required minimum limit of indemnity on a firm’s PI cover in the aggregate per year will be €1,850,000 (currently €1,680,300). If taking out or renewing PI cover before 1 October, request the higher levels of cover from outset. Where your policy is not due to be renewed until after 1 October, speak to your PI broker to ensure the appropriate cover is in place from that date.
- Appointed representatives. There are new requirements related to obligations when appointing and monitoring AR firms. You will need to make sure the AR is keeping appropriate records to demonstrate they are complying with the “good repute” requirements for staff involved in insurance distribution, ensure they are complying with requirements in relation to minimum knowledge and ability of staff and obtain information on the ownership and close links of the AR.
- Introducer appointed representatives. A new exemption will mean those that merely pass on contact details by way of introduction may no longer need to be registered as IARs with the FCA. Lead generation activities and gathering and passing on more than just basic contact details will not fall within the scope of the new exemption.
- Client disclosure. For non-investment insurance contracts, the nature and basis of the remuneration received for advising on and/or arranging the contract must be disclosed. This means the type (such as fee or commission) and the source (fee direct from client or commission from insurer). For IBIPs, aggregated costs and charges must be disclosed. The IDD does not mandate an illustration to show a client the cumulative effects of costs on return, either initially or on an ongoing basis.
- Remuneration. You should not be remunerated or remunerate or assess the performance of employees in a way that conflicts with the duty to act in a client’s best interests, such as sales targets being designed to incentivise recommendations of a particular insurance contract where a different one would better meet the client’s needs.
- Inducements. These requirements are closely aligned to those introduced by Mifid II in relation to other investment business. There is a small difference between IDD and Mifid II requirements in relation to the potential impact of any fee, commission or non-monetary benefit on the service to the client. For Mifid II, the test is that any inducement must “enhance the quality of the service” while for the IDD, the test is that an inducement “mustn’t have a detrimental impact on the quality of the service”. For other insurance business, existing requirements continue to apply.
- Conflicts of interest. The FCA is updating its conflicts of interest rules to refer to insurance distribution activities. It will also include the text of the directly applicable IDD regulation which applies to the distribution of IBIPs. Some examples of changes that apply specifically for insurance distribution activities are:
- You must establish, implement and maintain a written conflicts of interest policy.
- The management body must be provided, on at least an annual basis, with a written report on all instances where a conflict of interest has or may arise.
- Records must be kept and regularly updated on the kinds of service or activity carried out in which a conflict of interest has arisen or may arise.
- You will be required to make enhanced disclosures to your clients where you cannot prevent or manage a conflict of interest from arising.
Targets should not be set to incentivise recommendations where a different one would better meet a client’s needs
Jon Roberts is compliance policy consultants at Threesixty