A shake-up in insurance – Implementing the Insurance Distribution Directive

Posted: 2nd October 2018

The Insurance Distribution Directive (IDD) has long been expected to be one of the most significant regulatory shake-ups in the 2018 / 19 financial year for general insurance firms and the insurance market at large. Now that the implementation date has arrived, it’s crucial to reflect on and fully understand the requirements of the regulation and areas in which the regulator is likely to focus their attention. IDD is all about ensuring fairer customer outcomes, after all, and firms that provide the best possible outcomes will be those attracting future consumers – and avoiding unnecessary regulatory scrutiny.

The core of the new directive is very simple: insurance firms and professionals “must always act honestly, fairly and professionally in accordance with the best interests of their customers”. Amongst all the complex regulation and requirements that IDD brings, we have identified three key areas in which we believe the UK regulator will focus their attention.

Demand and Needs

The IDD builds on and enhances the existing Insurance Conduct of Business Sourcebook (ICOBS) standards for advised and non-advised sales.

All firms are required to take a more active role in identifying their customers’ demands and needs and ensure that insurance contract proposed is consistent with them. The stricter requirements mean firms can’t simply offer all the firm’s available products through generic statements about the type of needs each product will meet. Where a personal recommendation is given, the firm must be able to explain why the proposed product best meets the customer’s demands and needs.

The regulator will certainly be interested in how firms can evidence that the product proposed was the best product for each individual circumstance. Of course, this will involve some extra work from firms, as overly-generic or standardised documents will not stand up to the enhanced scrutiny dictated by IDD.

The regulator recognises the importance of the distinction between advised and non-advised sales. Firms offering only non-advised sales will not be expected to undertake such a detailed investigation of customer circumstances as if they were offering advised sales but, naturally, they will still be expected to identify and meet the demands and needs of the customer.

The ‘best interest’ requirement

Under IDD, distributors “must always act honestly, fairly and professionally in accordance with the best interests of their customers”. Distributors may say this is already the case – as it is consistent with the FCA Principle for Business no. 6: “A firm must pay due regard to the interests of its customers and treat them fairly.” – but we are still to see to what extent the FCA will ‘double down’ in this area.

We will have to see how the regulator interprets ‘best interests’, but it is already easy to predict that it will go beyond the current ‘due regard’. This requirement will come into play across the breadth of customer journey but will particularly bite around firms meeting their customers’ demands, needs and remuneration arrangements.

This also applies to all firms in a distribution chain. Given the current focus on distribution chains, it is likely that the regulator will explore further the concept of best interest with distributors.

Product Oversight and Governance (POG)

The IDD introduces enhanced POG requirements for insurance undertakings and intermediaries who manufacture insurance products. POG relates to the systems and controls firms must have in place for the design, approval, marketing and ongoing management of products throughout their lifecycle.

Although implementation will have its challenges, ranging from resource allocation to the rewriting of policies and procedures, the positives are that POG should lead to more clarity about roles and responsibilities throughout the distribution chain.

Responsibilities of Product Providers and Distributors for the Fair Treatment of Customers (RPPD) is the existing guidance that is broadly equivalent to POG, but it is only that: guidance. POG will provide the regulator with more teeth when it comes to investigating product governance issues. We will have to watch this space to see how the regulator will flex their power, but firms should not be surprised by regulatory intervention in this space.

The IDD is an extensive rewrite of the current rules. As with any change, inevitably there will be a number of areas where there is a real difference in interpretation and approach. The regulator will continue to set out their expectations and identify issues and discrepancies that arise from their supervisory engagement with firms. Firms will need to monitor ongoing communications from the regulator closely.

As an example of where inconsistency could arise is the application of requirements for 15 hours of Continuing Personal Development (CPD). Huntswood has previously been supporting firms in identifying employees who are subject to these requirements. No doubt, some of these debates will continue well beyond implementation date.

The vision in mind and further steps

The central objective of the IDD is to enhance consumer protection, ensuring they are well-informed, able to effectively make decisions and come a little closer to understanding the labyrinthine structures of some insurance products.

In any case, firms should be now in a period of embedding, ensuring that any wrinkles in their preparations are ironed out and regulatory requirements met. It will also be necessary to undertake a post-implementation review, to ensure that any changes made to teams, processes or policies leave the firm on a more secure footing.

Huntswood, as a specialist recruitment and development firm within regulated industries, is well prepared to assist firms in this crucial transition period. We can help you gain assurance over your firm’s implementation plan and embedding approach, as well as support you in mitigating regulatory and reputational risk through identifying and addressing any areas for redress early.

Time will tell whether the IDD will deliver on its objective of enhancing consumer protection and just how the regulator will use their strengthened powers. Although IDD does make inroads into better disclosure, transparency and ensuring firms act in the best interests of their customer, it is only one piece in a series of initiatives from the regulator, all designed to deliver better outcomes for customers.