The Insurance Distribution Directive (IDD) has arrived and whether they have made sufficient preparations or not, intermediaries should already be compliant. Firms with in-house compliance departments, typically larger businesses, are likely to be up to speed. Smaller firms though, are likely to be in a less favourable position.
But, excuses or a lack of knowledge won’t wash - the European Parliament had already agreed to extend the introductory date from 23 February 2018 to 1st October. But did all intermediaries use this extra time wisely?
It seems not… last month, insurer Ecclesiastical found some 27% of general insurance brokers were ‘completely unaware’ of the directive. Only 31% felt ‘fully prepared’ to meet the requirements, 17% said they were ‘not ready’ and a further 52% needed more training. Meanwhile, software company, UndewriteMe, found just 60% of advisers who sold protection insurance were prepared.
Raising the regulatory bar
The IDD aims to update regulations surrounding intermediated sales and replaces the Insurance Mediation Directive, which came into force in 2003. It also brings more into the regulator’s scope, applying to those who do not sell insurance as primary roles, such as car dealers and travel agents. Only pure introducers, who pass information on, but play no part in the sale are exempt.
Notably, the IDD brings in a new principle that intermediaries “must always act honestly, fairly and professionally in accordance with the best interests of their customers.” Many will say they already do this, but if challenged by the FSA, then under the terms of the directive, evidence needs to be produced.
The IDD introduces a number of key changes, including:
- Staff training and knowledge
A minimum of 15 hours’ CPD for staff and where already subject to the FCA’s Training and Competence, there is now a 35 hours requirement. Employees should understand areas like product coverage, claims and regulation, with records to show this.
- Insurance product information document
Customers, both existing and new, will be given a prescribed form, prior to the conclusion of a contract. This must be in plain language, without jargon. It will detail further information such as the nature of the distributor and remuneration arrangements, replacing key facts documents.
- Remuneration disclosure
Although brokers only need to disclose sums on request, they must explain the ‘nature and basis’ of commission, such as bonuses, profit shares or extra fees for services such as claims handling. Intermediaries must disclose any fee payable in cash terms, including for mid-term adjustments.
- Complaints handling
Regulated firms must have a policy for all customers, and not just those eligible to use the Financial Ombudsman Service.
- Demands and needs
The directive has a stricter and more interactive approach when it comes to identifying what is required.
- Cross selling
There are new requirements regarding customer information where a product is sold alongside another.
- Product distributors
Intermediaries wishing to distribute must have a defined strategy, showing relevant details based on their agreement with the insurer.
- Conflicts of interest
New requirements will mean formal conflicts of interest policies, informing boards when these occur and informing clients if conflicts are unmanageable.
- Additional disclosure
Shareholdings of 10% or more between insurer and intermediary should be disclosed. Where intermediaries use a panel, they need to let customers know up front who is on it.
- Professional indemnity
Minimum levels of €1,250,000 per claim per year (up from €1,120,200) are required. The required minimum limit of PI indemnity in the aggregate per year will be €1,850,000 (previously €1,680,300).
There will not be a brand new framework since the FCA has said it will build on its existing Handbook. But there is plenty to take on board. Better consumer protection and a more level playing field will no doubt result from the IDD, but any intermediary who fails to take heed of the rules may well put their business in peril.