Insurance Distribution Directive

The Insurance Distribution Directive is EU legislation, which sets regulatory requirements for firms designing and selling insurance products.

The Insurance Distribution Directive (IDD) replaces the Insurance Mediation Directive (IMD). It aims to enhance consumer protection when buying insurance – including general insurance – and to support competition between insurance distributors by creating a level playing field.

Like the IMD, the IDD covers the authorisation, passporting arrangements and regulatory requirements for insurance intermediaries.However, the application of the IDD is wider, covering organisational and conduct of business requirements and introducing requirements in new areas, including product oversight and governance.

The Insurance Distribution Directive is effective from 1 October 2018.It brings in some fundamental changes to the rules surrounding insurance distribution within the UK and applies to any firm that sells, advises on or concludes insurance contracts.

The following link allows you to view the FCA handbook, as it will look at 1 October 2018, including all the changes brought about by the Insurance Distribution Directive: https://www.handbook.fca.org.uk/handbook?date=01-10-2018&timeline=True.This link may be of interest to the person responsible for compliance within your business.

This document is designed to provide an overview of the changes the IDD brings about.It does not encompass full details of all of the new rules and should be read in conjunction with the FCA’s handbook.

Car Care Plan is committed to helping its partners establish compliance with the new requirements.If we can be of any assistance, or if you have any questions, please do not hesitate to contact us via email to Compliance@CarCarePlan.co.uk.

If you are directly authorised by the FCA, you will need to ensure your processes and controls are reviewed in line with the FCA’s new or updated rules.

Alternatively, if you are an appointed representative then you should be receiving further guidance from your principal firm on their expectations surrounding the new or updated rules.

Continuing Professional Development

The Directive introduces the requirement for all staff involved in the distribution of insurance to undergo a minimum of 15 hours Continuing Professional Development (CPD) per annum.

Under the new rules, firms must, including in relation to the relevant employee, demonstrate compliance with the following professional knowledge and competence requirements:

  • minimum necessary knowledge of terms and conditions of policies offered, including ancillary risks covered by such policies;
  • minimum necessary knowledge of applicable laws governing the distribution of insurance products, such as consumer protection law, relevant tax law and relevant social and labour law;
  • minimum necessary knowledge of claims handling;
  • minimum necessary knowledge of complaints handling;
  • minimum necessary knowledge of assessing customer needs;
  • minimum necessary knowledge of the insurance market;
  • minimum necessary knowledge of business ethics standards; and
  • minimum necessary financial competence.

This CPD could include e-learning modules, classroom based training, individual coaching and development, on-line product knowledge assessments, external training, conferences etc.

The key is to establish appropriate systems and processes to log the development and to ensure that any individual that has not completed the required 15 hours CPD in a 12-month period is stopped from conducting insurance distribution activities until the CPD requirement is achieved.

The relevant section of the FCA handbook can be accessed here: https://www.handbook.fca.org.uk/handbook/TC/4/2.html?date=2018-10-01

The immediate challenges

  • Identifying who is directly involved in insurance distribution, including those within the management structure responsible for the firm’s insurance distribution activities; or responsible for the supervision of a relevant employee who is directly involved in insurance distribution.
  • Designing a development plan to satisfy the minimum 15 hours CPD requirements, ensuring the development fits within one of the FCA’s professional knowledge and competence requirements, as detailed previously.
  • Introducing a method of logging the development completed by the employee; and establishing a method to stop any employee that has not completed the required CPD from being involved in the distribution of insurance.

The Insurance Product Information Document

The Insurance Distribution Directive introduces a new document, called the Insurance Product Information Document (IPID).

The requirements of the IPID are set out in the FCA’s handbook and can be found via the following link: https://www.handbook.fca.org.uk/handbook/ICOBS/6/Annex3.html?date=2018-10-01

The IPID replaces the current Policy Summary Document, which is commonly used within the Motor industry when selling insurance products. However, as the IPID is a document that has to follow a prescribed format and include specific information, you may still decide to use a summary document or sales leaflet to provide consumers with additional information.

The IPID must contain:

  • Information about the type of insurance;
  • A summary of insurance cover, including the main risks insured, the sum insured, the geographical scope and summary of excluded risks;
  • The means of payment of premium and the duration of payments;
  • The main exclusions where claims cannot be made;
  • The obligations at the start of the contract;
  • The obligations during the term of the contract;
  • The obligations in the event that a claim is made;
  • The term of contract including the start and end date of the contract;
  • The means of terminating the contract;
  • The company/brand name;
  • A reference that complete pre-contractual and contractual information about the product is provided in other relevant documents.

Each section should be headed by icons or symbols visually representing the content of the respective section heading.

Car Care Plan has completed IPID templates for all products.These will have to be used for all product sales from 1 October 2018, but can be introduced sooner.Please speak to your usual Car Care Plan contact about when and how to introduce the IPID.

*Please note – an IPID must be provided for each insurance product being offered. For example, CTI Warranty and Roadside Assistance would require 2 separate IPIDs.


What does an IPID look like?


Information about the firm, its services and remuneration

The Insurance Distribution Directive brings in new requirements surrounding the information you provide to your customers about your firm, the services you offer and how you are remunerated.The full information can be found via the following link:

https://www.handbook.fca.org.uk/handbook/ICOBS/4/1.html?date=2018-10-01&timeline=True

Although it is no longer a prescribed form, many retailers still use an Initial Disclosure Document to provide the customer with the required information.

From 1 October 2018, you should ensure that, prior to the conclusion of a contract of insurance; the customer is provided information on:

  • The firm’s identity, address and confirmation that it is an intermediary;
  • Whether the firm provides advice about the products sold;
  • The complaints procedure;
  • The fact that the firm is included in the Financial Services Register and how to verify this;
  • Whether the firm is acting on behalf of the customer or the insurer;
  • Whether the firm has a significant (10%) financial interest in a given insurer or an insurer has a significant financial interest in it;
  • If the firm is a tied agent and if it gives advice based on a fair and personal analysis (of a sufficiently large number of insurers);
  • The nature of remuneration received in respect of the insurance contract;
  • Whether the firm works on a fee, commission or other basis;
  • The amount of fee if paid by the customer.

Example wording regarding fee / commission:

This product is provided to us by the insurer for a net premium.The difference between the retail price you pay for this product and the net premium, less any applicable taxes, is retained as commission by the parties involved with the supply of this product.

Remuneration:

We remunerate our employees using a combination of fixed and variable rewards that are designed to ensure they act in customers’ best interests at all times. All employees receive a base salary and our sales people also receive variable financial rewards based on the insurance policies they process, providing they also achieve high levels of customer service


Advised and Non-Advised Sales

The Directive also brings in some changes to the standards for advised and non-advised sales.

  • An explicit requirement that all contracts proposed must be consistent with the demands and needs. This is for both advised and non-advised sales.
  • Also a requirement that firms who advise must provide a personalised recommendation explaining why the product recommended best meets the customer’s needs.

Current Example

Post 1 October 2018 Example

Based on your demands and needs, I recommend that you purchase Asset Protection Insurance to provide protection in the event your vehicle is written off by your motor insurer.

Based on your demands and needs, I recommend that you purchase Asset Protection Insurance to provide protection in the event your vehicle is written off by your motor insurer.This best meets your needs as you have highlighted that you would like to be in the position to purchase a replacement vehicle of similar quality should your current car be written off.

The following links provide further information on the requirements surrounding advised and non-advised sales:

https://www.handbook.fca.org.uk/handbook/ICOBS/5/2.html?date=2018-10-01

https://www.handbook.fca.org.uk/handbook/ICOBS/5/3.html?date=2018-10-01

Product Manufacturer Responsibilities

The Insurance Distribution Directive requirements has meant that the FCA has introduced a completely new section to its handbook, called PROD, which can be found via this link: https://www.handbook.fca.org.uk/handbook/PROD/4/1.html?date=2018-10-01

PROD stipulates the rules surrounding product governance: including the design, approval and testing of products, identifying the target market, assessing distribution channels and monitoring product performance.The rules are intended to ensure that firms are offering products that are designed with the consumer in mind and provide appropriate protection for consumers.

It is likely that for the majority of products, the parties will agree that Car Care Plan and the client are all involved in the manufacture of the product.This means that the parties will have to sign a co-manufacturer agreement; stipulating which element of the product manufacture responsibilities each party is responsible for:

  • Designing a product to be compatible with the needs, characteristics and objectives of the target market, through a proportionate and appropriate product approval process which is documented as set out in PROD 4
  • Drafting and/or approving the policy documentation.
  • Identifying the target market including, where relevant, identifying groups of customers for whom the product is compatible.
  • Creating the ‘sales model’ and detailing all relevant information as to how sales will be carried out / monitored on an ongoing basis including ensuring the product is distributed to the target market and that all appropriate information on products is provided to the customer.
  • Setting the Retail Selling Price charged to insureds provided that such Retail Selling Price shall at all times be “fair” within Principle 6 of the FCA’s Principles for Business.
  • Monitoring and regularly reviewing the product, as a minimum ensuring the product remains consistent with the needs of the target market and the distribution strategy remains appropriate.

Car Care Plan intends to introduce a new standard Terms of Business Agreement with all dealers in Q4 2018 to cover off the product manufacturer responsibilities and general Insurance Distribution Directive requirements.


Professional Requirements – Good Repute

Another requirement of the Insurance Distribution Directive isthat firms must establish (on reasonable grounds) that all the persons in its management structure and any staff directly involved in insurance distribution activity are of good repute.

The rules state that in considering a person’s repute, the firm must at a minimum ensure that the person:

  • has a clean criminal record or any other national equivalent in relation to serious criminal offences linked to crimes against property or other crimes related to financial activities; and
  • has not previously been declared bankrupt, unless they have been rehabilitated in accordance with national law.

Firms should give particular consideration to offences of dishonesty, fraud, financial crime or other offences under legislation relating to banking and financial services, companies, insurance and consumer protection.

Firms will need to ascertain which employees are included in this assessment and as a minimum:

  • Conduct a CRB check;
  • Ensure they have not previously been declared bankrupt;
  • Assess the individual’s honesty and competence.


Customer Best Interest Rule

Conduct of Business requirements – general principles including acting in customers’ best interests

https://www.handbook.fca.org.uk/handbook/ICOBS/2/5.html?date=2018-10-01

The IDD requires that distributors must always act honestly, fairly and professionally in accordance with the best interests of their customers. This is not just about acting in the customers’ best interests, but also being able to demonstrate that you are doing that. The FCA has confirmed that the "customers' best interests" applies to all firms in the distribution chain. This means that even firms in the middle of a distribution chain will have to meet and be able to demonstrate that they are meeting this principle.