Since its introduction in October 2018, the Insurance Distribution Directive (IDD) is proving more difficult to implement that expected. David Allison of Compliance Management Services reports on the sticking points.
After an unprecedented delay of eight months from its original effective date, IDD finally came into force on 1 October 2018. Nearly a year-and-a half on, it might reasonably be expected that firms would have embedded the directive’s requirements into ‘business as usual’. But the reality, in our experience, is somewhat different. Insurers and intermediaries alike continue to be challenged by what is arguably the biggest single change to regulation since the introduction of its predecessor, the Insurance Mediation Directive, in 2005. For this reason, the FCA has said it’s taking a ‘keen interest’ in the way firms have risen to the challenge, in the expectation that they have made significant progress in the last year or so.
When the FCA takes a keen interest in a topic, you can be sure that it’s looking carefully for evidence that firms are complying with the new rules.
Non-compliance is rife
From a conduct perspective, the introduction of an overarching ‘customer’s best interests’ (CBI) rule has been highly significant. Particularly so as it applies to all firms, regardless of their position in the distribution chain. The FCA is already challenging firms’ business models and practices against the CBI rule. We have also seen its application featured in the April 2019 thematic work undertaken by the FCA on general insurance distribution chains (TR19/2) and new non-handbook guidance which followed in its wake (FG19/5).
Certain aspects of the IDD have been designed to improve selling standards. While some of the changes have proved challenging (and costly) for many customer-facing intermediaries to implement, we still see instances of non-compliance with the most basic of the new requirements. For example, telling customers about the nature and basis of the firm’s remuneration on a contract-specific basis and giving customers the option to receive their documentation in hard copy for no additional charge. More worryingly, some firms have not reviewed their selling standards at all.
Missed or misunderstood?
One of the most commonly discussed areas of IDD compliance is the requirement for all staff involved in insurance distribution activities to undertake a minimum of 15 hours CPD per year. On the face of it, this seems straightforward. But the new rules stipulate which topics must contribute to CPD, a requirement which some may have missed.
A real game-changer for the industry, but much less widely understood, has been the introduction of new Product Oversight and Governance rules (PROD). The PROD rules apply to all product manufacturers and distributors. More than a year on, we find that firms are still trying to get to grips with what the rules mean for them, including their interactions with other parties in the chain. For example, an insurance intermediary with a decision-making role in designing and developing a product must have a documented product approval process for each new or significantly-adapted product before it is brought to market.
Where an intermediary has any form of product manufacturing responsibility, it will sit alongside the insurer as a ‘co-manufacturer’. This requires a written agreement between the co-manufacturers that identifies their respective roles and responsibilities in the manufacturing process.
Behind on PROD
The market appears to have been slow in some quarters to get up to speed with PROD requirements. The findings of the recent Lloyd’s IDD Thematic Review, conducted by the corporation on its own market, illustrate this point. They are expected to prompt significant activity between managing agents and coverholders, so that the correct documentation and processes are in place.
It is also not often appreciated that intermediaries with no involvement in manufacturing have new responsibilities under PROD. For example, they must have a documented distribution strategy for each product, and review it regularly to keep it valid and always up to date.
The requirements of the IDD are far-reaching and not to be underestimated. Now would be a good time for firms to take stock of the progress they have made in their implementation plans and take actions to address any gaps identified.