Getting ready for the insurance distribution directive

Background to the IDD

The European Union Insurance Distribution Directive ("IDD") is designed to make it easier for firms to trade cross-border, create a level playing field among all participants and strengthen policyholder protection. The Directive updates the 2002 Insurance Mediation Directive ("IMD"), which set out a framework for regulating EU insurance brokers, agents and other intermediaries.

The overriding aim of the IDD is to ensure that all parties in the insurance distribution chain act professionally, honestly, fairly and in the best interests of their clients.

The IDD is wide-ranging but some of its specific provisions include:

• Professional development: employees of insurance intermediaries must complete at least 15 hours of professional training per year.
• Disclosure: before the conclusion of a contract, intermediaries must disclose to their customers the nature and basis of their remuneration (e.g. fees and commission).
• Remuneration: intermediaries must not remunerate or assess the performance of employees in a way which conflicts with their duty to act in the best interests of their clients.
• Provision of information: intermediaries must provide certain information to their customers to summarise the main features of the proposed contract).

Transposition into UK law

The IDD is currently subject to consultation and the Government intends to transpose it into UK laws by February 2018.

Full details of the Government’s consultation can be found here:
https://www.gov.uk/government/consultations/transposition-of-the-insurance-distribution-directive/transposition-of-the-insurance-distribution-directive

Impact

The FCA is currently assessing the impact of IDD and we are engaging in the consultation process. Where we intend to introduce particular measures in response to the IDD we will be communicating suitable statements as our responses become clear.

Demands and needs

 One specific requirement of the IDD concerns demands and needs statements (D & NS) and we have been able to take an early look at that particular aspect of the directive. It is the responsibility of the organisation or person who sells an insurance policy to a customer to provide a D & NS.

• The IDD makes it clear that firms need to specify the customer’s insurance demands and needs based on information obtained by the firm from the customer. Firms must take an active role in identifying the customer’s demands and needs (through asking questions) early in the sales process.
  
• To comply with this new requirement, firms need to:
  
• identify the customer’s demands and needs and match them to the available products, and
  
• state the customer’s demands and needs to assist them in making an informed decision.
  
• The distinction between advised and non-advised sales will remain. For non-advised retail sales, the FCA will not expect firms to carry out a detailed investigation of the customer’s circumstances, but customer demands and needs must be identified and it must be ensured that contracts proposed provide cover that meets those demands and needs. For example, a firm which sells motor insurance on a non-advised basis would be expected to ask the customer questions about the level of cover they require, the amount of excess they are prepared to pay, and the type/amount of their driving (amongst other relevant things). The product offering should be limited to products which would meet these specified demands and needs.
  
• The FCA will amend its guidance to make it clear that firms must ensure that they identify and specify the demands and needs of the customer. For example, it would not be appropriate to provide a generic statement of demands and needs where the firm has not first taken steps to identify the demands and needs of the actual customer. However, generic D & NS may be appropriate if the firm has narrowed the product options it offers to only those where the customer’s demands and needs match those in the statement.

Our response

We have taken the opportunity to improve our suite of D & NS in advance of the implementation of IDD.

Since it is a seller’s (and not a product designer’s) responsibility to provide customers with a D& NS, agents are free to use their own documents if they wish or to re-brand ours. We will ask to see a copy of an agent’s own document if they do not wish to use the ARAG D & NS.

Our new D & NS comprise of question sets to encourage customers to actively consider what they want from their Legal Expenses or Assistance Insurance policy and raise awareness of policy features at the point of sale. The new D & NS literature can be down- loaded as PDF documents from the product section on our website. Items are suitable for our standard product range. Agents may wish to modify the standard D & NS where we have designed bespoke content into a product or where products target customer groups with particular interests or concerns.