The Implementation of IDD – Warnings from the FCA

In early December the FCA quietly published a new webpage on delivering clear and fair outcomes for consumers under the Insurance Distribution Directive.

You can find this at https://www.fca.org.uk/firms/insurance-distribution-directive/idd-delivering-clear-fair-outcomes-consumers-insurance-sector

The webpage may have been published without fanfare but, my goodness, it is a tough warning to the general insurance market – which you must not ignore. Indeed FCA make the point that, when it published similar materials, regarding insurance renewals, firms did fail to take due note. FCA says that it:-

“expects firms to have learned lessons from this”

The page states that the FCA expects firms to have already adapted their processes to meet the IDD requirements, which came into effect on 1 October 2018. However, it calls on them to continue considering how they can improve customer outcomes. This is followed by the sinister sentence:-

“The FCA is taking a keen interest in the way firms are applying the IDD-related rules”

The page then goes on to highlight the following “important areas” which FCA says that it expects firms to have considered:-

“around which it is focusing its supervision”

So – if you ever wanted a better (and targeted) warning of where you might be caught out by the FCA within the next year or so, I doubt whether you will find it.

Here follows a summary of the key issues which the FCA highlight:-

Identifying customers’ insurance demands and needs, and ensuring products offered are consistent with them.

The FCA says that firms can still carry out non-advised sales, and it does not always expect them to perform a detailed investigation of a customer’s circumstances. However, FCA says, firms must not offer customers products that do not meet their demands and needs.  I would add that demands and needs investigations (at whatever level) must happen and must be interactive. The FCA reminds firms of the illustrative examples of likely compliant, and non-compliant, scenarios in this area in its March 2017 consultation paper (CP17/7). It says that firms should have reviewed their sales process to ensure they are compliant with these requirements.

Having in place product oversight and governance (POG) arrangements.

The webpage tells us that one of the FCA’s key ongoing aims is to ensure firms place sufficient focus on identifying vulnerable customers and treat them appropriately. The FCA reminds firms that all those which have a role in manufacturing (that is, creating, developing, designing or underwriting) an insurance product need to meet the requirements set out in Chapter 4 of the Product Intervention and Product Governance Sourcebook (PROD).

I have a deep concern that many firms are still failing to address the implications of the PROD requirements up and down the distribution chain. Have you got the necessary written agreements and policies in place?

Complying with the customer’s best interests rule.

FCA say that this rule extends throughout all elements of insurance products and services. This is a rather “pat” statement by the FCA, although they do go on to add:-

“the IDD introduces a rule which requires that all firms act honestly, fairly and professionally in the customers’ best interests regardless of their position in the distribution chain, and whether or not they have direct contact with the end customer. Throughout the distribution process, including the marketing, remuneration and the sales of products, firms must always focus on and meet this requirement”

 It has been really interesting, as I have delivered my IDD Foundation Course (see below*), just  how few folk (senior management through to operational management) have really digested the full significance of the customer’s best interests rule.

In effect, the rule supplements the PROD requirements, as referred to above, by demanding that:-

• not only must the entire distribution chain take responsibility for liaison and co-governance to ensure that no product is launched, nor maintained, in the market unless it is, and remains, compliant with PROD;
• but this is coupled with equivalent requirements for liaison and governance over the business strategies and conduct of business within those distribution chains – whether related to remuneration, culture or to the knowledge and competence of those working within them.

The above is driving a complete change of behaviour, and operational requirements, within the general insurance market.

That is the sort of thing which people, like me, can easily rattle off a keyboard – but I beg you not to underestimate the significance of what I (and FCA) are saying. This is that the way everybody has conducted business (especially the firm centric, and non-participatory, operation of responsibilities within the distribution chain) has got to fundamentally change.

Please do not underestimate this – it is like trying to stop an ocean liner in a hurry and to turn it round to go back in an entirely different direction. It takes time – but FCA say you do not have time. In FCA’s words:-

“in summary, the effective implementation of the IDD and our new rules by firms forms an important part of our focus on firms adopting a customer-centric culture. Our Supervision teams have been highlighting its significance when engaging with firms in recent months, and will continue to focus on how firms are complying with the new rules in a way that properly considers their customers”

Be warned!!

* For details of Malcolm Padgett’s Foundation Course see:-

https://www.paginator.co.uk/project/1791/

This Course is delivered, in house to firms, and is suitable for all staff (from senior management to new starters). It delivers a full overview of all the issues covered in this article and will deliver  all the minimum knowledge (but with Malcolm’s expert interpretation) as required by SYSC 28.2 from those undertaking insurance distribution. The Course is also an excellent preparation for knowledge to be demanded under the extended Senior Management and Certification regime.