The aim of this EU legislation is to enhance consumer protection when buying insurance and to support competition between insurance distributors.
Key areas covered by the regulation include:
- Professional, organisational and prudential requirements covering professional indemnity cover, and training and competence
- Conduct of business general principles including acting in customers’ best interests
- Customer demands and needs
- Product oversight and governance
- Remuneration disclosure
- Conflicts of interest disclosure
- Pre-contract disclosures
- Complaints handling and out of court redress.
I’ll focus on the first three of these and highlight things you could consider within your business in order to meet the IDD requirements.
Acting in the customers’ best interests
The overarching principle of IDD is that distributors ‘must always act honestly, fairly and professionally in accordance with the best interests of their customers’. Now this is nothing new in itself as the FCA has always expected firms to do what is right for their customers.
The IDD introduces a rule that demands all firms act honestly, fairly and professionally in the customers’ best interests, regardless of their position in the distribution chain.
The IDD introduces a rule that demands all firms act honestly, fairly and professionally in the customers’ best interests, regardless of their position in the distribution chain. This is whether they have direct contact with the end customer, or not. And it’s not enough to just act in the customer’s best interest - you have to evidence it too.
Specifically, the regulator calls out that remuneration policies for employees shouldn’t impair their ability to act in the customer’s best interest or prevent them from either making a suitable recommendation or presenting information in a form that is fair, clear and not misleading.
You also need to ensure that the product is appropriate for the customer. This means you’ll need to do some form of due diligence on the product governance process of an insurer to make sure it’s been thorough. You also need to be satisfied with the approach taken to be aware of the target market and distribution approach.
At Royal London, all our products go through an approval process and we’ve developed a range of target market statements for them.
Things to consider:
- Make sure your remuneration policy doesn’t conflict with your duty to act in the customer’s best interests e.g. by including incentives to sell a product that doesn’t meet the customer’s needs.
- Make sure you have robust record keeping in place to demonstrate how you’ve met the customer’s best interests.
- Make sure you provide information to your clients at an appropriate time and through the right channels.
- Check that any protection provider you’re using has a robust product approval process and target market statements available for their products.
Customer demands and needs
The IDD also requires that firms only offer customers insurance products that are consistent with their demands and needs. Again, this isn’t something new in itself, but what you need to do in order to meet this requirement is.
Prior to IDD, you only needed to provide customers with a ‘statement of demands and needs’ which could be fairly generic and broad brush. You now need to obtain specific information about your clients’ insurance demands and needs up front and map these to the products on offer. This means you need to have carried out a robust analysis of the products available so that you can be confident that your recommendation is in line with the client’s demands and needs – it’s not enough to just take the first three cheapest quotes on your portal of choice and pick from those. You need to look beyond price and make sure you have considered the various product benefits and options on offer.
It’s not enough to just take the first three cheapest quotes on your portal of choice and pick from those. You need to look beyond price and make sure you have considered the various product benefits and options on offer.
For example, if you’re recommending a critical illness plan and your client is planning to have children at some point in the future, you’re probably going to want to look into which plans offer the ability to add children’s cover at a later date - such as our own Children’s Critical Illness Cover.
Things to consider:
- Review your sales process to make sure you’re identifying client demands and needs early on.
- Review any sales scripts to ensure that enough customer information is obtained so that only those products that are consistent with demands and needs are offered.
- Make sure that you have carried out a thorough analysis of the products available so that your recommendations can be mapped to your client’s demands and needs.
Training and competence
The IDD requires everyone selling insurance to do at least 15 CPD hours per year. If you already need to do 35 hours of CPD each year for retail investment activities, these 15 hours are included in that. The FCA also expects the training to cover specific areas which it refers to as ‘minimum knowledge criteria’.
Training and development can include various types of facilitated learning opportunities including courses, e-learning and mentoring.
These areas include product coverage, the claims process and insurance regulation among others. Training and development can include various types of facilitated learning opportunities including courses, e-learning and mentoring. You also need to establish, maintain and keep appropriate records to demonstrate compliance with employee knowledge and ability requirements.
To help you meet your ongoing CPD requirements, we’ve created a CPD hub. Here you’ll find useful articles or webinars on different topics, all divided into bite sized chunks, so it’s easy to build up those valuable CPD hours. Just view the content you’re interested in, answer a few related questions and we’ll send you a completion certificate for your CPD records.
Things to consider:
- If you’re a member of a network or service provider, check to see if they already provide support to help you meet your CPD requirements.
- Set aside regular time during your working week for your development – you’ll find it easier to build up your CPD hours that way.
- Make sure you have robust record keeping in place to evidence your CPD hours.
If you want to find out more about the Insurance Distribution Directive, visit the FCA.