Stay of execution on IDD – Analysis

Many brokers and insurers will have breathed a big sigh of relief at the news that there has been a delay in the implementation of the Insurance Distribution Directive (IDD) – which applies to the distribution of insurance and reinsurance and to post-sale assistance with administration and performance of insurance contracts.

After all, the original timescale, which required UK compliance this February after the final rules had only been published last December, was never terribly realistic.

Although the new timetable is not yet set in stone, David Sparkes, head of compliance and training at Biba, is in the loop after seeing the draft text of the directive issued from Europe.

He expects that the FCA and Treasury will have to have the law in place by 1 July and that firms will actually have to comply with it by 1 October.

He says, “I am expecting the whole rubber stamping process to be completed by mid-to-late March and I am quite confident the 1 October deadline won’t change.”

But the additional time now available only constitutes a stay of execution of something that the FCA can’t wriggle out of even if it wanted to. In particular, the timescale dictates that Brexit will have no impact on the implementation process.

Furthermore, if and when Brexit subsequently occurs, it is unlikely that such pieces of European legislation will be repealed – as the UK will need to demonstrate it has a regulatory regime at least equivalent to that of the EU.

The need to start now

Whilst the extra months afforded for compliance have been widely welcomed and should give firms the chance to properly implement and test their systems, the fact that the implementation dates haven’t yet been formally finalised is providing excuses for procrastination.

Progress updates even from those insurance firms with the very largest of compliance departments are too bland to warrant publication and fail to indicate any conspicuous sense of urgency.

But insurers and brokers of all sizes should be left in no doubt that it is already high time to face the music.

Smaller brokers, in particular, cannot start soon enough because their current practices are the least likely to be fully compliant with the new rules, and their resources are most likely to be stretched by the requirements.

Branko Bjelobaba, managing director of insurance compliance consultancy Branko, says: “The extra time is just delaying the inevitable, and brokers need to pick up and deal with this as soon as possible. These are sizeable changes they need to get their heads around and will take up a lot of time and money.”

So what exactly is involved?

The IDD aims to strengthen and consolidate the existing rules of the Insurance Mediation Directive (IMD), introduced in 2005.

For the most part therefore it is instigating evolution rather than revolution. But this comes with its own problems.

Mathew Rutter, regulatory partner at international law firm DAC Beachcroft, says: “Part of the difficulty with the IDD is that it is to a large extent tweaking what’s already there, and tweaking things tends to make it harder to identify what is significant and what is not.”

The CPD issue

One of the most significant changes under the IDD is the need or those involved with the selling, advising and transacting of insurance business to do at least 15 hours Continuing Professional Development (CPD) a year. Under current IMD rules there is no mandatory CPD requirement, although employers must decide that employees are competent to carry out their jobs.

This will not be an issue for Chartered Insurance Institute (CII) members, who already have to carry out a minimum of 35 hours of CPD a year.

Most non-CII member staff at sizeable brokers will also in fact already be performing the equivalent of 15 hours of CPD because a lot of their current training and seminar attendance will count towards it.

The main challenge for the larger brokers is therefore to start keeping adequate internal records of the activities employees are doing that count towards CPD. Smaller players, on the other hand, could find themselves involved with a whole new ball game.

Bjelobaba says: “The smaller bucket shops will have to buck their ideas up. Few of them are currently being effectively policed for ensuring that their employees are competent.”

Customers’ Best Interests and disclosure rules

Some brokers may also have their work cut out complying with the IDD’s Customers’ Best Interests Rule to act “honestly, fairly and professionally in the best interests of their customers.”

This goes significantly beyond the current Treating Customers Fairly requirements. The fact that it also refers to wholesale brokers is in fact the one aspect of the IDD that Biba’s Sparkes feels can actually be considered ‘revolutionary’.

He says: “Unlike with Treating Customers Fairly, wholesale brokers will be required to look through the chain to the end customers. When they offer a product to a retail broker for consumers they need to need to keep a record of why it’s in customer’s best interests.”

Particularly affected by the Customers’ Best Interests Rule are likely to be brokers who are swayed by enhanced insurer commission – and the insurers who offer such enhancements – because the practice could clearly be in conflict.

Other IDD rules also require intermediaries to disclose the forms of remuneration they are receiving – but not the exact amount.

DAC Beachcroft’s Rutter says “This is not necessarily that onerous but some intermediaries will need to think about how they are going to explain to customers for the first time that they are receiving commission. It could prove a sensitive area.”

Further disclosure rules contained in the Directive are also likely to result in more paperwork for both insurers and brokers.

Biba’s Sparkes says: “You must disclose whether you are a broker or insurer and whether you are giving advice or not, and brokers must disclose whether they are acting as an agent for client or insurer. The problem for the industry is that they can be acting for both, so this can be a grey area. So we need to watch this space for the final rules.

“Additionally, at the moment brokers who use a panel of insurers rather than a whole-of-market approach just have to say that a list of the panellists is available if the client wants it. But under the new IDD rules they actually have to give them the list. This will apply to all new business and also to renewals if they have changed the panel.”

The IPID

Another important consideration for both new and renewal business will be the need to include the Insurance Product Information Document (IPID) – a new pre-contractual disclosure document of up to three pages long that will replace the current Key Facts Document.

The ABI estimates that the IPID, which all insurance product manufacturers must provide, will cost the UK insurance industry as a whole tens of millions of pounds.

The bulk of the cost burden will fall on insurers, but distributors are responsible for giving the document to consumers.

Brokers may therefore need to be enclosing IPIDs as early as this September or August If they are sending out renewal notices for products being issued from 1 October.

Ancillary Insurance Intermediaries

Brokers should also be aware of IDD requirements to align the regulatory regime for ancillary insurance intermediaries – whose principal professional activity is not insurance distribution – with the regime for insurance intermediaries.

The FCA believes it is important to have, as far as possible, a single set of standards across the industry, and feels that products sold by ancillary insurance intermediaries don’t have a lower risk of consumer detriment than others.

It also feels that consumers are not likely to really understand the distinction between ancillary insurance intermediaries and regulated ones and that it is important to avoid market distortions by reducing the regulatory burden on some firms relative to their competitors.

There are a number of categories outlined for ancillary insurance intermediaries, and depending on the activities involved, they could be anything from fully compliant – including having to do at least 15 hours of CDP – to ‘out of scope’ or merely passing on client contact details.

James Bridge, head of conduct regulation at the ABI, says “The IDD could potentially have an impact on whether vets, garages and travel agents carry on with insurance. Our advice to members is that they would be well advised to get professional advice on how their business model fits in.”

Ancillary insurance intermediaries and their providers are clearly still considering the issues involved, and when asked how IDD is likely to affect them, are far from enlightening.

An Association of British Travel Agents’ (ABTA) spokesperson says “IDD will not make much difference to our members really as they already have fairly stringent regulations under the FCA”.

A Petplan spokesperson says “We welcome any improvements which provide clarity for our customers and increased consumer protection.”