Insurance Distribution Directive (IDD)
Executive Summary of a Briefing Paper produced by Derek Lavington and kindly made available to us.
What is the IDD? The IDD replaces the Insurance Mediation Directive (IMD) which established a common European market in insurance products.
When is the IDD being implemented? Implementation – 01/10/2018
What is changing under the IDD? The policy statement sets out a number of changes of which the following are relevant to IFA firms:
- New pre-contract disclosures.
- Change to the definition of ‘durable medium’
- 15 hours annual T&C to be applied to staff involved in advising on insurance, or assisting in the performance and administration of insurance contracts.
- Increased PII requirements
- Stricter requirements relating to the timing of the provision of suitability reports and product literature.
- Removal of the requirement for introducers to be authorised as ‘appointed representative introducers’
What insurance products are involved by the IDD?
- General insurance contracts
- Long term insurance contracts, ie pure protection contracts
- Insurance-based investment products, ie insurance products which offers a maturity or surrender value, and where the maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations. This will include :
- Single premium whole life (insurance bond)
- Insured pension funds (trustee investment bonds)
- Flexible whole life assurance providing life or critical illness cover
- Unit linked savings plans (qualifying and non-qualifying)
- With profit assurances
- Contract based group pension plans (excluding workplace pensions)
T&C requirements for staff: Staff involved in assisting with claims, renewals, surrenders and applications will fall within the scope of the requirement of the IDD competency and T&C requirements. At a practical level, this means the firm must:
- Formally assess the competence of relevant staff
- Establish learning needs based on that assessment
- Facilitate those needs through a T&C scheme to a minimum of 15 hours per annum*
- Monitor completion of the T&C on an ongoing basis
*where the individual is subject to the requirement for 35 hours T&C/CPD, this includes the 15 hours pa.
FCA have indicated that they do not intend to apply separate requirements for structured and unstructured T&C/CPD.
Increased PII requirements: Current PII requirements for insurance mediation require firms to establish cover to a minimum of €1,250,000 per claim per year, and €1,850,000 per year in aggregate. It is proposed to increase the aggregate cover level to the greater of €1,850,000 and 10% of annual turnover.
Pre-contract disclosures: Generic disclosures, ie those that will need to be included in firms propositions documents will need to include:
- The firm is an intermediary and not an insurance undertaking.
- The firm provides a personal recommendation.
- The firm is acting on behalf of the customer and not the insurance undertaking.
- The firm gives advice based on “a fair and personal” analysis of the market.
- Those insurers with whom the firm places business.
- The type of the remuneration the firm receives from insurers, eg commission
- The basis on which commission paid from insurers is calculated.
Specific disclosures, (potentially fee agreements / engagement letters and suitability report will need to disclose, where a fee is to be charged, the exact amount,
Change to the definition of ‘durable medium’: This is changed to include paper, website or email. The latter requires the customer to make an express election, but does not require paper to be the default, simply an option.
Timing of the provision of suitability reports and product literature: The requirement under IDD is expressed as ‘in good time’ which has been interpreted by FCA as
“Having regard to the urgency of the situation, the client’s need for sufficient time to read and understand the information before taking an investment decision.”
This effectively means suitability letters should be issued before applications are signed, which neatly complements the MiFID2 requirement.
Outline action plan for firms
- Incorporate generic disclosure in draft ‘propositions’ brochure – may not be necessary if Terms already incorporate these
- Update Compliance Manuals / Procedures to reflect revised timings for issue of suitability reports if not already done through MiFID
- Amend TOBs / agreements for investment based insurance with contain relevant generic and specific disclosures – may not be necessary if Terms already incorporate these
- Review and update existing CPD/T&C plans for staff – may already be incorporated though MiFID changes
When should the Firm look to have completed this process?Firms should look to have completed its action plan by the end of the year.