United-Kingdom – James Thompson and Ben Hardiman, Mills & Reeve

James Thompson and Ben Hardiman, Mills & Reeve – trace the most significant points of the transposition of the Insurance Distribution Directive and its impact on insurance intermediaries in the United-Kingdom

What are the most significant points in the transposition of IDD in your country?

The changes brought about by the IDD have resulted in some modest tweaks in developments to the FCA’s rules and guidelines for brokers. Typically, they have been focused around ensuring that brokers are aware of their duties to ascertain their client’s demands and needs and to understand what products their customers require.

In particular, we have seen a focus on the FCA’s agenda to ensure that vulnerable customers are well catered for. So these are customers who may be elderly or have mental or physical disabilities, and this is a continuation of an agenda that the FCA has been developing for some time *.

  •         The Financial Conduct Authority (FCA) has introduced changes to their rules to further define requirements to (i) identify customers’ demands and needs and ensure products offered are consistent with them (ii) have in place product oversight and governance arrangements and (iii) adhere to the customers best interests rule.
  •         Firms can still carry out non-advised sales, and the FCA does not always expect them to perform a detailed investigation into a customer’s circumstances. Firms will need to obtain information to identify the customer’s demands and needs. They must then consider this information alongside the products they have available to ensure that all products they then offer are consistent with those demands and needs. Firms must not offer customers products which do not meet their demands and needs.
  •         A key, ongoing part of the FCA’s Business Plan is to ensure that firms place sufficient focus on identifying vulnerable customers and treating them appropriately.

There are new rules in their Product Governance sourcebook (PROD) which apply to the manufacture and distribution of insurance products. All firms that have a role in manufacturing (eg creating, developing, designing and/or underwriting) an insurance product will need to meet the product governance and oversight requirements. A product may have more than one manufacturer and, in these cases, firms must set out their mutual responsibilities in a written agreement.

The rules require that, when firms develop new products or make significant changes to existing products, there is a product approval process. As part of this firms will need to identify the target market and ensure the product is compatible with the needs, characteristics and objectives of customers in that target market. The rules also place responsibilities on firms selling insurance products to understand the products being sold and the target market of customers.

  •         The FCA has always expected firms to do what is right for their customers, and have set out clear rules – including the Principles – in this respect. 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.

The customer’s best interests rule applies to insurance policies regardless of whether they are sold on their own or in connection with another policy (eg they apply to an add-on policy as well as the primary insurance product they are sold alongside). This rule covers issues such as those covered around breakdown insurance in the demands and needs examples above. But it also extends throughout all elements of products and services. In terms of remuneration, firms must ensure that any remuneration they receive does not conflict with their duty to act in the customer’s best interests – for instance by giving them an incentive to sell a product which does not meet the customer’s needs.

Have new categories of intermediaries emerged since the IDD came into force?

Historically, we have very similar situation to what has come into play as a result of IDD, I think if new intermediaries were coming in, we would have seen them by now.

Are these changes positive for insurance intermediaries, or do you think they could create new risks of liability?

The changes are positive for insofar as they go for consumers in terms of ensuring the highest possible standards are met by brokers. I suspect that they do not create new risk of liability for the UK market because the changes haven’t been so significant and they are in development rather than a wholesale change*.

*Where the risk may arise is that IDD represents yet another standard by which an intermediary may be measured. So we expect Claimants to refer to it as a basis for evidencing that an intermediary has breached its duty of care to the client.

Are intermediaries ready to put these changes into practice?

They certainly should be, because the IDD is simply a continuation of a standard that has been ongoing for some time. Good brokers ought to have been doing all that is required of the IDD already, of course some will require review and will need to do some work to ensure that they are complying.