Blog: Don't be phased by the IDD

Much of the Directive, which is due to take effect on 23 February 2018, represents an enhancement to existing rules and builds on the changes introduced by the Insurance Mediation Directive in 2005. However, crucially, the rules are being extended to many more purveyors of insurance products, including motor dealers and electrical goods retailers. Therefore, insurance companies should bear in mind that even relatively small changes affecting the Financial Conduct Authority’s industry handbooks could have a significant impact on internal processes, so it is important to review these at the earliest possible opportunity.

The main thrust of the changes proposed under the new Directive is to improve transparency and ensure methods of distribution will ensure the best possible outcome for consumers. Specifically, the consultation proposes a new ‘customers’ best interest rule’, which should be used as a guiding principle controlling everything from the way products are developed and marketed, to sales practices and distribution methods.

Overall, insurance providers and intermediaries will welcome the consultation’s proposals. In effect, the proposed customers’ best interest rule and the move to extend the rules to other areas of insurance will help pave the way for the Senior Managers Regime and Senior Insurance Managers Regime, which are currently being rolled out. In fact, those not already affected by SMR will find the proposed IDD rule changes helpful as a means of ensuring readiness when the extended SMR regime comes into force in 2018.

In response to the consultation, insurance providers should perform a thorough review of current processes - from new product development to sales practices, governance and product distribution. They should give careful consideration to any enhancements they would like to make ahead of the incoming rule changes and plan to implement them.

Among the main areas of change, it is proposed that all insurance providers, which are captured by the broader legislation, should maintain records of competence. This measure is intended to reduce the risk of mis-selling and most companies will already be doing this, particularly if they are SMR-compliant, but for others, this could be a new requirement. Further detail about the precise nature of the IDD’s record-keeping requirements should feature in the second consultation, which is due for publication later this year.

Complaints handling is another key area of focus and the consultation includes proposals that could affect the current Dispute Resolution Complaints handbook. More fundamental rule changes are proposed, which will affect all distribution activities, and new out-of-court redress arrangements are to be introduced.

To help define who is affected by the IDD’s extended reach, the consultation is proposing to create a new category of insurance and reinsurance providers, described as ‘ancillary insurance intermediaries’. All those captured must comply with the incoming legislation. However, it is worth noting that there may be some businesses that fall outside the requirements of IDD but within the scope of UK regulations.

In summary, the consultation’s proposals should be viewed as a constructive means of aligning processes in readiness for the SMR. In particular, the new ‘customers’ best interest rule’ will help insurance providers to instill a customer-first culture.