Posted: 30th January 2017
The regulatory focus on customer outcomes in financial services has highlighted the need to strengthen how insurance is sold to consumers.
2002’s Insurance Mediation Directive has been updated in the light of this greater customer focus and burgeoning industry discussion of trust, and will focus on creating a ‘level playing field’ in the insurance and re-insurance distribution market. The legislation will now be known as the Insurance Distribution Directive (the Directive).
The Directive has a wider scope than its predecessor, and includes intermediaries, insurance companies, their employees, bank-assurance, ancillary insurance intermediaries (such as travel agents and car rental companies) and online distribution.
It should come as no surprise to firms that it aligns closely to other European Directives in terms of what it is looking to achieve; transparency, fairness and protection for consumers across European financial services and deliver good customer outcomes. Despite Brexit and the ongoing uncertainty over the UK’s exit from Europe, the principles of the Directive align with the FCA’s regulatory approach, and so we are likely to see many of its recommendations make it into final guidance.
The FCA will consult the industry on its proposals for the Directive before transitioning it into local regulation by February 2018, and will begin its consultation process in February 2017.
Many firms will of course be keen to see final guidance before making any significant changes. However, given the industry conversation taking place around insurance distribution right now, there are already some areas for firms to consider. How well are the following aspects of your firm set up to help you embed the new requirements effectively?
Four key areas
There are four areas that will impact upon firms’ preparedness to embed new rules. Firms who are able to examine the following elements of their business model ahead of implementation are the most likely to set themselves up for success:
With the purpose of the Directive to protect customers across the insurance market, all firms dealing in insurance products (including intermediaries) should begin to assess their internal culture and consider whether or not their customers’ best interests are at the heart of their sales approach. Some questions for firms include:
- Do senior management (including the Board) take an active interest in the marketing and distribution of products?
- What post-product review activity do you undertake to ensure a product remains fit for purpose and is reaching its intended target market?
- How do you manage conflicts of interest between your firm and a customer, and how are customers made aware of actual or potential conflicts?
- Have you reviewed whether or not your remuneration policies impair your employees or representatives to act in the best interest of the customer?
2. Disclosure of information to customers
The Directive sets out clear expectations of the information that must be disclosed to a customer before the sale of an insurance product is concluded. Firms should consider:
- The need to perform a gap analysis on their current disclosures against the eventual requirements of the Directive. What will this require, and how easily can you transition to the new requirements?
- Whether or not the information you provide to your customers about your products and services (specific written communications during the product lifecycle, financial promotions, online information and over the phone) are aligned to good outcomes, and are clear, fair and not misleading
- Whether all pre-contractual information is available free of charge and in the prescribed format (where applicable)
- Whether you disclose all fees and charges associated with your insurance products and any remuneration you receive (the FCA’s final guidance will shed more light on precise disclosure requirements)
3. Product oversight and governance
All insurance undertakings, including intermediaries manufacturing insurance products, will be required to operate and maintain a review process of their products. Given the regulatory approach in other areas of financial services, it’s extremely likely that this requirement will be borne out in final rules. With this in mind:
- Do you review (and revisit on an ongoing basis) the outcomes provided by existing and new insurance products, including any significant adaptations of existing products?
- Does your product approval process specify an identified target market for each product, ensure that all relevant risks are assessed and ensure that the distribution strategy is aligned to the identified target market?
- Do you review your insurance products against your target market in order to get an accurate view of its ongoing suitability for that market?
- Can you articulate and evidence the decisions you’ve made in this area, and were these decisions driven by the need to deliver good outcomes?
4. Training and development
Of course, for processes to be understood and their effectiveness maintained, all levels of the business must be aligned to the same goal. Effective training of internal processes will be an important factor in this. There may be an opportunity in the lead up to final guidance to consider what this might look like:
- What systems and controls do you have in place to assess and support employee competency?
- Does your training or development programme take into account the nature of the products sold, the type of distribution, the roles performed and the activity carried out within the your firm?
- Can your senior management demonstrate their knowledge and your firm’s customer-centric approach?
Practical Early Considerations
The strengthening of distribution rules in insurance is likely to cause a further shift in the sector towards transparency and consumer protection. Although firms may not make significant changes ahead of the final guidance, it will not be long before the four areas above will be very relevant to successful implementation.
Firms who have added the topic to their risk register, considered the resource required to perform a gap analysis and ensured senior management have implementation on their agenda early can move ahead of their industry peers, lower the costs of implementation, improve and strengthen their culture, better protect customers and improve trust in their brand.