HT The Insurance Distribution Directive Product Oversight and Governance

Size: px

Start display at page:

Download "HT The Insurance Distribution Directive Product Oversight and Governance"

Dina Cannon
5 years ago
Views:

HT 2018-02 The Insurance Distribution Directive Product Oversight and Governance Background This is the third in a series of Hot TopICS concerning the details of the forthcoming changes that will

1 HT The Insurance Distribution Directive Product Oversight and Governance Background This is the third in a series of Hot TopICS concerning the details of the forthcoming changes that will affect, amongst others, general insurance intermediaries as a result of the Insurance Distribution Directive (IDD). This article looks at the IDD requirements on Product Oversight and Governance (POG) and the FCA proposals to implement them. The IDD came into force on 22 February 2016 following a lengthy European review of the effectiveness and appropriateness of the existing 2002 Insurance Mediation Directive (IMD), which itself set out a framework for regulating EU insurance brokers, agents and other intermediaries. Member states, including the UK, have two years to transpose the IDD into national law, namely before 23 February 2018 on which date the EU will repeal the Insurance Mediation Directive (IMD). However, the European Parliament s Economic and Monetary Affairs Committee has recommended and the European Commission has accepted the recommendation that the application date for the Insurance Distribution Directive (IDD) be delayed until 1 October This is highly likely to mean that each EU member state would still be required to transpose the IDD into its national legislation by 23 February 2018, but that insurance firms would not be required to comply with the new legislation until 1 October Firm news on this will follow from ICS once it is available. The new Directive includes provisions designed to require that firms ensure responsible management, oversight and monitoring of the products they bring to the market. The FCA issued a Consultation Paper (CP 17/23) in July 2017 and all responses to that CP are now complete and integrated into the FCA s Policy Statement 17/27, issued in December Some further details are anticipated in an additional Policy Statement, due in January 2018 (see Other Issues below). Product governance relates to the systems and controls firms must have in place for the design, approval, marketing and ongoing management of products throughout their lifecycle. In its Consultation Paper (CP 17/23) the FCA proposed to implement the IDD requirements in relation to all types of insurance products, not just as regards insurance-based investment products (IBIPs). Key requirements for manufacturers and distributors Under the IDD, firms that manufacture insurance products are required to: maintain, operate and review a product approval process for new products and existing products to which significant adaptations have been made, before such products are marketed or distributed; ensure staff involved in product design and manufacture have the necessary skills, knowledge and expertise for their roles; specify a target market for each product, including, where relevant, identifying groups of customers for whom the product is generally not compatible;

2 ensure all relevant risks to the target market are assessed; design products to be compatible with the needs, characteristics and objectives of the target market; develop a distribution strategy consistent with the target market; test the product before bringing it to the market; select distribution channels that are consistent with the target market; take reasonable steps to ensure the product is distributed to the target market; monitor and regularly review products, at least to ensure the product remains consistent with the needs of the target market and the distribution strategy remains appropriate; make available all appropriate information on products and the product approval process, and provide appropriate information to distributors. For firms that distribute but do not manufacture insurance products, they are required to have in place adequate arrangements to obtain information about the product and the product approval process, and to understand the identified target market. Insurers and other product manufacturers should therefore be in a position to provide the relevant details about each of their products to brokers and other distributors in a readily accessible format. The current position Currently, the FCA is concerned at how firms design products and as to how their systems and controls ensure that products function as intended and reach the right customers, largely in the context of Treating Customers Fairly. At present there is guidance on firms obligations in the Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD), based on the high-level rules in the Principles for Businesses sourcebook (PRIN) and SYSC. The FCA considers that this guidance covers broadly similar matters as the IDD provisions and that therefore it does not anticipate the introduction of the new provisions will require significant change for UK firms in practice. MiFID II is also introducing product governance requirements for MiFID business (investments). The FCA is introducing new rules to implement these requirements in the UK within a new sourcebook: the Product Intervention and Product Governance sourcebook (PROD). In general, the IDD and MiFID II product governance requirements are similar, though not fully aligned. The MiFID II requirements go further than the IDD in a number of areas. For example, they cover considerations for firms in assessing product charging structure and value for money, development of the target market and distribution strategy, multi-firm product development and information that manufacturers provide to distributors. Elements of PROD will therefore mirror requirements for insurance business, but not all elements of PROD will do so. For this reason, there will be a separate chapter in PROD applying purely to insurance business. The proposals outlined in CP 17/23 The FCA s plan is to apply the product governance provisions to all insurers and insurance intermediaries where those firms manufacture or distribute insurance products. This will include applying the requirements to all insurers, whether they distribute products directly or via intermediaries. The FCA also proposes to apply these requirements to firms within the

3 regulatory perimeter which may not be within scope of the Directive. This is because it considers that these new requirements should apply to all firms involved in insurance product manufacture and distribution to create a level playing field, and to promote effective competition in the interests of customers by avoiding regulatory distortions. The FCA s general preference is to introduce rules to implement the high-level measures in Article 25 of the IDD. It proposes to introduce a new chapter to the PROD sourcebook to implement the provisions for insurance business. These new rules will replace broadly equivalent existing RPPD guidance for firms within scope of PROD. To assist firms, the FCA proposes to make use of definitions drawn from MiFID II for manufacturer and distributor with necessary adaptations to give effect to the IDD scope and to help explain the concepts of manufacturing and distributing. For example the IDD clarifies that distributing, for the purposes of the product governance requirements, covers the activities of advising and proposing. The IDD delegated acts in the forthcoming January 2018 Policy Statement are expected to provide more explanation as to the activities which would be regarded as manufacturing a product. ICS s view of distinction between manufacturer and distributor MiFID II says: A manufacturer will be a firm which creates, develops, issues and/or designs (investment) products and is intended to capture a broad range of firms (including corporate issuers on the launch of new securities). A distributor will be a firm that offers and/or recommends (investment) products and services to clients. In this context, offers has a wide application and is to be read in a broad sense. The word investment can be replaced by insurance in the context of IDD business. In all cases, the key question is who has created, developed, issued and/or designed the product? That will depend on the facts of the case. If a broker went to the insurer with an existing wording and asked them to provide capacity, it is likely that the broker is the manufacturer, even if the insurer signs off the product. On the other hand, if the insurer provides the wording, or engages the broker to produce a wording on its (the insurer s) behalf, it is likely that the insurer has manufactured the product. Where distributors have a joint decision-making role in the design and development of an insurance product with the insurer, in such cases, they should agree with the insurer their share of responsibilities under the product manufacturer requirements. Other issues While the RPPD and IDD product governance provisions are similar, there are some differences. For example, the RPPD includes guidance covering considerations firms should take into account when reviewing products. As the RPPD guidance already applies and its removal could lead to consumer harm, the FCA proposes to copy such relevant parts of the RPPD to PROD, as guidance on the rules to which it relates. The RPPD will remain applicable to firms that are not within the scope of PROD. The FCA is still consulting on the following rather technical issues, and further information will be provided, where necessary, to ICS Clients: - The FCA proposes to change the definition of manufacturing used for the scope of PROD 1.4 and 4 (on which it is consulting in CP 17/23) to take into account the relevant provisions of the POG Regulation. The design and development of an insurance product may be an unregulated activity when undertaken by an intermediary and so

4 for PROD the FCA expects to use its powers to make rules in relation to such activities; - The FCA proposes to reproduce the POG Regulation requirements in the Handbook. This is consistent with its proposed approach to set out all requirements for firms subject to the IDD in a single place. The FCA also proposes to apply the provisions of the POG Regulation as rules for firms to whom they are not directly applicable; - In addition, the FCA is proposing to introduce new guidance to help firms understand its expectations of the IDD requirements based on the recitals to the POG Regulation to provide clarity on issues such as: cases where distributors have a role in product manufacture; target market assessment; product testing; ongoing product reviews. - In CP 17/23 the FCA indicated that it was considering applying additional requirements drawn from MIFID II obligations and the continued application of existing RPPD guidance. While existing RPPD guidance and the IDD product governance provisions are similar, there are some differences. Removal of relevant existing guidance could lead to consumer harm, so the FCA proposes to retain it by copying it to the PROD sourcebook. For example, it proposes to include guidance that, in monitoring and reviewing products after sale, manufacturer firms should consider the need for communication of contractual breakpoints to customers and the need for fair and prompt claims handling; - In CP 17/23 the FCA also indicated that it was considering the MiFID II product governance requirements against those of the IDD. While the IDD and MiFID II product governance requirements are similar, the MiFID II requirements go further than the IDD in a number of areas. The FCA proposes to improve alignment between the two by introducing requirements based on the additional MiFID II provisions, adapted where necessary for firms conducting insurance business. This will cover areas such as: product design considerations in assessing product charging structure and value for money; ensuring manufacturers make available to any distributor information regarding the target market assessment undertaken; information that distributors should seek from manufacturers. Challenges arising from these requirements The FCA has stated that the new requirements are similar in nature to the existing guidance; that is true to an extent, but governance and documentation requirements are enhanced, and there is definitely more work involved for many firms. The other key challenge is that manufacturers are likely to feel the need to be much more intrusive with their distributors in establishing the latter s sales processes.

5 What do I need to do now? 1. Appoint senior person to manage the POG work-flow. 2. For each product you distribute, assess whether you manufacture the product; document the findings. 3. If there are any you do manufacture, review each such product in line with the 12 bullet points listed under Key requirements for manufacturers and distributors above. 4. For those you do not manufacture, create adequate arrangements to obtain information about the product and the product approval process, and to understand the identified target market. This would require liaison with product manufacturers. 5. Stay alert to the implementation date of these measures and any additional requirements created by the FCA. 6. Train staff to be alert that all new products must be adequately dealt with through the POG process before being put to market. If you would like any help with this topic or further information on ICS Services, Elearning or anything else we might be able to help you with, please contact your usual ICS representative, Head Office on or admin@insurancecompliance.co.uk

Gem Briefing Note 17/4

Gem Briefing Note 17/4 CP17/33 - Insurance Distribution Directive Implementation Consultation Paper 3 Introduction The IDD entered into force on 23 February 2016 and firms must follow its requirements from 23 February 2018.