Conflicts of interest and the Insurance Distribution Directive
14 September 2018
Under current FCA rules, intermediaries need only disclose commission on demand, and only to commercial customers. With the new rules introduced by the Insurance Distribution Directive (IDD), all the insurance distributor’s remuneration must be disclosed to all customers, and information about the deal must be provided whether the customer asks or not. This includes areas such as the names of all the insurers they contract with, and whether they have 10 percent or more in voting rights or capital in an insurer.
IDD’s focus is on protecting the customer, especially retail consumers, from conflicts of interest. Brokers and product providers alike must be transparent about any commission payments, how much they are and what they’re for.
The new requirement for transparency, particularly where commission accounts for more than 50% of the premium, is designed to prevent the types of problem we saw with mis-selling of PPI.
The main challenge in tackling any conflict of interest is simply human nature – it is understandable for product providers to be drawn to distributors that provide the highest amount of commission, for example.
Putting in place a structure to avoid conflicts of interest in IDD
Fortunately, compliance with IDD can be achieved to a great extent through structural measures.
Product governance framework
The first step is to take a broad look at your product governance framework, and in particular how you manage and mitigate conflicts within your firm. By putting effective policies and robust control frameworks in place, and reviewing their workings regularly, you can manage these conflicts.
More specifically, you should establish a conflicts policy and register, and create structures to ensure that it is maintained and managed. Make sure you have the quality assurance and management information processes to identify risks and anticipate problems. Ensure there is clarity about who is responsible for what.
Write transparency around remuneration into your terms of business, ensuring that both broker and insurer have sufficient management information to spot if any business is being placed to maximise commission rather than obtain the best customer outcomes.
Patterns of business
It’s also important to monitor patterns of business. For example, if you’re a broker and you find you are doing a high volume of business with one particular underwriter, check whether this is explained by the quality of its service, or whether it is offering higher-than-normal commission.
As well as monitoring your own activities, check what your suppliers are doing. If you’ve got a third party handling sales or claims on your behalf, you need to be able to demonstrate that they are compliant too – remember, you can outsource an activity but not the associated accountability to the regulator. This area can usefully be explored at account management meetings. Talk about whether customers are getting a good deal, as well as how many sales you’re making: if you identify poor outcomes then your product governance process should trigger re-review of the product.
Finally, above all, you need to make sure all your actions take the customer’s interests into account.
How we can help
We have extensive experience of implementing governance measures in response to regulatory change in various market sectors and can draw on that experience to help guide you through the trickiest areas of IDD. We appreciate the need to tailor the approach for the size and type of firm, and to work with your organisational culture rather than against it.
Please get in touch if you’d like to talk through your approach to IDD, or to find out how we can help.