Paraplanning with insurance-based products under the EU IDD
1 November 2019
Chris Dunne, Proposition Manager Scottish Widows highlights key points for paraplanners required under the EU’s Insurance Distribution Directive when recommending insurance and insurance-based products within a client’s financial planning
Insurance products are rising up the recommendation list for financial planners when advising clients. A holistic view of a client’s circumstances logically and by necessity should include relevant protection planning so that should an individual or family suffer a negative life event, they have insurance in place to ensure they are financially covered and secure.
Insurance business written by financial planning firms is now covered by the Insurance Distribution Directive (IDD), EU legislation which came into effect on 1 October 2018. This sets regulatory requirements for firms designing and selling insurance products. The IDD replaced the Insurance Mediation Directive (IMD) and aims to enhance consumer protection when buying insurance and to better support competition between insurance distributors.
This article covers some of the key points from the directive of which paraplanners should be aware. The directive applies to all firms involved in the “advising on, proposing, or carrying out other work related to contracts, or concluding such contracts”, which includes financial planning/adviser firms.
The fundamental principle of the IDD is that distributors “must always act honestly, fairly and professionally in accordance with the best interest of their customers”. While this is standard practice of financial planning firms and certainly required by the FCA, the directive requires that firms must be able to provide evidence that they have acted in this way. Hence, robust record keeping which demonstrates how the recommendation is in the client’s best interests is essential. This should include a demonstration of how any recommendation is suitable and that information is presented in a form that is “fair, clear and not misleading”.
Financial planning firms must also ensure that the product is appropriate for the individual client. Where this is for insurance-based investment products, for example, it must take into account their knowledge and experience of investments, their financial situation including their ability to bear losses, their investment objectives, and their risk tolerance.
Due diligence should incorporate a provider’s product governance, such as the product approval process, as well as understanding “the characteristics and identified target market of each insurance product”.
In addition, firms need to be able to show that they have recorded a client’s specific insurance demands and needs and have then aligned these with the products in the market. This requires product knowledge and due diligence on the market’s offerings which includes not just price but also the relevant benefits.
In order to ensure that firms “possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately”, the IDD requires that individuals undertake a minimum of 15 hours of relevant CPD per year. This can be included within the 35 hours required by the CII. As with other forms of CPD the learning can be undertaken though courses, online modules, and mentoring; and records need to be kept.
Example topics include the insurance market, applicable laws governing insurance distribution; claims handling, complaints handling, assessing customer needs, appropriate financial competency; and business ethics standards/conflict of interest management.
Most financial planning firms are likely to be undertaking the majority of the points above as a matter of course, and so might only need, for example, to expand their record keeping and ensure staff are undertaking relevant CPD. But we recommend that anyone undertaking this form of business ensures they stay up-to-date with the legislation and regulations which apply. Links to documents and official sites you may find useful are provided below.
As part of the FCA’s implementation of the IDD, it introduced several changes to its rules which further defined regulation and consumer protection in this area.
This included three key requirements, to:
1. Identify customers’ insurance demands and needs, and to ensure that products offered are consistent with them. ICOBS 5.2 refers https://www.handbook.fca.org.uk/handbook/ICOBS/5/2.html
2. Have in place product oversight and governance arrangements. PROD 4 refers. https://www.handbook.fca.org.uk/handbook/PROD/4/
3. Adhere to the customer’s best interests rule. ICOBS 2.5 refers.
The full Directive: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32016L0097
Scottish Widows IDD support: https://www.scottishwidowsprotect.co.uk/inourmarket/buildingyourknowledge?wt.mc_id=APAOct19-paraplanner5IDD-support
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