All firms are required to take a more active role in identifying their customers’ demands and needs and must ensure that any insurance contract proposed is consistent with them. The stricter requirements mean firms can’t simply offer all of the firm’s available products through generic statements about the type of needs each product will meet. Where a personal recommendation is given, the firm must be able to explain why the proposed product best meets the customer’s demands and needs.
The regulator has made it clear that they are interested in how firms can evidence that the product proposed was the right product for each individual circumstance. This will involve some extra work from firms, as overly generic or standardised documents will not stand up to the enhanced scrutiny dictated by the Insurance Distribution Directive (IDD).
The regulator recognises the importance of the distinction between advised and non-advised sales. Firms offering only non-advised sales will not be expected to undertake such a detailed investigation of customer circumstances as if they were offering advised sales but, naturally, they will still be expected to identify and meet the demands and needs of the customer.
The new requirements under IDD are more detailed:
- Prior to the conclusion of a contract of insurance, a firm must specify, on the basis of information obtained from the customer, the demands and the needs of that customer.
The details must be modulated according to the complexity of the contract of insurance proposed and the type of customer.
- A statement of the demands and needs must be communicated to the customer prior to the conclusion of a contract of insurance.
- A firm may obtain information from the customer in a number of ways including, for example, by asking the customer questions in person or by way of a questionnaire prior to any contract of insurance being proposed.
- When proposing a contract of insurance a firm must ensure it is consistent with the customer’s insurance demands and needs.
- ICOBS 5.2.2BR applies whether or not advice is given and in the same way regardless of whether that contract is sold on its own, in connection with another contract of insurance, or in connection with other goods or services.
- The sale of a contract of insurance must always be accompanied by a demands and needs test on the basis of information obtained from the customer.
Where a firm provides a personal recommendation the firm must, in addition to the statement of demands and needs, provide the customer with a personalised explanation of why a particular contract of insurance would best meet the customer’s demands and needs. The explanation could be included either as part of Demands & Needs statement or a separate document.
Insurance Distribution Directive (IDD)
The IDD introduces general principles that apply to all insurance distributors. These are overarching requirements, which apply in a similar way to the current FCA ‘Principles for Businesses’.
In summary, the IDD general principles say that:
- Firms must act honestly, fairly and professionally in accordance with their customers’ best interests (The Best Interest Rule)
- Firms must communicate in a way, which is clear, fair and not misleading. Marketing materials must be clearly identifiable as such
- Remuneration of a firm or its employees, and performance management of employees, must not conflict with the duty to act in accordance with their customers’ best interests.
Intermediaries must disclose the nature of their remuneration in relation to the insurance contract and whether they work based on a fee, commission or other basis. This is applicable to all customers, not just commercial. Although it is no longer a prescribed form, many retailers still use an Initial Disclosure Document to provide the customer with this type of required information.
New rules are requiring that all products offered must be consistent with the customer’s demands and needs. A firm cannot just provide a generic statement of demands and needs without some matching of an individual customer’s needs to the products offered. These new regulations have required firms to review its practices and implement new policies and procedures in the way they operate. Most recently we have seen FCA reviews into the General Insurance Distribution Chain and Motor Finance. The findings from which suggest change is imminent.
Speaking about the findings on Motor Finance, Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, said:
‘We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves. We estimate this could be costing consumers £300 million annually. This is unacceptable and we will act to address harm caused by this business model.
‘We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.’
As part of its work the FCA also carried out mystery shopping of firms. The FCA found that where disclosures were given, these were not always complete, clear or easy to understand and as a result customers may not be given enough information to enable informed decisions. The FCA was also not satisfied that all lenders were complying with the rules on assessing creditworthiness including affordability.
Under new rules and regulations, along with reviews in to current processes, the FCA is strengthening the rules with how firms must act when offering and intermediating in finance deals. Firms are expected to be offering the right product that fits with their customer’s needs and best interests. Incorporating affordability questions or queries into a statement of demands and needs (SODAN) could be the key to success that lies with establishing a consistently compliant process.
In November 2018 the FCA introduced new rules on creditworthiness and affordability. Appropriate assessments are now a regulated requirement of any finance proposition. Yet, many salespeople still feel uncomfortable asking for even basic information such as the customer’s salary. Trying to reduce embarrassment by saying “I know it’s a pain, but I’ve got to ask,” implies affordability is a tick-box exercise or a chore; the reality is these questions have the buyer’s best interests at heart.
The FCA wants to see markets where:
- High-quality, good value products and services that meet consumers’ needs are available.
- Consumers can buy the products and services they need and the way in which they are sold is clear, fair and not misleading.
- The needs of vulnerable consumers are taken into account.
The Approach is based around the following core ideas:
Firm and consumer responsibility
Their starting point has always been for firms to treat customers fairly. The financial products and services consumers’ need should be available, marketed and sold in a way that allows them to make informed choices. However, the FCA also expect consumers to take reasonable responsibility for the decisions they make about the financial products and services they buy. The FCA know some people face challenges which mean they may not make the best decision for their particular needs. Firms must not exploit these customers and should exercise extra care where consumers may be vulnerable.
Regulating for vulnerable consumers
Consumers in vulnerable circumstances may be significantly less able to represent their own interests than the average consumer, and more likely to suffer harm. Any consumer can become vulnerable at any time in their life, for example through serious illness, bereavement or loss of income. The FCA expects firms to pay attention to possible indicators of vulnerability and have policies in place to deal with consumers where those indicators suggest they may be at greater risk of harm.
Why is documentation so important?
Wording such as ‘must establish, implement and maintain adequate policies and procedures’ and ‘must ensure that a customer is given appropriate information’ are regularly seen in the Financial Conduct Authority (FCA) handbook.
If you don’t document your policies, processes and/or procedures, how can you evidence their very existence? Yes, you can talk about them – but no matter how eloquently you explain what you do and how you do it, without evidence, your explanation holds little sway with the FCA. The inability to evidence the paperwork makes it a difficult task to prove you are compliant with all rules and regulations.
In the FCA handbook, there are numerous references to documentation. SYSC 9.1.1, for example, tells us ‘a firm must arrange for orderly records to be kept of its business and internal organisation, including all services and transactions undertaken.’ SYSC 9.1.4 confirms that records ‘should be capable of being reproduced in the English language on paper’.
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