IDD (7) - Employee Knowledge and Competence

YOUR COMPLIANCE MATTERS – Insurance Distribution Directive (7) ·           Employee Knowledge and Competence

Relevance:                   All firms.

Action required:           Ensure your training and competence scheme (T&C) includes the revised obligations concerning the amount and level of CPD for relevant employees.

The Insurance Distribution Directive (IDD) was implemented in the UK from 01 October 2018 and with it came a number of rule changes throughout the FCA Handbook.

For instance, one aspect of a firm’s training and competence scheme is the requirement to adhere to what is often referred to as “the competent employee’s rule”. From 01 October 2018, this particular rule has been amended to ensure it applies to all authorised firms, as follows:

·          “A firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.”

In particular, and for the first time outside of being a member of a professional body, those involved in insurance distribution activities are faced with minimum knowledge and competence requirements.  These are referred to as “relevant employees” and are defined in the new rules, as follows:

“….relevant employees are employees or other persons:

1)     directly involved in the carrying on of the firm’s insurance distribution activities; or

2)     within the management structure responsible for the firm’s insurance distribution activities; or

3)     responsible for the supervision of a relevant employee acting in the capacity as set out in (1).

 Under the “Knowledge and ability requirements”:

A firm must ensure that:

1)     each relevant employee possesses appropriate knowledge and ability in order to complete their tasks and perform their duties adequately.

2)     each relevant employee complies with continued professional training and development requirements in order to maintain an adequate level of performance corresponding to the role they perform and the relevant market.

3)     each relevant employee completes a minimum of 15 hours of professional training or development in each 12 month period.

4)     for the purposes of (3), it takes into account the:

a)   role and activity carried out by the relevant employee within the firm; and

b)   type of distribution and the nature of the products sold.

 Please note, an “employee”

1)     is not restricted to an individual working under a contract of employment; and

2)     includes (without limitation) any natural or legal person whose services are placed at the disposal of the firm, under an arrangement between the firm and a third party; and

3)     also includes Appointed Representatives (AR/IAR) and their employees.

 So, what should be included in the training (CPD) for relevant employees?

 The new rules state the following for general insurance contracts:

A firm must, including in relation to the relevant employee, demonstrate compliance with the following professional knowledge and competence requirements:

1)     minimum necessary knowledge of terms and conditions of policies offered, including ancillary risks covered by such policies;

2)     minimum necessary knowledge of applicable laws governing the distribution of insurance products, such as consumer protection law, relevant tax law and relevant social and labour law;

3)     minimum necessary knowledge of claims handling;

4)     minimum necessary knowledge of complaints handling;

5)     minimum necessary knowledge of assessing customer needs;

6)     minimum necessary knowledge of the insurance market;

7)     minimum necessary knowledge of business ethics standards; and

8)     minimum necessary financial competence;

 And then there are the “Record-keeping requirements”:

A firm must:

1)     establish, maintain and keep appropriate records to demonstrate compliance with this chapter;

2)     be in a position to provide to the FCA, on request, the name of the person responsible for the record keeping requirement in (1).

3)     make an up-to-date record of the continued professional training or development completed by each relevant employee in each 12 month period;

4)     retain that record for not less than 3 years after the relevant employee stops carrying on the activity; be in a position to provide any version of the record to the FCA on request.

5)     not prevent a relevant employee from obtaining a copy of the records relating to that relevant employee which are maintained by the firm.

 Other Points to Note:

·          The starting date for the 12 month period was 01 October 2018;

o  firms should ensure that measures are in place to comply with the IDD requirements from that date.

·          15 hours is a minimum amount and equates to 1.25 hours per month;

o  so, at the end of November 2018, a minimum of 2.5 hours should be recorded; and

o  as at 30 September 2019, a minimum of 15 hours.

·          Firms can take into account CPD undertaken during the same 12-month period at a new employee’s former workplace.

o  however, they should ensure that reasonable measures are in place to verify the completion of the previous CPD.

·          The FCA does not intend to prescribe a mix of structured and unstructured CPD.

o  firms should consider what is most appropriate to ensure that their employees have the required knowledge and competence.

·          Training and development can encompass various types of facilitated learning opportunities, such as;

o  e-learning modules, classroom-based training, individual coaching and development, online product knowledge assessments, external training, conferences, reading specialist press articles, etc.

 The immediate challenges are:

1.      Identifying who is directly involved in insurance distribution, including those within the management structure responsible for the firm’s insurance distribution activities or responsible for the supervision of a relevant employee who is directly involved in insurance distribution.

2.      Designing a development plan to satisfy the minimum 15 hours CPD requirements, ensuring the development fits within one of the FCA’s professional knowledge and competence requirements, as detailed previously.

3.      Introducing a method of logging the development completed by the employee; and establishing a method to stop any employee that has not completed the required CPD from being involved in the distribution of insurance.

 If you are already running a T&C Scheme that covers all of these items, then you may not have too much to be concerned about, other than making sure that suitable records are available.

 If you need to revisit your T&C Scheme to revise certain aspects, or you have a T&C Scheme that has fallen by the wayside, or you do not operate a T&C Scheme, you are nearly 7 weeks past the effective start date.

 If you have not yet made a start with putting CPD systems and controls in place, you must act sooner rather than later to prevent rushing things.

 To help you, the CPD Log at the end of this newsletter can be adapted for each employee but you will need to have a method of summarising the results of the total number of people involved in recording CPD.

 If you need further guidance and assistance in setting up your CPD methodology and recording systems, please let us know.

 REMEMBER:

Falling short of the required number of hours is likely to be classed as a breach of FCA rules.

 CONTINUING PERSONAL DEVELOPMENT (CPD) LOG