The Insurance Distribution Directive (IDD) came into force on 23 February 2016, and it must be transposed into the national laws of the Member States of the European Union by 23 February 2018. In the meantime, the European Commission has published a Call for Advice from the European Insurance & Occupational Pensions Authority (EIOPA), which is intended to enable the Commission to adopt delegated acts on (a) product oversight & governance; (b) conflicts of interest; (c) inducements; and (d) the assessment of suitability & appropriateness, and reporting – if that’s what the Commission wants to do, later on.
Product oversight & governance:
Product manufacturers (PMs) will be required to use “a process for the approval of [every] insurance product … before it is marketed or distributed“. This process must “ specify an identified target market …,  ensure that all relevant risks to [that] market are assessed and … the intended distribution strategy is consistent with the … market, and  [include] reasonable steps to ensure that the … product is [only] distributed to the … target market“. PMs will also be required to give distributors “appropriate information on the insurance product and the … approval process, including the … target market“; and distributors will be required to have “arrangements to obtain [this] information … and … understand the characteristics and … target market of each … product“. EIOPA’s task is to provide advice on product oversight & governance arrangements, which explains when insurers and intermediaries are acting as manufacturers or distributors, and sets the level of responsibility that each of these function holders should be expected to meet.
Insurers and intermediaries will be required to “take all appropriate steps to identify conflicts of interest between themselves … and their customers, or between one customer and another that arise in the course of carrying out any insurance distribution activities“. When they are distributing insurance-based investment products, insurers and intermediaries will also be required to have and use “effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest … from adversely affecting the interests of [their] customers“. If an insurer or intermediary cannot be sure that these arrangements will prevent the risk of damage to customers interests, it must disclose the conflict to the customer before he invests. EIOPA’s task is to give the Commission advice about what “effective organisation and administrative arrangements” should look like; and what factors or circumstances should be taken into account when a firm decides whether a conflict of interest might damage its customer’s interests.
Insurers and intermediaries will only be permitted to pay or receive a fee or commission, or a non-monetary benefit, in connection with the distribution of an insurance-based investment product if it will not (a) have a detrimental impact on the quality of the relevant service to the customer; or (b) impair the ability of the insurer or intermediary to comply with its obligation to act honestly, fairly and professionally in accordance with the best interests of its customers. For this reason, insurance distributors will be required to use appropriate and proportionate “structural arrangements“, and policies, and procedures, to ensure that fees, commissions and benefits paid by anyone other than the customer or on the customer’s behalf, in connection with an insurance-based investment product, are properly disclosed to the customer and don’t have a detrimental impact on the quality of the service provided to him. EIOPA’s task is to advise on the circumstances in which payments and non-monetary benefits may have a detrimental impact on the quality of the relevant service; and the circumstances that should be taken into account when determining whether an insurer or distributor is complying with its obligation to act honestly, fairly and professionally in accordance with the best interests of its customers, or not.
Suitability & appropriateness, and reporting:
An insurance distributor will be required to use the information provided by its customer to specify the customer’s demands and needs. It will also be required to provide objective information about the proposed product to the customer, so that he can make an informed decision about whether to proceed. If advice is given, the distributor must also give the customer a personal recommendation which explains why the product will best meet his demands and needs. The demands and needs test is complemented by a suitability and appropriateness test, if an insurer or intermediary is selling an insurance-based investment product. The information required for this test varies, depending on whether advice is given, or not; and the sale is for a single product, or a bundle. In particular, if a customer wants to buy an insurance-based investment product without advice, the insurer or intermediary must ask the customer for information about his knowledge and experience of buying / using the specific type of product or service; assess whether the product or service is appropriate for the customer; and, if it’s not, warn the customer. EIOPA’s task is to advise on the information that should be obtained so that suitability and appropriateness can be assessed when advice is to be given, and when it is not.
Comments and next steps:
EIOPA has been asked to provide its final technical advice to the Commission by 1 February 2017, so the Commission can decide whether to adopt delegated acts under article 290 of the Treaty on the Functioning of the European Union, and articles 10 to 14 of the EIOPA Regulation. If the Commission chooses to adopt delegated acts, the Call for Advice implies that the Commission will draft them with the help of Member State appointed experts, instead of asking EIOPA to draft them for it.
As it prepare its advice, EIOPA will work closely with the European Securities and Markets Authority (ESMA) to make sure that, its advice in connection with the sale or distribution of insurance-based investment products is appropriately aligned with MiFID II, so that customers can expect equivalent / consistent protection, whether they’re buying an insurance or non-insurance based investment product. EIOPA will consult its stakeholder group as it prepares its advice; and carry out a public consultation before finalising its advice and submitting it to the Commission.
The IDD is largely maximum harmonizing, so the Member States will be obliged to implement exactly (they cannot require any more or any less of their insurance distributors than the IDD itself requires). However, some IDD provisions are minimum harmonising, so the Member States can (for example) (a) impose stricter information requirements on their insurance distributors; and/or (b) “prohibit or further restrict the offer or acceptance of fees, commissions or non-monetary benefits from third-parties in relation to the provisions of insurance advice“.
Although the UK’s FCA has been taking the IDD into account recently (see, for example, “Increasing transparency and engagement at renewal in the general insurance market” (CP 15/41**) (our blog on these proposals is here); and (b) “General Insurance Value Measures” (FS 16/1)), it’s not yet clear how it will implement the IDD. Whilst some of it is broadly the same as the FCA’s existing rules; some is more nuanced, more complicated and/or sets higher standards; and some will be controversial (even though it’s too late to do anything about it). More to follow…