On 30 June 2015, after two years of negotiations representatives from the Economic and Monetary Affairs Committee (ECON) and Latvian Presidency of the Council of Ministers have finally struck an "informal deal" on a compromise of the draft Insurance Distribution Directive (IDD) bringing the directive, which aims to establish new and improved rules on insurance distribution, one step closer.
Under the new directive insurance distributors will have to be more transparent about the cost of products that they sell and disclose conflicts of interest, and give the consumer the option not to buy insurance in circumstances where the insurance is to be sold with another product being purchased by the customer.
The key aims of the IDD are to improve the way insurance is sold and bring benefits to consumers by introducing new requirements to enhance policy holder protection, enhanced information requirements and establishing improved conduct of business rules. However, for those selling insurance the new regime will bring added complexity and a higher disclosure burden to the sales process, and will require firms to look at remuneration arrangements to ensure that they do not conflict with customers' interests.
According to an ECON press release the political agreement will now be subject to "technical finalisation" before it can be endorsed by the Council and the ECON Committee, at which point the official legal text will be put before the European Parliament for a plenary vote and endorsed by Member States.
Although the detail is still to be finalised the indication is that the IDD will:
- apply to all distribution channels including aggregators and direct insurers - including proportionate requirements for those who sell insurance products on an ancillary basis;
- standardise information requirements by requiring that a simple Product Information Document be given to customers (this is consistent with consumer information documents for life insurance products under the Solvency II Directive and for investment products under the PRIIPS Regulation);
- require distributors to be more transparent about the price and cost of their products. The agreed version appears to have watered down the Commission's original proposal that the amount of commissions paid must be disclosed to customers. However, the directive will require the nature of remuneration arrangements (including whether commissions are paid) to be disclosed as well as whether the seller has ties to particular insurers.
- require that remuneration arrangements must not provide incentives to recommend a particular product when a different one would better meet the customer's needs. The seller of
- insurance will also be required to disclose whether there is any economic incentive to sell a particular product;
- introduce new standards (likely to include suitability and appropriateness requirements) for the sale of life insurance products with an investment element; and
- give customers the right, where insurance is sold as an ancillary product to other goods or services as part of a package, to buy the various components jointly or separately according to their needs.
The indication is the IDD will not:
- ban the remuneration of distributors through commission – provided, however, that any commission paid does not harm customers' interests;
- introduce a mandatory disclosure of commission (although the ECON press release alludes to the fact that EU Member States could require insurance distributors to disclose remuneration, fees, commissions and other benefits);
- impose a specific business model thereby allowing current practices of both 'execution only' sales and advised sales to continue;
- prevent member states going beyond the minimum harmonisation provision of the directive providing that such provisions are consistent with EU law.
The timeline below sets out details of the next steps on the evolution of the IDD.
Click here to view table.