The Insurance Distribution Directive (IDD) introduces new rules on insurance distribution. It came into force on 23 February 2016 and must be transposed into the national laws of the EU Member States by 23 February 2018. Following the UK referendum vote to leave the European Union, there is a good deal of uncertainty over many aspects of insurance regulation. However, whilst the UK remains a member of the European Union, implementation of current legislative plans will continue.
In summary, the IDD seeks to:
- improve regulation in the retail insurance market and create more opportunities for cross-border business
- establish the conditions necessary for fair competition between distributors of insurance products
- strengthen consumer protection, with particular regard to the distribution of insurance-based investment products.
Under the IDD, delegated powers are conferred upon the European Commission. These delegated powers allow the Commission to supplement or amend non-essential elements of the IDD. Delegated acts enter into force if the European Parliament and the Council of Europe have not objected to the amendment within a stipulated timeframe. The European Insurance and Occupational Pensions Authority (EIOPA) received a formal request from the Commission to provide technical advice on the possible content of these delegated acts.
EIOPA has subsequently published a draft consultation paper in relation to its technical advice on possible delegated acts relating to the following provisions of the IDD:
- Product Oversight and Governance
- Conflicts of Interest
- Assessment of suitability, appropriateness and reporting.
EIOPA’s consultation is open until 18.00 CET on 3 October 2016, after which it will prepare a final version of its Technical Advice and submit to the European Commission in 2017.
Below we outline a brief summary of the key headline provisions emerging from of EIOPA's technical advice.
Insurance product oversight and governance
Manufacturers of insurance products should establish and implement insurance product oversight and governance arrangements that set out appropriate measures and procedures aimed at monitoring and reviewing products for customers. Such arrangements should result in products that meet the needs of a target market, deliver fair outcomes for customers and ensure products are sold to target markets in the appropriate distribution channels.
The IDD stipulates a number of requirements, including obligations on insurers and intermediaries to maintain and review processes to approve products before they are distributed to customers, to understand and review the products on offer and to understand the characteristics of a product’s target market. Product oversight and governance is applicable to all insurance products, not just insurance-based investment products.
EIOPA’s technical advice suggests extending the IDD’s obligations so that insurers and intermediaries have extra requirements, including:
- to carry out product testing before a product is brought to the market (or changes to an existing product are introduced)
- to carry out ongoing product monitoring once the product is distributed
- to select appropriate distribution channels for the product’s target market
- to ensure that product information is clear, precise and up to date.
Conflicts of interest
Conflicts of interest typically arise in situations where an insurer or intermediary has an ‘own interest’ in selling products of its own group, or where sales commission is being received. The IDD requires insurers and intermediaries to take appropriate steps to identify any conflicts of interest between themselves and customers, to maintain/operate administrative arrangements in order to prevent conflicts of interests from arising and to disclose the nature or source of any conflicts before the conclusion of an insurance contract. The advice relates explicitly to insurance-based investment products.
EIOPA’s technical advice relates specifically to identifying conflicts of interest. The advice suggests that insurers/intermediaries assess whether they have an interest relating to the insurance distribution activities which are ‘distinct from the customer’s interest’ or have the potential to influence the outcome of the services to the ‘detriment of the customer.’
EIOPA’s advice also stipulates situations where conflicts of interests should be assumed:
- where an insurer (or any of its employees) makes a gain or loss at the expense of a customer
- where there is a financial or other incentive to favour the interests of a particular customer
- where an insurer may receive a benefit (from a person other than a customer) in relation to insurance activities provided to the customer
- where an insurer is involved in the management or development of an insurance-based investment product.
EIOPA understands the term ‘inducement’ to be any ‘fee, commission or non-monetary benefit’ which is paid in connection with the distribution of an insurance-based investment product, or an ‘ancillary service to or by any party except the customer or person on behalf of the customer.’ The IDD states that the benefit must not have a ‘detrimental impact on the quality of the relevant service to the customer’ or impair an insurer/intermediary’s compliance with the obligation to always act ‘honestly, fairly and professionally’ and in accordance with the best interests of their customers.
EIOPA’s technical advice sets out a number of guidelines relating to where there is a ‘high risk’ of a detrimental impact. Situations include where the value of the inducement is 'disproportionate or excessive' and where the inducement is entirely (or mainly) paid upfront when the product is sold. More examples are listed on page 54 of EIOPA’s publication.
EIOPA’s advice also suggests that insurers operate certain organisational requirements and procedures that ensure that inducements do not lead to a detrimental impact on the quality of service that is provided to customers.
Assessment of appropriateness and suitability of reporting
Under the IDD, the assessment of suitability is one of the most important obligations for consumer protection. The IDD stipulates that distributors providing advice have to provide ‘suitable personal recommendations’ regarding insurance-based investment products. Suitability must be assessed against customer's knowledge and experience, financial situation and investment objectives.
EIOPA’s technical advice requires that insurers shall determine the extent of the information to be collected in respect of a customer’s knowledge, experience, financial situation and investment objectives. An insurer must also inform customers ‘clearly and simply’ that the reason for assessing suitability is to enable the firm to act in the client's best interest.
This provides an indicator of some areas of change. Following finalisation of the technical advice, it will be necessary to assess the provisions against the existing requirements of the Insurance Mediation Directive which was "gold-plated" on implementation on the UK.
For more information, read EIOPA’s Technical Advice