Twin peaks 2 reform
During the summer, the Belgian parliament approved the so-called 'twin peaks 2' reform, which, among other things, extended the powers of the FSMA for monitoring the financial sector.
This reform also declared that the rules of conduct set forth in articles 27, 28 and 28bis of the law on financial sector supervision dated 2 August 2002 (until then, only applicable to banks and investment firms) will become applicable to all insurance undertakings.
As a reminder, these three articles set forth the following basic rules of conduct to be complied with by any institution providing investment services (such as investment advice or portfolio management):
- article 27: duty to act honestly, fairly and professionally in accordance with the best interests of the clients (this duty is further detailed by about 10 more specific principles);
- article 28: duty of best execution of orders;
- article 28bis: duty to act in a manner which promotes the integrity of the market.
The reform also declared that all royal decrees implementing these three articles will be applicable to the insurance sector as well. This predominantly refers to the royal decree dated 3 June 2007 implementing MiFID (the ‘royal decree MiFID’) and providing more details on the aforementioned rules of conduct.
However, since these rules are customized for the provision of investment services and are not perfectly in line with the insurance business, Parliament gave legal competence to the government to adapt these rules of conduct and, as the case may be, to declare some of these as not applicable to the insurance sector.
Royal decrees dated 24 October 2013
The three royal decrees approved on 24 October are the result of such legislation.
In the first instance, it is to be noted that articles 28 and 28bis have been declared non-applicable to insurance undertakings, as these rules of conduct are not relevant to the insurance business.
However, most of the provisions contained in article 27 and in the royal decree MiFID are declared applicable to insurance undertakings.
Two different regimes
All insurance products are affected by the reform, even standard retail non-life insurance products such as fire or motor insurance.
However, the royal decrees set up two different regimes (a 'full' one and a 'light' one), taking the type of insurance product into account.
Indeed, only the commercialization of life insurance products with a saving component or linked to an investment fund will require the insurance undertaking to comply with the full set of MiFID rules of conduct (collection of all the information on the client's knowledge, objective, financial capacity; suitability test; appropriateness test; etc.). For other insurance products, a more limited regime has been put in place.
That said, rules of conduct on inducements (including disclosure of the remuneration of the sales network – agents and brokers) and on conflict of interest will be fully applicable to all insurance undertakings and for all insurance products, both life and non-life.
The prohibition of undisclosed inducements is likely to revolutionize the distribution model in Belgium. To date, the remuneration of the agent or broker is integrated and therefore included in the premium amount. From now on, insurance undertakings will not be regarded as acting honestly, fairly and professionally in accordance with the best interests of a client if they do not clearly disclose to the client the existence, nature and amount of the fee to be paid to brokers and agents (other than tied agents – see below).
Until now, insurance intermediaries were either agents or brokers. The new reform has created a new sub-category within the agent category, which is the 'tied agent'.
The category of agents will now be sub-divided into ‘tied agents’ and agents other than tied agents.
The tied agent is the agent who carries on its insurance mediation activity in the name and on behalf of:
- either one single insurance undertaking (i.e. all its production comes from one insurer); or
- several insurance undertakings, provided that the products of these undertakings are not competing with each other.
In that respect, if an agent commercializes (i) non-life insurance products of the same class of insurance from different insurers or (ii) saving/investment life insurance products from different insurers or (iii) life insurance products other than saving/investment life insurance products from different insurers, the agent will be deemed to offer products which compete with each other and therefore it will not be a tied agent.
Tied agents will carry on their activities under full responsibility of the insurance undertakings, which will increase the burden of control and monitoring of the latter’s distribution network.
The date of 1 January 2014 was initially advanced, but this was at too short notice for the sector; the government agreed to postpone its entry into force, but it had to occur prior to next year’s elections. Insurance undertakings will have to comply with this new regulatory requirement by 30 April 2014.