The Insurance Distribution Directive….one year to go
Member States across the EU are due to implement the Insurance Distribution Directive by 23 February 2018. With just one year to go Hogan Lovells have looked at what progress the supervisory authorities in France, Germany, Italy, Poland, Spain and the UK are making with their implementation plans and how firms in each country might be impacted by the Directive.
The Insurance Distribution Directive
The countdown begins
After almost 4 years of protracted negotiations, countless drafts and a change of name, the Insurance Distribution Directio (“IDD”) came into effect on 22 February 2016. It must be implemented by Member States by 23 February 2018. This note looks at what progress France, Germany, Italy, Poland, Spain and (despite Brexit) the UK are making in implementing the IDD and at how firms in each country might be impacted by the IDD.
Why the IDD?
Currently the selling practices of insurance intermediaries across the EU are regulated by the Insurance Mediation Directive (“IMD”) 2002. It was recognised that there are notable short comings with the IMD and in 2012 the European Commission published proposals for IMD2 (as the IDD was then called).
What were the issues with the IMD?
The fallout from the 2008 financial crisis highlighted the need for more effective consumer protection. The European Commission felt that the IMD fell short in certain areas:
- The IMD only applies to the sale of insurance products via intermediaries and not to those sold directly by insurance companies.
- There was inconsistency of regulation across Member States: whilst the real aim of the IMD was European harmonisation this was not being achieved as some countries “gold-plated” their rules (such as the UK and Germany), whilst others did not.
- Certain parts of the IMD were in need of modification or clarification, for example, introducing clearer provisons on the scope of the Directive and improving remuneration transparency.
The IDD expands the scope of the IMD to cover
- all sales of insurance products, including insurance-based investment products
- sales by insurance intermediaries like brokers or managing general agents and, significantly, it extends cover to more
- modern distribution arrangements such as web-based aggregators
- ancillary insurance intermediaries such as travel agents and car rental companies (where the premium exceeds a certain level and where certain other conditions are met)
- direct sales by insurers and reinsurers.
Certain activities are exempt, including the activity of ‘introducing’, activities relating to risks outside the EU or third countries and connected contracts.
Acting in the best interests of the customer
In line with the focus on consumer/customer protection there are two new conduct obligations for insurance distributors:
- to act “honestly, fairly and professionally in accordance with the best interests of the customer”
- that Member States will ensure that all information is “fair, clear and not misleading”.
It is not clear how the first new obligation will fit with the insurance market and it raises a number of questions: on its face it appears straightforward for an insurance broker acting – in a traditional sense – for their client, the policyholder. But how does this apply to insurers, where the policyholder is their contractual counterparty? How does it apply to a broker when acting as agent of the insurer? Moreover, does the new rule require distributors to act in the best interests of customers separately from acting honestly, fairly and professionally or if (as of course they should) they act honestly, fairly and professionally, is that in itself in accordance with customers’ best interests?
Product and selling requirements
The IDD introduces a number of detailed provisions regarding point of sale disclosure and advising requirements.
Bundled products/cross selling
Cross-selling practices and tied financial services have come under scrutiny. For insurance that is sold as a part of a package with other goods or services, the IDD introduces a new requirement to disclose to customers whether the insurance can be bought separately and if so, certain information disclosure requirements will apply such as a description of the insurance as well as evidence of the separate costs and charges.
The IDD will require firms selling insurance as part of a package with other goods or services also to offer the same goods or services without the insurance (although certain exemptions will be available e.g. insurance sold with payment accounts).
Conflicts of interest and remuneration
The IDD includes specific rules covering the management of conflicts of interest and the disclosure of remuneration by requiring firms to indicate clearly to customers the basis/nature of their remuneration whether by way of fee, commission or any other form of economic benefit. The IDD does, however, expressly allow Member State regulators to impose restrictions on specific types of fees, commission and other types of benefits.
Professional requirements and certification
There are new requirements for training and development. The IDD requires insurance intermediaries and the staff of insurers who are responsible for or involved in the sale of insurance products to have a high level of professionalism and competence. In addition, there is a specific requirement for those working in insurance distribution to be of “good repute” and as a minimum to have a clean criminal record.
Publication of “general good” rules
Member States must publish the “general good” rules applicable in their jurisdiction. In practice, how this will actually happens remains to be seen but it is hoped that the appropriate regulator in each country will have to publish on their websites the national rules for “protecting the general good”.
A single electronic database of insurance intermediaries will be established to simplify the procedure for cross-border entry to insurance markets across the EU.
Insurance based investment products
These products are within the ambit of the IDD and there are specific requirements placed upon distributors. Requirements cover, for example, conflicts of interest, disclosure of remuneration, assessment of the suitability of products, warnings of risks and disclosure of information.
Insurance and reinsurance intermediaries must obtain authorisation from the appropriate regulator to carry out insurance/ reinsurance distribution. Insurers and reinsurers, on the other hand, do not require distribution authorisation under the Directive. And the conduct rules which are set out in the Directive are only applicable to insurance intermediaries and insurers.
Enforcement and sanctions
The IDD sets out more stringent enforcement obligations, together with sanctions for breach of the requirements.
Implementation across the EU
The IDD must be implemented by Member States by 23 February 2018. The IDD introduces a number of new concepts and it remains to be seen how these will be implemented by Member States. The introduction of new requirements will most likely have a huge impact upon the day to day business of distributors. Given the sanctions for breach of the Directive, businesses will find themselves under pressure to deliver.
Timing is tight and this is of concern. The IDD provides a framework of principles but the detail will be set out in the Level 2 technical implementing measures to be adopted by the European Commission. Until there is certainty about the content of the Level 2 measures firms will not be able to make the necessary changes to their business models and organisational structures.
It is interesting to note that the IDD is a minimum harmonisation directive so Member States will not be prevented from “gold-plating” (introducing more stringent provisions) even though this was considered a defect of the IMD. How, or the extent to which, this may cause a fragmented approach across the EU is yet to be seen.
When the UK implemented IMD in 2005 it heavily gold-plated the requirements, including extending its scope to cover direct sales and ancillary intermediaries. As a result the IDD is not introducing too many material changes to the current UK regulatory regime. It is too early to tell what impact the Brexit vote will have for the UK – will the Financial Conduct Authority reverse or modify any of its regime in light of the IDD? All they have for now is a statement from Andrew Bailey, head of the Financial Conduct Authority, on 19 July 2016, in which he appears to have confirmed that directive requirements will continue to be met/implemented until the UK has left the EU. If that is the case, given the current timing of negotiations, which are unlikely to be completed before 23 February 2018, the UK should expect to see the IDD requirements implemented in the UK.
Hogan Lovells expects that, as with the Solvency II Directive, the IDD will be implemented through regulations and through amendments to the Prudential Regulation Authority Rulebook and Financial Conduct Authority Handbook. In the UK, transitional efforts to comply with the IDD should be minimal and quite straight forward.
The Law relating to “transparency, fight against corruption and the modernisation of the economic life” dated 9 December 2016 provides that the IDD will be implemented through an Ordinance (ordonnance), within 18 months following the enactment of the Law. A project of law of ratification will then be tabled before the French Parliament within a period of five months from the publication of the Ordinance. Ordinance is a quick way for European Directives to be transposed into French Law. As yet, no draft of the Ordinance and/or other secondary implementing legislation has been published but they expect the provisions of the IDD will be reproduced in full.
The IMD was implemented in Spain through the Insurance Mediation Act 2006. The Spanish regulator has decided to implement the IDD by replacing the 2006 Act with a new Act which will combine features of the old regulation with the provisions of the IDD. A first draft of the new Act was presented in February 2017.
The Federal Ministry for Economic Affairs and Energy published a draft law on the implementation of the IDD on 21 November 2016. The new law should be adopted in July 2017. Implementation will be through amendments to the Trade and Commerce Regulation Code, the Insurance Contract Act and the Insurance Supervision Act. At a regulatory level, amendments will be made to the Ordinance on Insurance Mediation and the Insurance Contract Act Information Ordinance.
The Ministry of Finance has taken its first steps to start the IDD implementation process. A draft of a new Act is planned to be adopted by the Council of Ministers in the second quarter of 2017.
The IDD is expected to be implemented through amending the Italian Insurance Code and the relevant IVASS regulations. It is expected the implementing legislation to substantially reproduce the provisions of the IDD. As yet, drafts of the implementing legislative decree and regulations have not been published by the Italian regulator.
Authorisation (or “registration”) requirements are set out in Article 3 of the IDD, together with plenty of extra commentary in the recitals.
As with the IMD, insurance and reinsurance intermediaries are required to be registered with their appropriate Member State regulator. Intermediaries already registered under the IMD will not be required to reregister under the IDD.
Ancillary insurance intermediaries (such as travel agents, banks and car rental companies) are covered by the IDD and, as with (re)insurance intermediaries, they must be registered. This will have an impact on firms in Poland and in Italy, who will come within the definition of ‘ancillary insurance intermediary’ but who are not currently required to be registered. French and UK law already provides for a similar category of intermediary and so the IDD will not substantially amend their existing regimes. However, Spanish law allows intermediaries to have recourse to ‘’external collaborators’’, individuals or companies who collaborate with intermediaries on the distribution of products but who are not classified as an intermediary. ‘’External collaborators’’ are only required to be registered on an internal register maintained by the intermediary. External collaborators will not fall within the IDD and we wait to see how the Spanish regulator proposes to deal with these types of firms in future.
Under the IDD (re)insurers are not required to receive specific distribution authorisation from their regulators although this may be required already by some Member States.
A new requirement of the IDD is that regulators are required to establish an online registration system.
- It must be easily accessible.
- It must allow online registration.
- If there is more than one Member State register, then the regulator must establish an electronic single information point allowing access from each register.
- EIOPA is to create a website with links to each single information point or register. Some Member States such as France and the UK already operate on an on line registration system.
Article 10 sets out the conditions of registration. Points to note are:
Knowledge and training
- The knowledge and training requirements apply to all staff who are responsible for or involved in the distribution of products.
- They must comply with continuing professional training and development to maintain an adequate level of performance corresponding to the role they are performing and the relevant market.
- Continuing professional training of at least 15 hours per year will be required.
- Regulators may require certification to prove completion of the training.
- There is a lighter touch regime for ancillary intermediaries.
In some Member States such as France, the principle of continual professional training is not a legal requirement, but the vast majority of insurance intermediaries already have compulsory training programmes, in line with the recommendations and expectations of the regulator. However in small offices (e.g. family owned and run businesses), it is likely that IDD will add to the existing regime.
There is a general requirement for people responsible for or involved in distribution to be of “good repute”. This essentially requires them to have a clean criminal record in relation to serious crimes involving property and financial activities, and to not have been declared bankrupt.
The provisions covering selling requirements form an extensive section of the IDD, with an emphasis on customer protection which goes back to the mandate behind the review of IMD and the creation of the IDD. These requirements cover the selling requirements applicable to those involved in insurance distribution (i.e. not reinsurance distribution).
Insurance distributors have a new overarching requirement placed upon them to always act “honestly, fairly and professionally in accordance with the best interests of their customers”. All information sent out by insurance distributors must be “fair, clear and not misleading”. Marketing communications must be clearly identified as such.
Information disclosure and transparency
Similarly to the IMD, insurance intermediaries and insurers must disclose certain specified information before the conclusion of an insurance contract. This includes, for example, its identity, complaints policies and its registration details. In particular, an intermediary must state if it is representing the customer or acting for an insurer.
Conflicts of interest
Insurance intermediaries are required to disclose information to a customer about its holdings in an insurer. Insurance distributors are required to not remunerate or assess the performance of their staff in a way which conflicts with the duty to act in the best interests of the customer.
In some Member States such as France, distributors have not yet developed policies relating to conflicts of interest but it is already anticipated that the cost of complying with this requirement will be significant. The French regulator and operators are waiting for the European Commission delegated acts in relation to conflicts of interest before taking appropriate measures.
Disclosure of remuneration
Insurance intermediaries must disclose:
- the nature of remuneration
- the basis of the remuneration
- fee paid by the customer
- a commission included in the insurance premium
- an economic benefit of any kind offered or given in connection with the insurance contract
- any combination of these.
- If a fee is to be charged, the fee or the method for calculating it must be disclosed.
- Payments, other than on-going premiums and scheduled payments must be disclosed.
Insurers must communicate to the customer the nature of the remuneration received by its staff in relation to the insurance contract.
The German legislator has indicated that it intends to impose stricter provisions on remuneration for example, insurance agents and brokers will only be able to receive their remuneration from the insurer and not from the customer. If these controversial proposals are implemented it will have a significant impact on the business model of German insurance agents and brokers.
For Spanish and Polish firms the IDD disclosure requirements will be a significant change from the current disclosure regimes which only requires disclosure in limited circumstances.
Italian and French law already requires disclosure of remuneration in certain circumstances. The IDD will enhance the existing requirements and remuneration policies and practices will need to be revised. In France, it is likely that the revision of distribution schemes will be a hot topic involving lengthy and strong discussions between the market players. Achieving the revision in a prompt manner will however certainly be fostered by the enhanced powers given to the ACPR notably to sanction remuneration schemes when the remuneration creates incentives for distributors which are not correlated with customers’ interests.
There are new requirements placed on insurance distributors in relation to the advice they provide in relation to insurance products, and how they provide that advice. Depending on the complexity of the insurance product and the type of customer, insurance distributors are required to specify the demands and needs of the customer and provide objective information in a comprehensible format. For certain nonlife insurance products, a “standardised insurance product information document” has been introduced: this is to be drawn up by the manufacturer of the non-life product and must contain certain information as specified in Article 20(8). It must also comply with a list of requirements and be:
- entitled “ insurance product information document”
- short and stand-alone
- clear and easy to read
- as clear in black and white as in colour
- in one of the official languages of the Member State
- accurate and not misleading
EIOPA are working on a standardised presentation format for this document.
Current German law already imposes a general duty to advise which goes beyond the duties prescribed by the IDD.
In Poland the advice requirements are currently much less stringent than under the IDD and we expect to see significant changes in these areas under Polish law.
In France, the distributors are already subject to a duty to advice that must be summarised in writing. The standardised insurance product information document may however overlap with the existing obligations of distributors to provide pre-contractual information which is very much along the lines of the requirement set out in the IDD and, may ultimately result in additional work for these distributors, who were to date subject to “lighter” obligations in comparison to the distributers of life insurance products (who are already subject to this requirement).
Format of information
There are over-arching requirements concerning the format of all information provided to customers. Information must be:
- on paper, or in certain circumstances on some other durable medium or on a website
- clear and accurate
- comprehensible to the customer
In France, this is already the case.
Ancillary insurance intermediaries
Ancillary insurance intermediaries need only comply with a watered-down set of selling requirements.
Large risks and reinsurance
Where distributors are distributing large risks (as defined by the IDD) insurance or reinsurance they need not comply with the information disclosure requirements.
Packaged Products and Services
The distribution of insurance products offered as part of a package with another product or service, are subject to a set of additional rules. For example, the distributor must offer the possibility of buying the product or service without the insurance.
Product oversight and governance requirements
Whilst the IMD concerned itself with the actual distribution of insurance products, the IDD veers into product oversight territory. There are a host of requirements placed upon the manufacturers of insurance products: each insurance product requires a review and approval process for which specific requirements are set out in the IDD.
These requirements are new under German, French and Italian law and are likely to have a substantial impact on the administrative practices for firms and on implementation costs.
It is also anticipated that distribution agreements will have to be revisited in order for insurers and distributors to be able to comply with their obligations (e.g. type and frequency of information to be exchanged, allocation of responsibilities, duty to distribute and product only to the suitable target defined by the insurer).
In line with the aim of improving customer protection, the IDD contains specific provisions relating to the organisational requirements of insurance distributors. Members States are specifically required to “take all necessary measures to protect customers against the inability of the insurance, reinsurance or ancillary insurance intermediary to transfer the premium to the insurance undertaking or to transfer the amount of claim or return the premium.”
Regulators have a choice of how they implement this: one way is to require that the intermediary has a permanent financial capacity of 4 % of the sum of annual premiums, subject to a minimum of € 18,750 (EIOPA will be reviewing these amounts in 2018 and then every 5 years). The 4% capital requirement is the same as currently required under the IMD and most Member States have implemented this requirement but will need to amend their legislation to increase, or in some cases like Spain, impose the minimum amount. In Poland there are currently no specific capital requirements.
In addition, a prerequisite to registration is that intermediaries must have professional indemnity insurance amounting to a minimum of €1.25m each claim and €1.85m in aggregate. These minimum amounts are higher than current amounts required by the IMD. Some countries, like France already provide for higher amounts than those imposed by the IMD. In fact, France already provides for a higher amount than the IDD. Others, such as Germany will need to make appropriate increases.
Cross border activity
The IDD aims to simplify cross border activity. (Re)insurance and ancillary intermediaries who wish to carry on business in another Member State for the first time can communicate to their home state regulator certain information (i.e. registration details and where they wish to operate) so that the regulator can communicate that information to the host Member State. The home state regulator then informs the intermediary at which point it is free to start business in the host state. A similar procedure is set up for intermediaries wishing to open up a branch in another Member State.
Information on these (re)insurance and ancillary intermediaries will be made available via a single EIOPA electronic register:
- Published on the EIOPA website
- Kept up to date
- Contain records of (re)insurance and ancillary intermediaries which have notified intention to carry on cross-border business
- Member states shall provide the information to EIOPA
- Links from the EIOPA register to the websites of Member States’ regulators
- Links from the websites of Member States’ regulators to the EIOPA single register
Another new requirement under the IDD is that regulators are required to publish their “general good rules”. EIOPA will include links to these on its website.
In Italy and Germany, the regulator already publishes on its website a list of ‘general good’ provisions. In both countries the list is quite short although we expect they will be amended to reflect the IDD. The French regulator, the ACPR, takes a broad interpretation of the concept of ‘general good’ and considers the entire Book 5 of the French insurance code relating to insurance mediation to be of ‘general interest’.
There is an emphasis on home state regulators being responsible for overseeing and enforcing compliance with the new regulation. Under the new Directive, in the event of any breaches by distributors carrying on business outside their home state, the issue will be redirected back to the home state regulator. This will not impact some Member States like France where the regime already provides that home state regulators are primarily, if not exclusively, responsible for supervision, control and sanction of their distributors.
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The original article was published by Hogan Lovells at hlinsurancelaw.com.