The European Insurance and Occupational Pensions Authority (EIOPA) has decided to follow the Financial Conduct Authority (FCA) and develop guidelines for Member State competent authorities on product oversight and governance for consumer products. This represents the developing move away from consumer protection measures at point of sale (i.e. status disclosure and product information) towards a more intrusive and pre-emptive regulatory approach. Clearly, like the FCA, EIOPA will expect firms to have in place advanced systems in order to ensure that products are not sold to the wrong markets.
This consultation follows a mandate given by the Joint Committee of the European Supervisory Authorities (ESAs) after it published a Joint Position of the ESAs on Manufacturers’ Product and Oversight & Governance Processes (November 2013). EIOPA sees its mandate to issue guidelines in the light of Article 41(1) of Solvency II: ‘Member States shall require all insurance and reinsurance undertakings to have in place an effective system of governance which provides for sound and prudent management of the business’.
Among the implications of the guidelines is that firms will need to take a much more robust approach to product testing. This may include undertaking stress-tests which take into account changes in the financial strength of the firm as well as reviews of how policy terms and conditions may impact the target audience and whether products may be affected by changing tax environments.
For the general insurance market, EIOPA suggests that an assessment of a product may include a review of the expected claims ratio and claims payment policy. This would require firms to review products should the claims ratio be higher or lower than expected. Firms would also have to take into account whether products overlap with coverage already provided to customers. Terms and conditions should be reviewed to see if they meet the needs of the target audience and reviewed to ensure that that audience understands the policy terms and limitations.
For the investment market, product testing should consider what would happen to the risk and reward profile of the product following changes to the value and liquidity of the underlying assets, how the risk-reward profile of the product is balanced and how might the tax environment change the product outcomes.
EIOPA is seeking feedback on the following 12 guidelines:
- Establishment of product governance and oversight arrangements.
- Role of the manufacturer’s administrative, management or supervisory body.
- Review of product governance and oversight arrangements.
- Management of conflicts of interest in product design.
- Target market.
- Knowledge and ability of staff involved in the design of products.
- Product testing.
- Product monitoring.
- Remedial action.
- Distribution channels.
- Outsourcing of the product design.
- Documentation of product governance and oversight arrangements.
Responses are due by January 23, 2015.
For our insight into product governance please refer to our briefing Beyond law: understanding the scope of conduct regulation, April 2014
For further information: EIOPA Guidelines on product oversight and governance arrangements by insurance undertakings, 27 October 2014