Since May 2014 there have been published six compromise texts of the directive to revise the regulation of insurance mediation – now called the Insurance Distribution Directive (IDD).
The directive is expected to be adopted by Spring 2015 with transposition within two years meaning that the revised rules for the distribution of insurance products may be in effect in early 2017.
Set out below are key issues relating to the proposals in the IDD.
- Revised scope. The IDD is a minimum harmonisation European Directive that will be applied to intermediaries and also to insurance and reinsurance undertakings who sell direct to their customers. Claims management, loss adjusting and expert claims appraising are not within scope of the draft IDD according to the latest compromise text.
- Introducing no longer included. Insurance distribution includes advising on, proposing or carrying out work preparatory to a contract of insurance or assisting in the administration and performance of such contracts, in particular in the event of a claim. Notably, the activity of ‘introducing’ is not within the definition of insurance distribution (as it is under the current Insurance Mediation Directive (IMD)). Accordingly, once in force there will no longer be any need for those merely introducing customers to brokers or insurers (or providing data on policyholders to insurers) to be registered.
- Registration of all intermediaries. Intermediaries (i.e. those distributors who are not insurers or reinsurers selling directly) are required to be registered with a competent authority in their Home Member State. Where a distributor is responsible for the activities of an intermediary (for example, an Appointed Representative) they will have responsibility to ensure that the intermediary meets the conditions for registration and for registering that intermediary with the relevant competent authority.
- Overriding requirement to act in customers’ ‘best interests’. The IDD requires that all insurance distributors should act ‘honestly, fairly and professionally in accordance with the best interests of its customers’. This requirement imposes a high standard upon all distributors (including direct sellers and those distributing to professional customers) to consider the interests of customers in their business. This could have potentially far reaching consequences as was seen in the application of Treating Customers Fairly by regulators in the UK. Furthermore, distributors are required to ensure that they do not remunerate or assess the performance of their employees in a way that conflicts with the duty to act in the best interests of customers. In a move similar to the recent tack taken by the Financial Conduct Authority (FCA), the draft IDD also requires firms to operate and review a process for the approval of each insurance product they offer and to review any significant adaptations of existing products before they are marketed or distributed to customers. This process requires firms to identify target markets and ensure that risks to the target market are assessed and managed.
- Conflict management requirements for investment products. The IDD introduces higher standards of disclosure and conflict management for Insurance-based Investment Products (IBIPs). These are products that offer a maturity or surrender value that is dependent on market fluctuations. Where organisational measures are insufficient to ensure, with reasonable confidence, that risks of damage to the customer cannot be prevented, the distributor is required to disclose the general nature and source of the conflict. The European Commission is given powers under the IDD to introduce delegated acts in order to define the steps that distributors might reasonably take in order to identify, prevent, manage and disclose conflicts and to establish criteria for determining the types of conflicts that may damage the interests of customers or potential customers. The inclusion of the conflicts measures and supporting delegated acts reflects similar requirements in the Markets in Financial Instruments Directive (MiFID). In addition, insurance distributors will be subject to the requirement in the measures being developed for packaged retail investment and insurance-based investment products (PRIIPs) to provide customers with a key information document (or ‘KID’).
- Conflict measures expedited into ‘IMD 1.5’ by MiFID II. In order to ensure that MiFID type conflicts measures are introduced for IBIPs in advance of agreement on the IDD, Article 91 of MiFID II introduces a new Chapter IIIA into the IMD in a measure being called ‘IMD 1.5’. Chapter IIIA introduces the requirement for insurance intermediaries and direct sellers to identify conflicts and disclose the existence of conflicts where required. Similar to the current draft of the IDD, IMD 1.5 requires the European Commission to introduce delegated acts to define the steps that distributors might take to identify and manage conflicts and to identify particular types of conflicts. In its consultation, the European Insurance and Occupational Pensions Authority (EIOPA) proposes using very similar wording to that applied in MiFID for both the identification of conflicts and types of conflict scenarios. It is likely that this IMD 1.5 approach will be replicated in the IDD, once finally agreed.
- Enhanced professional requirements. Those persons carrying out insurance or reinsurance distribution will be required to meet certain competency requirements and comply with obligations for continuing professional development, taking into account the nature of the products being sold and the type of distributor (i.e. taking into account the variances between tied agents, commercial brokers and IFAs). These include requirements for continuing professional development.
- Disclosure and transparency. Before the conclusion of an insurance contract, intermediaries are required to provide details about themselves and must describe to their customer the nature of their remuneration and whether the contract will work on the basis of a fee or commission (or other type of arrangement). The IDD excludes these obligations where the distribution relates to large risks, reinsurance or for professional customers. The European Commission proposal for a revised IMD had originally mandated commission disclosure after a 5 year transitional period for all insurance policies. Insurance undertakings will be required to disclose the nature of the remuneration received by its employees in relation to the contract sold (i.e. bonus payments). The latest European Council compromise text enables Member States to restrict the payment of commission as has been done in the UK under the Retail Distribution Review rules in operation since December 31, 2012.
- Online selling and aggregators. The IDD recognises the use of websites in distribution and in particular includes aggregator sites within scope. In addition, the IDD recognises that pre-contractual information can be provided to customers via a website.
- Cross-selling disclosures. When a product is offered with another service or as part of a package the distributor must inform the customer whether it is possible to buy the different components separately and if so they must provide an adequate description of the different components as well as separate evidence of costs and charges.