The aim of this article is to provide an overview of the latest proposed amendments to the Insurance Mediation Directive which were adopted by the EU commission on 3 July 2012.
What is the aim of the EU commission in reviewing IMD?
The aim of the Commission’s consultation was to review the current Insurance Mediation Directive (IMD) to ensure it still meets its original objectives of guaranteeing a high level of consumer protection, professionalism and competence amongst insurance intermediaries.
Why was the review required?
- IMD was a minimum harmonisation Directive, which has resulted in differences in how it has been implemented by Member States.
- IMD did not achieve sufficient transparency and certainty for consumers or sufficiently take their interests into account.
- IMD did not effectively facilitate cross-border provision.
- Selling practices for financial products have also proved to be inadequate.
What are the objectives of IMD2?
The objectives of IMD2 are to increase consumer protection and provide greater legal clarity and certainty.
Currently IMD exempts insurers and their employees from its scope. This could result in less information and protection to consumers who buy direct from them rather than through an intermediary.
The Commission sought views on how the provisions of IMD can be applied to direct sales, websites that just provide information about insurance and the sales of insurance products by distance marketing (online, email, etc).
By bringing direct sales within IMD2 this would create a level playing field between these distribution channels and therefore increase consistency and transparency across the market for consumers.
The Commission also wants to implement ‘conduct of business’ and ‘conflicts of interest’ rules in respect of the sale of insurance PRIPs modelled on the MiFID rules.
What are the proposed changes?
IMD2 will make the following changes as proposed in draft IMD2 legislation:
Extending the scope of IMD to include direct sales from Insurers and Reinsurers
Article 1 extends the scope of the IMD requirements to:
- sales of insurance contracts by insurance and reinsurance companies directly to policyholders;
- claims management activities by and for insurance companies;
- loss adjusting; and
- expert claims appraisal.
There will be a ‘de minimis’ in order to exempt policies sold for annualised premiums of €600 or less.
Insurance policies sold as ancillary services (such as travel insurance by travel agents) will need to comply with IMD requirements under IMD2 also.
Redefining insurance activities, products and remuneration
The definition of ‘Insurance mediation’ is extended to include direct sales, claims management activities, loss adjusting and expert claims appraisal along with certain activities by insurance aggregator websites, but removes ‘introducing’.
This means consistency amongst the sales channels for insurance without penalising those who simply engage in introducing consumers to intermediaries where insurance needs are identified.
A definition of insurance investment products is included to match the definition in PRIPs regulations. This will allow for 101% life assurance bonds and capital redemption contracts to be distinguished from traditional life assurance products where the focus is protection rather than investment and therefore tailor disclosure requirements accordingly.
Finally remuneration is defined to include not only payments (fees, commission, etc) but also economic benefits of any kind. For example, an employee for an Insurer’s direct sales arm may receive cash bonuses, or gifts such as an all expenses paid holiday for meeting certain business volume or sales targets. The application of this requirement has yet to be fully prescribed.
Centralised register of authorised persons
Previously those subject to IMD must be registered on their national regulator’s register where they are licensed.
Article 3 requires the establishment of a single electronic register by the European Insurance and Occupational Pensions Authority (EIOPA). The register will function as a portal linking back to the national registers.
There is also exemption from registration for those persons and entities subject to the declaration procedure.
The declaration procedure will apply to:
Those who conduct insurance mediation as an ancillary service (i.e. a travel agent) and the products cannot include life cover or liability risks other than incidental cover; and
Those whose activities are limited to the professional management of claims and to loss adjustment.
Clarity on roles and responsibilities for freedom of services and freedom of establishment business
IMD2 introduces a definition of ‘Freedom of Establishment’. This allows for greater clarity over the difference between freedom of services and freedom of establishment in terms of regulatory requirements.
It also details the role and responsibilities for Home and Host States, especially when an intermediary is not meeting its obligations when transacting business in the Host Member State.
Professional and organisational requirements
The current rules in Article 4 of IMD1 are:
- requirement for appropriate knowledge and ability,
- to be of good repute,
- to hold professional indemnity insurance and other measures,
- to protect a client against an intermediary’s inability to transfer premiums to the insurer or receive claim payments from the insurer.
IMD2 adds a requirement for continuous professional development for intermediaries and others caught under IMD2. Those subject to disclosure rather than registration would be able to satisfy this requirement by limiting development to their area of expertise - for example claims management.
General good requirements at national level
Article 9 now requires Member States to prescribed their general good rules and requires EIOPA to collect and publish information about such rules.
Any new regulation must also reduce the administration requirements on companies.
Articles 15 to 20 determines general principles for conduct and disclosure applicable to all persons subject to IMD2:
- General principles that they should act in the best interests of their clients.
- Disclosure requirements are broadly similar with the current IMD requirements for insurance products.
- An obligation on insurers and intermediaries to provide sufficient information about the insurance at pre-sale.
- Ensure the client receives information about the amount and basis of remuneration of the seller (making it clear the difference between the premium paid and the actual amount invested), including variable remuneration received by sales employees of insurers or intermediaries. Remuneration structures should not materially impact on the seller’s ability to act in the best interests of their clients.
- Full product disclosure is a mandatory requirement for life insurance and on-request for non-life products. After a 5-year transition, the requirement for full product disclosure for non-life products will also become mandatory.
Conduct of business rules: conflicts of interests and transparency
Article 23 deals with additional requirements for insurance investment contracts in respect of conflicts. It gives the EU Commission powers by delegated acts to:
- define steps that may be required to identify, prevent, manage and disclose such conflicts; and
- establish criteria for specifying types conflicts, which may damage the interests of policyholders.
MiFID II gives a benchmark for intermediaries to:
- Identify conflicts of interest and where they are not managed in a way that prevents the risk of damage to clients interests, then disclosure of the general nature and sources of conflicts of interest should be provided to the client before business is undertaken.
Selling practices for Insurance PRIPs
Article 24 deals with consistent conduct of business and inducements rules being applied to all persons selling PRIPs regardless of whether the distribution is through an intermediary or a direct sale and Article 25 will how suitability and appropriateness of products should be determined.
The rules of MiFID II provide the benchmark to use. The person selling the insurance PRIPs should:
- Act honestly, fairly and professionally in accordance with the best interests of their clients,
- Ensure that information is clear, fair and not misleading.
- Provide information about the insurer or intermediary and its services (in particular, whether any advice is given on an independent basis), about the scope of any market analysis (whether ongoing suitability assessment will be provided), about proposed products and investment strategies, and about costs.
- Independent advice is said to be amongst other things and assessments on products on the whole of the market and a requirement not to accept remuneration from third parties (i.e. commission).
- Information should be obtained about the client’s knowledge, financial situation and investment objectives to enable suitable products to be recommended or to warn clients of unsuitable products for execution only business.
How will this affect other reviews being undertaken by the Commission?
- The Commission has produced a number of inter related consultations on MiFID, IMD2 and PRIPs. The point of sale regulatory regime for insurance PRIPs will fall under IMD2 whilst the regime for other PRIPs will generally be reviewed under MiFID.
- IMD2 therefore reviews the selling practices for both insurance PRIPs and general insurance products. It also provides conduct of business and conflict of interest rules, which are based on the MiFID rules for the sale of insurance PRIPs. Therefore, the PRIPs, IMD2 and MiFID consultations should be read alongside one another.
- The likely roll out of these inter-related directives and regulations, is that MiFID will take effect first, with PRIPs (which complements MiFID) following and finally IMD2 (which includes MiFID and PRIPs requirements within it). This will ensure a joined up approach for the EU.
When is IMD2 likely to take effect under national law?
- As explained above, the roll out of IMD2 is affected by any change to the roll out of MiFID or PRIPs. However, it is currently likely to take effect from the start of 2015.
- IMD2 continues to be a minimum requirement directive and therefore individual Member States can choose to adopt additional measures. To ensure transparency, EIOPA will be responsible for recording and publishing these additional measures for individual Member States to ensure Insurers and intermediaries are notified of these additional measurers.