This article aims to provide you with an understanding of how the Insurance Mediation Directive works in practice.
The Insurance Mediation Directive (IMD) is a “minimum harmonisation” directive and therefore each European Union (EU)Member State (MS) is free to adapt the directive in a way that suits their own supervisory regime for example by registering different categories of intermediary and by making the rules more stringent if they choose to –“gold-plating”.
The IMD should have been implemented into the local law of each EU MS by 15th January 2005. The aim of the IMD is to protect consumers by regulating intermediaries.
Who does it apply to?
Broadly, the IMD covers all natural and legal persons who for remuneration purposes carry out an insurance mediation activity, including providing financial advice and introducing a client to another firm to receive financial advice. The directive requires that these professionals be registered with their Home State regulator (the country in which they are resident) in order to operate a legal business. There is an exemption for professionals whose principle activity is not insurance mediation, e.g. lawyers and accountants.
The directive does not apply to sales persons of an insurance company.
What requirements have to be complied with?
The IMD requires that those practicing an insurance mediation activity fulfil a set of minimum standards and must:
- possess the appropriate knowledge and ability to perform their role (the rules and qualification levels will be determined by the Home State authority).
- be of good repute. This includes a clean police record in respect of serious crimes against property or relating to financial activities.
- provide certain minimum pre-sale information which includes information about a firm’s status and services and a statement of the customer’s ‘demands and needs’ including the reason for any advice given for advised sales.
- minimum professional indemnity cover €1 million.
- adequate minimum capital requirement as laid down by the Home State regulator.
- establish a guarantee fund.
- segregate client assets in accordance with the Home State regulator's rules for handling client money.
What is passporting?
Passporting provides the opportunity for a legal or natural person to conduct business in other member states.
There are 2 ways in which it is possible to ‘passport’ under IMD. These are known as Freedom of Establishment (FoE) and Freedom of Services (FoS).
This is the right of an intermediary resident in one EU MS to mediate insurance in another EU MS through a local branch, agency or subsidiary.
FoS allows an intermediary to mediate in another EU MS on a temporary basis, without having to establish a branch, subsidiary or agency.
How does the IMD impact those who wish to passport into another MS?
Passporting from one EU MS to another is relatively easy and is done by notifying the regulator in the Home State about the intention to passport into another EU MS the “Host State” on a FoS or FoE basis. The Home State regulator must comply with the time scales set down in the directive for notifying the Host State regulator, which means that it must advise the Host State regulator within one month of receiving the notification. It must also advise the applicant that it has done this. A ‘passport’ will then be granted, within one month from the date of that advice unless there are exceptional reasons to refuse it.
Andrew, is an intermediary who is an English resident and registered with the FSA to provide insurance mediation. Andrew would like to passport into another MS, for example, Spain.
The process to achieve this is prescribed and there are currently no fees for making an application to passport. (However, any queries are dealt with by the FSA Passport Helpline on +44(0)2070667188).
If Andrew wants to passport into Spain on a FoS basis then he would need to notify the FSA that he intends to do this by completing the whole FSA Form ‘Passporting Notification of intention to provide cross border services in another EEA state’ which is available on the following link: http://fsahandbook.info/FSA/docs/sup/Sup13_Ann5_20101004.pdf
However, if Andrew wants to passport into Spain on a FoE basis then he would need to notify the FSA that he intends to do this by completing the front page and sections 1, 2, 3 and 10 of the FSA Form ‘Passporting Notification of intention to establish a branch in another EEA state’ which is available on the following link: http://fsahandbook.info/FSA/docs/sup/Sup13_Ann1_20110701.pdf
The form must be returned to the Passport Notification Unit either by email or post, using the following addresses:firstname.lastname@example.org or Passport Notification Unit, Financial Services Authority, 25 The North Colonnade, Canary Wharf, London, E14 5HS.
The FSA must then notify the Spanish regulator within one month of receiving Andrew’s notification and advise Andrew that it has done this. Andrew must then wait for the Spanish regulator to confirm the local requirements he must comply with before he can start business.
For example, in Spain the ‘general good’ provisions which must be complied with include the need for all passporting intermediaries to have a “customer services” function to deal with complaints (which is accountable to the Spanish Regulator) or they must appoint an independent ombudsman to provide the service. There are likely to be more extensive local laws and regulations, including taxation which must be complied with for FoE passporters.
If the Spanish regulator has not contacted Andrew within one month of the date that the FSA confirmed to him that it had notified the Spanish regulator, then he can start conducting insurance business in Spain subject to complying with general good requirements.
The FSA has produced a ‘Passporting FAQs’ document which provides further information on passporting from the UK and is available on the following link:
2. Companies with employees resident in another MS
There may be some confusion where it is a company with employees resident in another MS who wishes to passport i.e. FoS. While the process is similar to the one outlined above, as the Directive requires that all members of a company involved in insurance mediation would need to be registered, there are some points to be aware of.
For example, if French resident company ‘IntermediariesRus’ has registered intermediaries in France and would like to passport into Spain, it will follow the approval process and within a couple of months it could be conducting insurance business in Spain.
Similarly, if IntermediariesRus would like to expand into Cyprus, there are two options available. IntermediariesRus could either employ another intermediary in France who could then passport into Cyprus or the company could employ a Cypriot resident who is authorised in their own right as an intermediary in Cyprus therefore meeting any requirements set out in the Cypriot law.
What happens if an intermediary wants to change their country of residence?
Where an intermediary changes their country of residence rather than using IMD to passport into another MS, then they will need to become registered in the new country as a new applicant to continue carrying out insurance intermediation.
This will include the need to satisfy all the new country’s requirements including examinations and experience.
It will therefore be for the regulator in each country to decide whether it wishes to take account of the fact of registration in the former country and the training and experience involved. The view of the training and experience in the former country may in part influence the decision.
The EU Commission has issued a Consultation paper on IMD2 on 28 February 2011. The aim of IMD2 is to provide better consumer protection, greater legal clarity and certainty then the current IMD offers.