The proposals published by the European Commission on 3 July 2012 introduce rules aimed at levelling the playing field for the sale and disclosure of insurance and retail investment products, so as to strengthen consumer protection.
PRIPs addresses disclosure rules for retail investment products and IMD II addresses sales and disclosure rules for insurance products, including additional sales rules for insurance investment products – insurance ‘PRIPs’.
Both proposals have been some time in coming, following consultations in Autumn 2010. They pose significant strategic and operational challenges to providers and distributors in the insurance and retail investment markets. As anticipated, IMD II proposes to widen the scope of the Directive to include direct sales by insurance and reinsurance undertakings.
It introduces strengthened conduct of business rules, particularly for insurance investment products, and increased professionalism requirements. It also contains surprises, explicitly bringing certain activities of insurance aggregator websites, claims managers and loss adjustors within scope of the Directive, and goes further than expected in some areas, notably in relation to remuneration disclosure and rules on cross-selling.
PRIPs proposes the introduction of the Key Information Document (KID) when investment products are sold to retail consumers, but also steps away from the Consultation by not excluding certain pensions products and variable annuities from scope. Competent Authorities will also be given product intervention powers when KIDs fail to comply with the Regulation, or are not provided at all.
The principle behind the KID is generally seen as sound: consumers should have access to information that is easy to understand and facilitates straightforward comparison between investment products. If it achieves its aim, the KID has the potential to improve fundamentally consumers’ engagement with investment products.
However, considering the wide range of investment products that will be covered, it will be a challenge for firms and regulators to ensure that KIDs are of practical use to consumers and serve the purpose for which they are intended. By bringing certain activities within scope of the Directive and increasing transparency and conduct of business requirements, IMD II is likely to impact firms’ business model decisions.
While IMD II remuneration disclosure requirements aim to address potential conflicts of interest, remuneration structures differ across sales channels. Ensuring that consumers understand the context in which disclosures are made, and can make use of this information, will be important to avoid undermining the Commission’s objective of a level playing field.
IMD II is intended to address gaps and inconsistencies in insurance mediation identified by the Commission during a 2005-2008 implementation check, following the IMD’s initial adoption in December 2002.
The PRIPs initiative, which has its roots in a 2007 Call for Evidence by the Commission on substitute investment products, aims to improve cross-sector transparency in the retail investment market. The initiative is no longer called PRIPs, but a Regulation on Key Information Documents for Investment Products. However, for the purposes of continuity in this briefing, we will continue to refer to the proposal as ‘PRIPs’.
IMD II and PRIPs have been launched as a package by the Commission, alongside a further revision of the UCITS Directive (UCITS V). UCITS V similarly aims to promote consumer protection through introducing new provisions relating to UCITS depositaries, as well as new remuneration rules for UCITS managers (see UCITS V briefing for further details).
IMD II and PRIPs, while separate proposals, are linked. While disclosure requirements for investment products (including insurance investment products) will be addressed through PRIPs, sales rules will be addressed through IMD II and the Revision of the Markets in Financial Instruments Directive (MIFID II). MIFID II sales rules for non-insurance investment products will provide the blueprint for IMD II sales rules for insurance investment products.
MIFID II proposals were published in October last year and are currently being negotiated. Splitting sales rules for investment products between two different Directives introduces the potential risk of discrepancies arising between the rules for insurance and non-insurance investment products during negotiations and when further measures and guidance are published. Any discrepancies would undermine the consistent and harmonised approach to the selling of investment products that the PRIPs initiative is seeking to achieve.
The table below illustrates the application of sales and disclosure rules across IMD II, PRIPs and MIFID II.
|IMD II||PRIPs||MIFID II|
|Insurance (non-investment)||Sales and disclosure||n/a||n/a|
|Investment products (non-insurance)||n/a||KID disclosure||Sales and disclosure|
|Insurance investment products||Enhanced sales rules (MIFID II used as blueprint)||KID disclosure||n/a|
This section provides an overview of the proposals followed by a more detailed look at the key changes contained in the proposals and the challenges they might bring for firms.