We have identified six key changes in the Revision of the IMD proposal:
In line with what was set out in the Consultation, the proposal confirms the Commission’s intention to widen the scope of the Directive to capture sales by insurance and reinsurance undertakings without the intervention of an intermediary i.e. direct writers.
This aims to address inconsistencies in the sale of insurance and its impact is likely to vary across Member States depending on the extent to which competent authorities have already attempted to level the playing field through national rules.
The definition of ‘insurance mediation’ has changed. In addition to including direct sales by insurance undertakings, it also now specifically includes certain activities of insurance aggregator websites (i.e. price comparison sites) and professional claims management and loss adjusting.
Significantly, the term ‘introducing’, which had been interpreted differently across Member States, is removed from the definition. The definition of ‘reinsurance mediation’ is similarly amended. The definition of an ‘insurance investment product’ is introduced as a contract of insurance which is also an ‘investment product’ as defined in the PRIPs Regulation (see below). This is intended to allow the read-across of MIFID II sales rules to these products.
With the aim of promoting proportionality for certain activities, the proposal introduces an exemption from registration with competent authorities for those who conduct insurance mediation on an ancillary basis (and who meet certain other conditions) and for professional claims managers and loss adjustors.
They will instead only need to submit a declaration to the competent authority stating their identity, address and professional activities and will be subject to a ‘light touch regime’; the full conduct of business and information requirements will not apply.
The Commission has also introduced rules aimed at improving cross-border entry to insurance markets across the EU, including enhancing transparency through requiring publication of general good rules applicable in Member States.
The proposal introduces increased professionalism requirements, such as a requirement for continuing professional development (CPD), whilst attempting to retain proportionality as those performing intermediary activities should ‘complete their tasks and perform their duties adequately, demonstrating appropriate professional experience relevant to the complexity of the products they are mediating’.
The requirement to possess appropriate ‘knowledge and ability’, as determined by the Home Member State, is maintained, however, the Commission is empowered to adopt delegated acts to specify: the notion of what adequate ‘knowledge and ability’ means; criteria for determining appropriate professional qualifications, experiences and skills; and the appropriate CPD necessary to maintain an adequate level of performance.
We will have to wait and see as to how onerous these requirements may be on firms. To promote cross-border trade, the proposal also sets out circumstances for the mutual recognition of such ‘knowledge and ability’ across Member States.
The proposal imposes similar disclosure requirements on insurance undertakings as exist for insurance intermediaries and increases requirements in several significant ways, particularly with regard to remuneration disclosure and cross-selling. Certain exemptions exist for the mediation of ‘large risks’, mediation by reinsurance intermediaries or undertakings and in relation to professional customers, as defined in the annex to the proposal.
The Commission has stopped short of requiring MIFID conflicts of interest requirements (i.e. the requirement to identify conflicts and disclose them to the consumer where they cannot be managed), as they have required for insurance investment products (see below). Instead, they have sought to address conflicts of interest through increased remuneration transparency.
Insurance intermediaries and undertakings will be required to disclose the nature and the basis of the calculation of any variable remuneration (i.e. sales bonus) received by employees during distribution of the insurance product. In addition, the basis (i.e. fee and/or commission) and amount of fee or commission should be disclosed by insurance intermediaries. If the amount of the commission is based on the achievement of agreed targets or thresholds, the targets or thresholds as well as any amounts payable on achieving them, should also be disclosed.
With the aim of allowing a longer lead-in time for non-life intermediaries, the disclosure requirements relating to the amount of fee or commission received for the intermediation of non-life products will be ‘on request’ for the first five years following the Directive coming into force, before full disclosure is required. The Commission will set out further detail on this regime in delegated acts.
In line with MIFID II proposed rules on cross-selling, the proposal sets out that when an insurance product or service is offered together with another product or service as a package, the customer should be told: that the components of the package can be bought separately; and information on costs and charges of each component of the package that can be bought separately. ‘Bundling’ practices can continue, subject to the above, however, ‘tying’ will no longer be allowed i.e. defined as ‘offering one or more ancillary services with an insurance service or product in a package where this insurance service or product is not made available to the consumer separately’.
A requirement is introduced that the insurance intermediary or undertakings, when carrying out mediation activities, should act ‘honestly, fairly and professionally in accordance with the best interests of its customers’ and all information disclosed to consumers should be ‘fair, clear and not misleading’. Prior to the conclusion of a contract, IMD II also proposes a requirement that the consumer should be given sufficient information about the product to allow an informed decision on its purchase to be made.
The proposal introduces a new chapter specifying additional requirements that relate to the sale of insurance investment products by insurance undertakings or intermediaries.
As expected, these read-across MIFID II conflicts of interest and investor protection provisions, with the aim of harmonising selling practices across all investment products. The requirements include:
Importantly, the proposal does not read-across the MIFID II exceptions to the appropriateness test for non-advised sales, where appropriateness does not need to be assessed when certain conditions are met, for example if the sale is in relation to a non-complex product.
This would therefore suggest that the Commission has concluded that all insurance investment products are complex and require an appropriateness assessment. While many insurance investment products are undoubtedly complex, there are many different types of products on the market which range in complexity and the Commission has not provided flexibility in this rule.
The proposal introduces tougher rules relating to sanctions. Sanctions or measures imposed for breaches must be published by both competent authorities and, on an annual basis, by the European Insurance and Occupational Pensions Authority (EIOPA). The rules also require effective mechanisms to encourage the reporting of breaches, including protections for ‘whistle-blowers’ and their personal data.
Member states are now required, rather than encouraged, to set up appropriate, effective, impartial and independent complaints and redress procedures for the out-of-court settlement of disputes. However, this is unlikely to be of significant impact as the majority of Member States already have an existing dispute resolution body that covers insurance, such as the Financial Ombudsman Service in the UK.