The Insurance Mediation Directive (IMD), passed in 2002, sought to harmonise rules governing the sale of insurance products across the EU. Although it created common obligations for agents and brokers, there remain significant differences in national rules for insurance distributors. The EU has therefore concluded that it is necessary to establish an updated framework – The Insurance Distribution Directive (IDD). The European Commission estimates that the IDD will cover 98% of the EU market for insurance products (the IMD covered 48%), and so almost every firm in the industry faces a new set of requirements.
Am I affected?
The IDD covers any natural or legal person involved in the distribution of insurance or reinsurance, be them direct distributors, intermediaries or persons that distribute insurance on an ancillary basis. There are exemptions for certain entities, such as consumer association websites that aim to provide a comparison of insurance products available on the market rather than sell a specific contract. On the whole though, the IDD creates a wide umbrella that captures everything from life to motorcycle insurance.
What amendments are being made to the IMD regime?
- Scope. The IDD extends the scope of the IMD to all sales of insurance products. Insurance undertakings which sell insurance products directly should be brought within the scope of this Directive on a similar basis to insurance agents and brokers. In order to guarantee that the same level of protection applies regardless of the channel through which customers buy an insurance product, the IDD also covers other market participants who sell insurance products on an ancillary basis, such as travel agents and car rental companies, unless they meet the conditions for exemption.
- Training and Competence. It is important that individual managers and employees possess an appropriate level of knowledge and competence in relation to the distribution activity. The IDD introduces provisions that recognise the importance of guaranteeing a high level of professionalism and competence among firms involved in insurance distribution and their employees.
- Passporting. Despite the existing single passport systems for insurers and intermediaries, the insurance market in the Union remains very fragmented. The IDD provides greater detail and clarity on the procedure for cross-border entry by intermediaries into insurance markets across the EU.
- Conflicts of interest. Firms must establish organisational arrangements to prevent conflicts of interests, and inform clients if those arrangements are insufficient to prevent a conflict with regard to a particular contract.
- Bundled products. If a firm is offering insurance products together with an ancillary product or service, it is obliged to inform the customer if components can be bought separately, and how the price and risk of those components differ from the bundled package.
- Information and conduct of business. The IDD significantly amends the IMD information and conduct of business requirements, taking the MiFID II Directive into account to ensure cross-sector consistency.
- Insurance-based investment products. Insurance-based investment products are often made available to customers as potential alternatives to investment products. To deliver consistent investor protection and avoid the risk of regulatory arbitrage, it is important that insurance-based investment products are subject, in addition to the conduct of business standards defined for all insurance products, to specific standards aimed at addressing the investment element embedded in those products. Such specific standards should include provision of appropriate information, requirements for advice to be suitable and restrictions on remuneration.
Following the European Commission’s request, EIOPA has consulted on its proposed technical advice across a number of areas:
- The arrangements for product governance and oversight by product manufacturers
- The arrangements which need to be put in place to manage any conflicts of interest which may arise between the distributor and the customer, for example in relation to commission bias
- The circumstances when inducements may have a detrimental impact on the quality of service received by a customer;
- The specification of the information which a distributor will need to obtain in order to correctly assess the suitability (advised sales) or appropriateness (non-advised sales) of a product for the customer and
- The specification of the reporting on a service provided to the customer.
After a number of respondents voiced concerns about the proposals set out in the consultation paper, EIOPA has now issued a final version of its technical advice to the Commission. It is anticipated that the Commission will finalise the requirements in this area in Autumn 2017.
In addition to the above, EIOPA is also assisting the Commission in producing a number of other technical standards, including in relation to the Insurance Product Information Document (PID or IPID). In its consultation paper, EIOPA explained that the IPID should be provided to customers before the sale of a non-life insurance product so they can make an informed decision about their purchase. EIOPA has now published its final draft implementing technical standards (ITS) on a standardised IPID along with an IPID template. The Commission now has three months to decide whether to endorse the draft ITS.
On 27 February 2017 HM Treasury published its consultation paper on the transposition of the IDD. It proposes to take a similar approach to that taken with the original Insurance Mediation Directive and will transpose the requirements through a combination of legislation and FCA rules. The FCA has also now published its first consultation paper which covers a number of Handbook changes. A further consultation will follow later on the year on the IPID and any other outstanding conduct issues.
Timeline for implementation
You will need to comply from 23 February 2018.
How can Bovill help?
The enhanced scope of the IDD subjects a large number of firms to new reporting, disclosure and organisational obligations. Bovill’s experts are prepared to help you prepare and ensure that your firm’s processes are in compliance. Further, the IDD provides member states with considerable flexibility to alter its provisions. Therefore, it is imperative to keep track of the Directive’s legislative development at the national level. Bovill is doing just that, and if you have any questions about its progress, please do give us a call.