On 2 February 2016, the Insurance Distribution Directive (IDD) was published in the Official Journal of the EU. The Directive entered into force on 22 February 2016. The requirements set out in the Directive applied to firms from 1 October 2018.
The IDD aims to improve the regulation of retail insurance sales and distribution practices across the single European market and aims to bring greater transparency and improved, more comprehensible, information to consumers, to help people ensure that they buy products that suit their needs. It will continue to be a minimum harmonisation Directive, meaning that Member States may gold-plate it (impose higher standards/requirements) if they wish.
To enhance cross-sectoral consistency, certain parts of the IDD are aligned with the rules under the MiFID II Directive.
Key changes to IMD regime
-Scope: The IDD extends the scope of the IMD to all sales of insurance products, covering all participants in the sale of insurance products. The IDD will apply to not only (re)insurance intermediaries but also to distributors of insurance products that sell directly to customers without the use of an intermediary i.e. insurers and reinsurers Insurance undertakings which sell insurance products directly are brought within the scope of this Directive. 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.
-Minimum professional knowledge and competence requirements: Individual managers and employees possess an appropriate level of knowledge and competence appropriate to product complexity and nature of activities conducted (includes minimum 15 hours CPD requirement). 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: The IDD provides greater detail and clarity on the procedure for cross-border entry by intermediaries into insurance markets across the EU. EIOPA is to establish a single electronic public register containing records of all intermediaries that have notified their intent to carry on cross-border business.
-Enhanced information and conduct of business requirements: 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. 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. In addition to the conduct of business standards defined for all insurance products, insurance-based investment products are subject to specific standards aimed at addressing the investment element embedded in those products. Such specific standards must include provision of appropriate information, requirements for advice to be suitable and restrictions on remuneration.
The IMD which came into force in 2005, introduced a regime for intermediaries involved in the promotion, sale and administration of insurance contracts permit them to operate in other Member States on an establishment or freedom of services basis.
The IMD aims to guarantee a high level of consumer protection. The Directive has also established a legal framework, aiming at a high level of professionalism and competence among insurance intermediaries. However, due to its minimum harmonisation character, a patchwork of national regulations has emerged in Member States leading to significant gaps and inconsistencies as far as the activity of insurance mediation is concerned. This had led to consumers having poor understanding of the risk and features of insurance products, exacerbated by a collapse in consumer confidence in the aftermath of the financial crisis.
Furthermore, the risk based solvency regime introduced under the Solvency II Directive will also affect the relationship between insurers and policyholders. Recital 139 of the Directive invites the Commission to revise the current IMD to align it with the proposed risk-based framework.
The Commission Consultation
In November 2010, the Commission launched a consultation on the review of the Insurance Mediation Directive focusing on modernisation on the current rules in the Directive, increasing consumer protection, and eliminating obstacles to the functioning of the single market through greater harmonisation. The consultation drew on advice submitted by EIOPA (formerly CEIOPS). At the same time it also issued a consultation on PRIPS.
The objectives of the consultation are:
- a high and consistent level of policyholder protection embodied in the EU law;
- effective management of conflicts of interest and transparency;
- introducing clearer provisions on the scope of the IMD;
- increased efficiency in cross-border business; and
- achieving a higher level of professional requirements.
The revision of the IMD will consist of two parts:
- revision of the IMD provisions in light of the implementation review mentioned above; and
- the introduction of MiFID-inspired conduct of business and conflicts of interest rules regulating the sale of insurance PRIPS (product disclosure to be dealt with separately in future PRIPS Directive).
Key issues addressed
The aim of the Commission’s consultation was to review the current IMD to ensure it still meets its original objectives. As IMD was a minimum harmonisation Directive it has resulted in differences in how it has been implemented by Member States - the Commission wants to address this “patchwork” of regulation:
- insufficient quality of information provided to consumers
existing national insurance markets are fragmented; overlapping requirements under Solvency II could increase confusion and administrative burden; unsuitable advice is being given; potential for regulatory arbitrage,
- conflicts of interests
Article 12 of the IMD contains a mixture of confusing disclosure and conflicts of interest provisions; remuneration and inducements are greater for selling some insurance products as compared with others; compromise of objectivity of advice given;
- transparency of remuneration
current IMD contains no provisions on remuneration; divergence of conduct of business models in Member States
- legal uncertainty due to unclear definition of scope in the IMD
diverging interpretations concerning exemptions from its scope; no guarantee of a level playing field between all participants involved in the selling of insurance products - insurance undertakings (direct writers) and their employees are exempt from scope,
current notification system is burdensome; does not encourage cross-border insurance mediation leading to negative impact on the competitiveness of the insurance markets and the final cost for consumers,
- professional requirements
need to achieve a higher level and increased professional role of insurance intermediaries.
The proposals will include:
- legal framework for IMD2;
- extending the scope of IMD2 and its potential application to direct selling;
- insurance mediation by insurance intermediaries established in third countries;
- professional requirements and mutual recognition of professional qualifications;
- improvement of the current notification system; and
- management of conflicts of interest – should be identified and disclosed to the client.
The proposals aim to apply consistent conduct, inducement and conflicts rules to all persons selling PRIPS regardless of whether they are an intermediary or product provider. The PRIPS selling rules will be aligned with the MiFID rules in order to ensure an equal level of protection.
MiFID II proposals contain an EU-wide commission ban which concerns investment firms: - a firm “shall not accept fees, commissions or any monetary benefits paid or provided by any third party... in relation to the service to clients”. This will be applicable to financial products but not to insurance policies. If applied to insurance distribution in the IMD2, it would mean a ban on the traditional payment of commission to intermediaries.
In the UK since 31 December 2012, the Retail Distribution Review (RDR) rules have applied, meaning that product providers are no longer be able to offer commission for advised sales, and financial advisers are no longer be able to accept commissions for recommending investment products (including life insurance) to retail customers. This has created the need for a totally new adviser charging model which intermediaries must agree upfront with their clients.