There have been a number of recent developments in the journey towards implementation of the Insurance Distribution Directive (IDD), which needs to be transposed by 23 February 2018, with a one year transitional phase for existing firms.
These developments are covered below:
On 1 February, EIOPA provided its final technical advice on IDD (PDF, 1.4MB) to the Commission. As expected, this builds heavily on EIOPA’s preparatory phase guidelines, minimising the impact on insurers and their distributors. The substance has not changed significantly since the original consultation paper, but a number of useful clarifications have been made, including a key take-away that there is no intention to introduce a ban on commission. Although the word ‘proportionate’ appears frequently, there are a number of areas where the principles require analysis at a granular level (for example the analysis of target market).
The advice concentrates on the following four areas of IDD;
1. Product oversight and governance;
2. Conflicts of interest;
4. Suitability and appropriateness of insurance based investment products (IBIPs)
Firms should conduct a gap analysis of existing processes to the final advice to identify areas where amendments need to be made before the implementation date.
IDD provides that where a sale is undertaken at a customer’s request, no advice is being given and the IBIP is considered “non-complex” i.e. the risks are readily understood by the customer, then the product can be distributed on an execution-only basis. This means that no suitability or appropriateness assessment needs to be undertaken, but information about the demands and needs of the customer do need to be obtained. This is a new Member State discretion for IBIPs under IDD.
In Ireland the Consumer Protection Code does allows execution only sales for products generally. However this applies in different circumstances, namely where the customer specifies both the product and product producer by name, where no advice is given and where a warning to the customer is given that the firm does not have the necessary information to conduct a suitability assessment. The Department of Finance, in its consultation paper on IDD, has posed the question about whether Ireland should avail of the new, IDD discretion and apply different criteria to execution-only sales of IBIPs to that of other products.
EIOPA, in an attempt to provide clarity on the discretion set out in IDD, has issued a consultation paper, which expands on its technical advice and sets out criteria to determine whether an IBIP is complex or not. The criteria considers both the underlying exposures and the contractual structure of the insurance contract itself. The underlying exposures point is dealt with by only permitting exposure to investment classes determined as ‘non-complex’ by MiFID II and its supporting guidance. The contractual structure point is dealt with by setting out a number of features that could hinder the customer’s understanding of the risks. These include:
What approach will be adopted in Ireland depends on the outcome of the Department of Finance’s consultation which has not been finalised yet.
The IPID will be a mandatory pre-sale document for any insurance product not covered by the Packaged Retail and Insurance-based Investment Products (PRIIP) regulations (for which the PRIIP key information document will be provided). This predominantly captures non-life insurance products.
On 7 February, EIOPA submitted its draft implementing technical standards (ITS) to the European Commission on the form and content of the “short and stand-alone” IPID. Annex 1 of the ITS sets out the proposed standardised template (PDF, 495KB) to be followed.
The ITS makes it clear that the IPID should normally be restricted to two pages of A4 (at a set font size), but may extend to three pages when necessary (for example to deal with add-ons, options and multi-risk policies).
It also prescribes the layout required where it the IPID will be provided in digital form.
In respect of the sections on “What is insured?” and “What is not insured?” firms will need to ensure that the key terms are brought out and clearly explained, while not exceeding the overall length requirement. As the IPID is intended as a “stand-alone” document, we believe a simple cross-reference to sections of the policy documentation is unlikely to be sufficient.
Firms already comply with the provision of information requirements under the Consumer Protection Code, including information about the regulated entity and the product. A lot of this information needs to be given to the customer prior to the sale of a product, but the provision of standardised template is a considerable uplift to what is already in place. Firms need to conduct a gap analysis between the content and form of information currently being provided and what will need to be provided, once the ITS is finalised.