Board Member of FECIF, Chairperson of FEPI, and Partner at The Spectrum IFA Group
The Insurance Distribution Directive – Are you ready?
Since 2005, insurance intermediaries have operated under the rules of Directive (2002/92/EC) – the Insurance Mediation Directive (IMD). This has now been replaced by the EU Directive 2016/97 – the Insurance Distribution Directive (IDD). The IDD applies to all forms of insurance, for example, car, household and travel insurance through to life insurance.
Originally, the IDD should have applied from 23rd February 2018. However, despite the two-year transition period foreseen following the publication of the IDD, by late 2017, it was identified that some insurance distributors would not be ready to meet the deadline. Arising out of this, the European Parliament and 16 Member States requested a postponement and subsequently, the deadline for the application of the rules was pushed back to 1st October 2018. The new date also applies to the application of the two Commission Delegated Regulations on Product Oversight & Governance and Conduct of Business Rules.
Member States Regulators are obliged to transpose EU law into national law by the due dates that are set and inform the Commission that this has been done. However, as concerns IDD this has still not been done by all Member States, as can be seen at the following link:
In effect, this leaves insurance intermediaries in those Members States that have not met the deadline in a vacuum, since the IMD is repealed from 1st October 2018 and the IDD has not been transposed into the national law. This also results in consumers being less protected since they no longer have the ‘shelter’ of IMD. It is therefore incumbent upon the European Commission to take infringement measures against those Member States that have not met the deadline, as soon as possible.
Under the new IDD framework, retail investors buying insurance products will benefit from rules on transparency and business conduct to help consumers avoid buying products that do not meet their needs. The rules applying to Insurance Based Investment Products (IBIPs) are particularly more stringent under IDD than under IMD. IBIPs are also subject to the PRIIPS Regulation for which the main goal is to enhance investor protection standards for retail clients. As such, potential investors must be provided with a standardised Key Information Document (KID) in ‘sufficient’ time prior to entering into the contract.
When advising on IBIPs, insurance distributors are required to obtain all necessary information from the client to be able to recommend suitable investment solutions. Inspired by MiFID II standards, this includes the client’s knowledge and experience in the relevant investment field, financial situation (including ability to bear losses), investment objectives (including risk tolerance) and ESG preferences. Client reviews must also take place at least annually.
In reality, for many independent insurance intermediaries, this is no different than the way they have operated pre-IDD (although many advisers may need training about ESG policies before they can discuss this subject with clients). However, for others, this results in major changes to the way they conduct business.
Overall, the IDD sets minimum harmonisation standards. However, Member States can introduce rules which surpass IDD standards. One example of this is Spain, which has draft legislation in its Parliament to introduce a commission ban for independent insurance brokers (but not for tied or multi-tied intermediaries). However, since Spain is one of the Member States that has not met the IDD deadline, here lies an immediate problem. Rather like Brexit, those affected are left in a position to plan for an outcome that may or may not happen. Should the product manufacturers and independent insurance brokers change their business model just in case the change on inducements goes through?