The European Parliament has published the latest draft text produced by ECON for a revised Insurance Mediation Directive (or “IMD2”). The European Parliament is scheduled to vote in the plenary session held between 24-27 February 2014.
This latest iteration of IMD2 contains a number of significant changes to the original proposal. The text has been subject to considerable negotiation before this latest draft was published. The consumer protection, legal and economic and monetary affairs committees of the European Parliament have all made a number of proposals to amend the text originally drafted by the European Commission.
The significant points to note about this text are:
- The role of EIOPA. EIOPA will play a greater role in regulating the conduct of insurance business in the EU. The proposed IMD2 text gives EIOPA responsibility for drafting various guidelines on conduct issues including information to ensure the better management of conflicts of interest, guidelines for the assessment of cross-selling practices and guidelines for the assessment of insurance-based investment products with complex structures. Importantly, EIOPA is given the power to monitor insurance products and to “proactively investigate” new products or instruments before they are distributed. EIOPA is also granted the power to restrict temporarily the marketing, distribution or sale of certain insurance and reinsurance products or restrict types of financial activity undertaken by insurance or reinsurance undertakings. This power can only be used where a Member State has failed to take action to address the threat posed by the product. As the FCA has similar powers to ban the sale of products temporarily it is unlikely that EIOPA would exercise this power directly in the UK, except where EIOPA deems that the FCA is failing to protect consumers adequately.
- Scope. The scope of the proposed IMD2 no longer extends to claims managers, loss adjusters or the expert appraisal of claims. Insurers and reinsurers selling directly to customers are however in scope. IMD2 will not apply to those who undertake insurance mediation as an ancillary activity to another profession so long as they do not take any additional steps to assist the customer in concluding the contract. Price comparison websites remain within the scope of regulation under IMD2.
- Commission disclosure is not mandatory, but “on request” from the customer. The payment and receipt of commission is allowed but the draft requires greater disclosure about the source of any commission (or other remuneration). This will not affect the ban on commissions under RDR as Member States are given discretion to impose additional requirements. Where an insurer sells directly they will be required to disclose to the customer whether any variable remuneration is paid to employees for distributing the policy in question. This will have the effect of disclosing the nature of any incentive structures for selling the policy.
- Increased standards. IMD2 will raise the standard of professional qualifications for intermediaries and requires that at least 200 hours of continuing professional development are undertaken within a five year period (adapted proportionately for those who are not undertaking mediation as their main activity).
- Intermediaries to act “honourably”. A general principle is introduced to ensure that intermediaries “always act honestly, fairly, trustworthily, honourably and professionally in accordance with the best interests of their customers”.
- Cross-selling. Tying and bundling are allowed although EIOPA is given the power to draft guidelines for the assessment of such practices.
- Alignment with MiFID. For insurance investment products IMD2 requires that conduct of business standards are aligned with those in MiFID with the result that the two regimes are consistent. Accordingly, enhanced conduct of business standards will be imposed on insurance investment products. To ensure the alignment with MiFID investments, both the European Securities and Markets Authority and EIOPA will work together to create guidelines on conduct requirements. As COBS already imposes MiFID requirements on insurance investment products in the UK these directive requirements may do little to alter the UK market.
Points of concern
That mandatory disclosure of the amount of commission being paid has been removed from the directive will be welcomed. As will the fact that claims managers and loss adjusters fall outside the regime. However, the text which has been published is clearly the result of extensive negotiation between competing interests. Unfortunately, agreement seems to have been reached at the cost of clarity. The purpose of the revision of the original IMD was to ensure that there was greater harmonisation across the EU. The draft IMD2 text, although peppered with references to ensuring a “level playing field” and minimising differences in national regimes, allows for extensive Member State discretion. This would therefore seem to undermine the very point of revising the original directive.
Furthermore, the text is poorly drafted with definitions missing and several areas of the text which do not make sense. One of the criticisms of IMD1 was that it lacked legal clarity. Unless more work is done to ensure the text is better drafted there is little hope that IMD2 will do much to improve the legislative clarity for insurers and intermediaries wishing to operate across EU borders.
The plenary session in which the European Parliament will consider the proposal to amend and replace the Insurance Mediation Directive is expected to take place between 24-27 February 2014.
Once IMD2 has been adopted, the European Commission and EIOPA are expected to work on technical measures prior to implementation. Implementation is likely to take place in 2016.
It is anticipated that MiFID2 will expedite the introduction of a number of provisions for the regulation of designated investment business into the existing insurance mediation text prior to IMD2 being adopted.
You can read ECON's draft IMD2 text here.