Insurance Distribution Directive, having taken effect on the 1st of October, brings about a yet new regulative instrument for insurance-based investment products.
The investment services branch has during the last years been target of attention for the EU legislator especially focusing in retail market and protection of the consumer customer. Relevant, intelligible and accessible information to customer about the investment product is preconditioned already in the framework of the 2014 PRIIPS regulation (Packaged Retail and Insurance-based Investment Products Regulation (EU) N:o 1286/2014) where the current rules in the distribution directive IDD are aimed at increasing transparency and clarity around the commission chain of insurers, agents and brokers.
The directive introduces stricter additional conditions for insurers and insurance intermediaries regarding the company’s business processes and professionalism of the staff, alongside the expressly stated fit & proper requirements. The provision of insurance-based investment products is also regulated by the European Commission delegated regulation on information requirements and conduct of business rules applicable to the distribution of insurance-based investment products ((EU) 2017/2359). The main focus in the delegated regulation is to prevent conflicts of interest through organizational measures and procedures and to ensure an adequate level of consumer protection by specifying the rationale and documentation of inducement schemes.
Due to the new regulation, insurers and intermediaries are obliged to evaluate their inducement schemes that are linked to the providing of insurance-based investment products. The assessment under IDD regime is to be done on both the inducement vehicles and schemes itself and the documentation thereof. The regulation imposes new, more detailed criteria for the assessment. Inducement schemes are evaluated depending on their possible detrimental impact on the quality of the service to the customer. The evaluation of a detrimental impact on quality of the provided service comes down to the question of whether the inducement gives an incentive for the distributor to act in a way that is not in compliance with the obligation to act honestly, fairly and professionally in accordance with the best interests of the customer.
Identify, assess, document
EIOPA has spoken out about the technicalities in carrying out the assessment, stating that a two-step approach is necessary. Firstly, insurance undertakings and insurance intermediaries have to identify all inducements which are paid in connection with the distribution of insurance products. Secondly, insurance undertakings and insurance intermediaries have to establish adequate procedures to assess whether the inducements have a detrimental impact and specific organizational measures aiming to address the risks of customer detriment caused by the payment of inducements.
The EIOPA two-step approach is to be understood as applicable in relation to a given product and its defined target market. The delegated regulation lays down a clear expectation that all insurance intermediaries and insurance undertakings establish individual conflicts of interest policies to reflect on the specific circumstances in the organization and its customers. A documented policy has a more functional role than that of a mere policy document. It also defines the target market and the accepted marginal for the product. Robust documentation is a way to bind the inducement schemes in the organization’s general control structure, to effectuate risk management and to carry out accountability.