Why has the European Commission published this draft delegated act?
The European Commission (the Commission) mandated the European Insurance and Occupational Pensions Authority (EIOPA) to provide it with technical advice on possible delegated acts concerning the Insurance Distribution Directive (EU) 2016/97 (IDD) on insurance distribution. On 24 February 2016, EIOPA was formally asked by the Commission to provide it with technical advice to further detail, by way of delegated acts, four provisions of the IDD, which are:
- product oversight and governance (Article 25 of the IDD)
- conflicts of interest (Articles 27 and 28 of the IDD)
- inducements (Article 29(2) of the IDD), and
- assessment of suitability and appropriateness and reporting (Article 30 of the IDD)
EIOPA's consultation paper on technical advice on possible delegated acts concerning the IDD was published on 4 July 2016, following which it held a public hearing on its draft technical advice on 23 September 2016.
EIOPA delivered its technical advice to the Commission on 1 February 2017.
How does the delegated act clarify the product oversight and governance regime introduced by the IDD?
Under Article 25 of the IDD, insurance undertakings (i.e. insurance firms) and insurance intermediaries who manufacture any insurance products for sale to customers will be required to maintain, operate and review an approval process for each product, before it is marketed or distributed to customers. This approval process will also apply to any existing
insurance products that have been significantly adapted.
As part of the approval process, insurance firms and insurance intermediaries will be required to identify the target market for each product, assess the risks of the product against the identified target, take reasonable steps to ensure the product is distributed to the identified target market and make available to insurance distributors all appropriate
information on the insurance product.
Articles 4 to 9 of Chapter II of the delegated act provide content on how this product oversight and governance (POG) regime is expected to work for manufacturers of insurance products. A summary of the key provisions from Chapter II of the delegated act are set out below.
Article 4 – product approval process
For newly developed insurance products and existing insurance products that have been significantly adapted, manufacturers will need to develop a process that incorporates measures and procedures for designing, monitoring, reviewing, and distributing insurance products—as well as corrective action for insurance products that are detrimental to customers. This process will have to be documented in the form of a product oversight and governance policy, and made available to relevant staff and competent authorities if requested.
Article 5 – target market
This group has to be identified at a granular level, taking into account the characteristics, risk profile and complexity and nature of the insurance product. Recital 6 of the delegated act explains that for simple and more common products, the target market is not expected to be as detailed as it should be for more complicated and less common products. Other important factors, such as the level of information available to customers of that target market and their financial literacy, also have to be considered as part of the assessment.
Article 7 – product monitoring and review
Insurance products that have been brought to the market will have to be continuously monitored and regularly reviewed by manufacturers to ensure that they continue to meet the needs, characteristics and objectives of the identified target market. Determining the appropriate intervals for these reviews will need to take account of the size, scale, contractual duration and complexity of the insurance products—as well as the different distribution channels.
Article 9 – distribution channels
These are to be carefully selected by manufacturers to ensure that they are appropriate for the identified target market. It should be noted that the manufacturer will be expected to take an active role in the distribution channel as it will be required to provide insurance distributors with information on the insurance product, the identified target market and circumstances that may cause a conflict of interests to the detriment of the customer—as well as information on the main features and characteristics of the insurance product. Insurance distributors equipped with this information should in turn have a better understanding of the insurance products, the identified target market and carry out the distribution activities honestly, fairly and professionally, in accordance with the best interests of the customer (Article 17(1)).
Chapter III of the delegated act addresses POG requirements for insurance distributors. As with manufacturers, insurance distributors will also have to put in place appropriate measures and procedures on the insurance products they intend to sell to customers, based on the information provided by manufacturers.
The product distribution arrangements should ensure that it prevents and mitigates customer detriment, properly manages conflicts of interests and takes into account the objectives, interests and characteristics of the customer.
What types of entities will be impacted by the delegated act?
General and life insurance firms, as well as insurance brokers who create insurance products that are sold to customers, will be affected by the delegated act.
Equally, any insurance distributor who advises or proposes on an insurance product will be affected as well.
How will the delegated act change current practices, particularly in the UK?
The requirement to provide insurance distributors with all appropriate information for the distribution channel, and taking an active role in that selection is likely to raise the biggest change and possibly challenge to the UK's current practice.
Insurance firms may not consider that they have the level of information or indeed any information to be able to do this if they rely upon the expertise and judgement of the insurance distributors. Similarly, the manufacturing and distribution chain of the insurance product may be particularly complex for firms to meet these requirements.
Another change that will emerge will be the documenting of any joint collaborations between insurance firms and insurance intermediaries. Where both parties have a decision-making role in the designing and developing of the insurance product, the delegated act recommends that a written agreement specifying their collaboration and respective roles should be produced (Recital 4).
It is interesting that the technical advice discusses the circumstances in which an intermediary may, or may not, be a manufacturer—while also, of course, stressing that the product provider will retain the ultimate contractual responsibility for a product regardless of whether the intermediary is considered a manufacturer in respect of it or not. What this particular advice does not address, however, is the practicalities of imposing the appropriate liabilities where the manufacturer is outside the EU.
How does the delegated act differ from EIOPA's technical advice?
Although the Commission made some changes to EIOPA's technical advice, a lot of it is still reflected in the delegated act. For example, on product testing, EIOPA put forward three proposals concerning:
- the testing of a product before coming to market
- testing results that did not meet the customers' best interests, and
- qualitative testing
The delegated act does not discuss qualitative product testing measures but the remaining proposals can be seen in Article 6 of the delegated act.
What should firms do now to prepare?
The IDD and these requirements will take effect from 23 February 2018, so over the coming months, firms should:
- conduct a review of their current practice on manufacturing insurance products and identify any gaps where they may need to allocate additional resource to comply with POG requirements
- review existing products that have been significantly modified but will be in the market on and after the 23 February 2018 as part of the above scope, and
- examine their distribution channels and collate information associated with the insurance product, making sure that the information is clear, complete and up to date.