The IMD has regulated the selling practices of all insurance products since its implementation in 2005. However, as a minimum harmonisation directive, it has been implemented ‘in substantially different ways’ by the Member States. This has resulted in fragmented insurance markets and inconsistencies, for example in information requirements. Particular concerns have arisen relating to insurance selling practices, e.g. conflicts of interest, and policyholder protection.
The review of IMD and the proposals for IMD 2 are intended to achieve a level playing field between participants in insurance sales in order to improve consumer protection, market integration and competition.
The IMD 2 proposals should be considered in the context of other European regulatory reforms concerning selling practices, conduct of business and investor protection as well as investment product disclosures, such as the review of the Markets in Financial Instruments Directive (“MiFID II”) and the proposals on packaged retail investment products (“PRIPs”).
Key provisions of the European Commission’s proposal for IMD 2
The new rule
The proposals for IMD 2 impose new requirements for insurance intermediaries to disclose the nature (i.e. fee and/or commission), basis and amount of remuneration they receive. The proposal will require mandatory prior disclosure to clients of the amount of commission retained by the intermediary/paid by the insurer, instead of disclosure on request. Although intended to mitigate conflicts of interest between sellers and buyers of insurance products, these developments have generated a great deal of controversy in the general insurance sector across Member States.
The proposal also requires disclosure by both intermediaries and by insurers (in relation to direct sales) of sales bonuses and any other variable remuneration received by individual employees for ‘distributing or managing’ the insurance. Both the nature and basis of the calculation must be disclosed. This will capture employee remuneration structures such as those based on sales volumes.
The European Commission will be able to specify further detail in relation to these requirements under delegated acts.
The transitional period
For a transitional period of five years, the mandatory disclosure regime will apply to the sale of life products only, while the remuneration disclosure requirement in relation to non-life insurance products will be ‘on-request’ only (although customers must be notified of their right to request disclosure). At the end of the five-year period, the full mandatory disclosure regime will apply to both life and non-life products.
Certain categories of insurance market participants will be exempt from the new remuneration disclosure rules, on the basis of advice provided to the Commission in November 2010 by the Committee of European Insurance and Occupational Pensions Supervisors (‘CEIOPs’)1 . The exempt categories are:
- intermediaries (e.g. brokers) intermediating contracts of large risks;
- intermediaries placing reinsurance; and
- the professional consumer category .
Discussion in Europe
The new mandatory prior disclosure requirement ran into opposition from the European Parliament’s Economics and Monetary Affairs Committee (‘ECON’).
On 29 October 2012 ECON, published an IMD 2 working document, which questioned the benefit to consumers of the disclosure requirement, and whether it would outweigh the additional administrative burdens and costs imposed (largely on SMEs). It suggested instead that the “disclosure of the nature and source of remuneration and/or of the acquisition and selling costs factored into the commission might be a far better alternative.”
A draft ECON Report on IMD 2 was published on 14 December 2012. This proposed
- removing the requirement to disclose the nature and full amount of the remuneration (or, if not possible, the basis of calculation), but
- retaining the requirement to disclose whether the intermediary works on the basis of a fee, or a commission or a combination of both.
The Report acknowledged that conflicts of interest and transparency are a major part of IMD 2; but expressed concern that compulsory disclosure of variable remuneration would lead to spiralling competition rather than greater consumer protection. ECON’s position, in contrast to the Commission, is that disclosure requirements should be introduced at the national, rather than EU level, and that Member States should be free to introduce disclosure requirements over and above those of IMD 2.
The European Parliament’s Internal Market and Consumer Protection Committee (‘IMCO’) published an opinion on IMD 2 on 30 April 2013, voicing similar concerns. IMCO proposed that the amount of remuneration (or the basis for calculation) should only be provided if the consumer requests it. (As with the transitional regime, the consumer should be informed of his right to request this information.) IMCO also suggested removing the Commission’s power to make delegated acts specifying how remuneration should be disclosed and how feels ought to be calculated.
The proposals for IMD 2 will extend the scope of the current IMD to cover direct sales by insurance and reinsurance undertakings without the intervention of an intermediary. This measure is designed to level the playing field in insurance sales and to improve consumer protection in relation to all sales channels.
The extension of scope means that insurance and reinsurance undertakings which carry out direct sales will now be subject to information and disclosure requirements and conduct of business rules applying to intermediaries under IMD 2.
These requirements and rules include a general obligation, when carrying out insurance mediation activities, to act ‘honestly, fairly and professionally’ in accordance with customers’ best interests; and to ensure that all information disclosed to consumers is ‘fair, clear and not misleading.’
Cross-selling – bundling and tying
The IMD 2 proposals introduce new requirements in connection with ‘bundling’ products together: i.e. offering one or more ancillary services with insurance as a package where the insurance is available separately but not necessarily on the same terms.
The new requirements will apply to both insurance undertakings carrying out direct sales and intermediaries. Under these requirements, insurance undertakings/intermediaries offering bundled products will have to inform customers that it is possible to buy the components of the package separately. They will also have to provide information about the costs and charges of each component of the package that may be bought from/through them separately.
Whilst ‘bundling’ will be permitted, IMD 2 would prohibit ‘tying’ practices, i.e. selling insurance in a package with ancillary services where the insurance is not available to be purchased separately (thereby forcing consumers into purchasing products or services which they may not wish to purchase, in order for them to obtain the product or service they want). An example of a tying practice would be making it necessary for customers to open a current account when purchasing an insurance service, in order to pay the premiums.
In contrast, both ECON and IMCO proposed that tying should also be permitted. IMCO suggested that tying might however be banned on a case-by-base basis by national competent authorities working alongside EIOPA.
The IMD 2 proposals state that guidelines will be developed by EIOPA for the assessment and the supervision of cross-selling practices, and will indicate situations in which cross-selling practices are not compliant with IMD requirements.
Life insurance investment products
Additional requirements are proposed in relation to the sale of insurance investment products. Again, these will apply to both insurance undertakings carrying out direct sales and intermediaries. The requirements include the following:
- Identifying conflicts of interest and disclosing them to customers where they cannot be adequately managed;
- Providing appropriate information to customers and potential customers about services, advice, the risks of investment strategies and costs and associated charges;
- Obtaining information from customers to assess the suitability and appropriateness of insurance products; and
- Preparing reports for customers on the services provided to customers.
Level 2 measures will be produced in order to reinforce these additional requirements and align them with the recast Markets in Financial Instruments Directive (‘MiFID II’).
Claims management and loss adjusting
The scope of IMD 2 will also be extended to cover professional claims management and loss adjusting. However, intermediaries carrying out these activities will not be required to meet the full registration requirements under IMD 2 but, instead, will be able to submit a simple declaration to the regulator4.
They will also be subject to lighter information and organisational requirements, under the supervision of an insurance undertaking or registered intermediary.
In addition, current exemptions under the IMD will be narrowed in order to bring within scope insurance policies sold ancillary to the sale of services (for example, travel insurance policies sold by travel agents). These activities will also be subject to a light touch regime and the declaration procedure.
The activity of ‘introducing’ will be removed from the definition of ‘insurance mediation’. This follows varying interpretations of the term ‘introducing’ being used across Member States. The effect of this change could potentially be to remove introducers from the scope of regulation. However, Member States have the option of imposing requirements beyond those in the Directive and therefore this change may have no effect in the majority of Member States.
1. Replaced by the European Insurance and Occupational Pensions Authority (‘EIOPA’) on 1 January 2011.
2. ‘Large risks’ will remain defined by reference to Article 5(d) of Directive 88/357/EEC with the same thresholds, including companies with a balance sheet total of €20 million; net turnover of €40 million; and own funds of €2 million.
3. Defined as “a customer who possesses the experience, knowledge and expertise to make his own decisions and properly assess the risks that he incurs”
4. Although IMCO suggested removing this system, as it did not consider it to make much difference in practice.