The European Commission has published a draft of the directive which will replace the Insurance Mediation Directive (2002/92/EC) or IMD. The revised directive on mediation or "IMD2" as it is known, makes a number of significant changes to the regulation of sales of insurance products in the EU.
The Directive will have to be approved by the Council and Parliament before adoption into law during 2013, likely to be in force in 2015. IMD2 will follow a Lamfalussy structure and will therefore contain certain Level 2 measures including detailed professional requirements for intermediaries, criteria for determining conflicts of interest and standards of customer information in investment products.
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What is changing and why?
Shortly after the implementation of the IMD in 2005 the European Commission conducted a review to gauge the effectiveness of the new regime. The review found that, although the IMD had introduced a minimum level of consumer protection for sales of insurance products, the minimum harmonisation nature of the Directive had resulted in a patchwork of national regulations - with some governments “gold plating” implementation measures while others introduced the bare minimum required to be compliant. As a result, there are numerous gaps and inconsistencies in the Single Market for insurance. There remains very little cross-border selling of insurance policies across the EU, undermining the Single Market. The Commission review found there to be insufficient consumer knowledge of the risks, costs and features of insurance products. In addition, the Commission found that a lack of transparency around remuneration meant that there were too many commission-driven conflicts of interest in the market.
The draft IMD2 tackles the issues of scope of regulation (who should be regulated and who not), conflict of interests and remuneration transparency (what are customers paying for and who are they paying), quality of advice and information for customers in addition to recognition of professional standards.
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Headline changes made to regulation in IMD2 include the following:
- The inclusion of direct writers (i.e. insurers and reinsurers selling without the use of intermediaries) and the inclusion of sales through aggregator websites.
- Claims managers, loss adjusters and expert claims appraisers being brought within scope of the regulation (although with limitations on the application of certain requirements of IMD2).
- The introduction of mandatory disclosure of remuneration for life insurance products and a five year on-request disclosure regime for non-life products. After the five year transitional period disclosure of the ‘amount’ or ‘basis’ of remuneration paid to intermediaries will become mandatory for all sales.
- A new definition of insurance mediation namely advising on, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, concluding or assisting in the conclusion of such contracts or assisting in the administration and performance of such contracts, in particular in the event of a claim. Professional management of claims and loss adjusting are now included within the definition of mediation. Notably, introducing is no longer within this definition so that the provision of information on an incidental basis to potential policyholders is not in scope.
- The creation of a distinction between insurance investment products and other products for the application of certain requirements, for example a requirement to identify, prevent, manage and disclose conflicts of interest when selling insurance investment products.
- IMD2 recognises the practice and risks of bundling products and requires certain information disclosure on sale of bundles. Tying is outlawed.
- The recognition of a lower risk posed by those offering insurance products on an ancillary basis to their main activity.
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Devil in the detail
As we have now become familiar with Lamfalussy structure directives, much of the detail will be contained in secondary level measures. It is only once this level is published that firms will be able to assess the true impact of the requirements. In particular, delegated acts will set out detailed professional and organisational requirements for the standards of knowledge and ability of those selling insurance, the information that must be provided to customers, and define the steps that intermediaries should take to identify, prevent, manage and disclose conflicts of interest. Furthermore, national implementation of the revised regime will reveal where the changes may have greatest impact.
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What should firms do next?
Firms should take time to consider what the changes being brought in with mean for their business. As a first step firms should:
- Familiarise themselves with the proposed changes.
- Undertake a review of all distribution agreements and consider which arrangements will fall within the revised regime.
- Review existing qualification standards of personnel and consider the impact on training and development that the new requirements may have.
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