knowledge | 4 April 2018 |
Transposing the Insurance Distribution Directive
The Department of Finance has published its feedback statement (the “Statement”) on the “Transposition of EU Directive 2016/97 on Insurance Distribution” into Irish law. The Statement (here) sets out the Minister for Finance’s decisions regarding the national discretions set out in the Insurance Distribution Directive (“IDD”).
The IDD regulates the way in which insurance products are designed and sold by insurance intermediaries, ancillary insurance intermediaries and by insurance undertakings (collectively “Distributors”). Broadly, the IDD:
- lays down the information that must be given to consumers before they sign an insurance contract;
- imposes certain conduct of business and transparency rules on Distributors;
- clarifies procedures and rules for cross-border business; and
- contains rules for the supervision and sanctioning of Distributors for breach of the IDD.
The IDD applies to all insurance products but contains more prescriptive rules for insurance-based investment products.
While the IDD was due to be transposed by the EU’s member states by February 2018, this deadline has been changed to the 1 July 2018. Moreover, the deadline for complying with the IDD is now 1 October 2018.
The IDD contains a number of national discretions and the Department of Finance consulted on these discretions between 29 March and 2 May 2017 (here).
The Statement sets out a summary of the responses to the Department’s consultation, together with the Minister’s decisions on the questions posed.
The IDD requires intermediaries and ancillary intermediaries to be registered in their home member states. The Minister intends:
- to allow insurance undertakings, intermediaries and other bodies to cooperate in the registration of intermediaries and ancillary intermediaries and the application of professional and operational requirements;
- to stipulate that the undertakings and intermediaries that are responsible for other intermediaries (including ancillary intermediaries) should ensure that the relevant intermediary meets the conditions for registration, and registers that intermediary; and
- not to apply the registration requirements to all natural persons who work in an intermediary or ancillary intermediary (the register will specify the names of the natural persons within the Distributor who are responsible for the distribution).
Professional and Organisational Arrangements
Under the IDD, Distributors, and employees of undertakings carrying out distribution activities possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately. They must also comply with continuing professional training and development requirements.
The Minister intends to avail of derogations to these requirements so that:
- the requirement to possess appropriate knowledge and ability, or continuous professional development will not apply to all natural persons who work in a Distributor;
- Distributors will be allowed to check their employees’ good repute and, the good repute of its intermediaries; and
- the good repute requirements will not apply to all natural persons who work in a Distributor, provided the relevant persons are not directly involved in distribution.
The IDD also requires member states to protect customers against the inability of an Intermediary to transfer premiums to an insurance undertaking or to transfer claims’ amounts or return premia to an insured. In this respect, it lists relevant measures that may be adopted by the member states.
The Minister intends to adopt two of the measures listed. First, the Minister will put in place provisions whereby monies paid by the customer to the Intermediary are treated as having been paid to the undertaking, whereas monies paid by the undertaking to the Intermediary are not treated as having been paid to the customer until the customer actually receives them.
Secondly, the Minister will require that customer’s monies be transferred via strictly segregated customer accounts and will prohibit those accounts being used to reimburse other creditors in the event of bankruptcy.
These measures both correspond to measures adopted under the IMD.
Advice and Standards
The IDD requires Distributors to provide certain pre-contractual information to the customer. Some of this information must be provided by way of a standardised insurance product information document (“IPID”), in relation to the distribution of non-life insurance products.
Member States have the option of stipulating that the IPID be provided together with other information and the Minister has decided to exercise this discretion to allow for existing Consumer Protection Code (“CPC”) and Solvency II information disclosure requirements to continue to apply when dealing with Irish customers.
Information Exemptions and Flexibility Clauses
Articles 29 and 30 of the IDD apply to distribution carried out in relation to the sale of insurance-based investment products. Article 29 requires information to be provided to the customer regarding the distribution of insurance-based investment products and with regard to all costs and related charges. Article 30 deals with assessments of suitability and appropriateness and reporting to customers.
The Minister has decided not to avail of the derogation set out in the IDD which would permit Ireland to disapply Articles 29 and 30 to professional investors.
The IDD sets out a number of requirements applicable to cross-selling, eg where an insurance product is offered together with an ancillary product or service which is not insurance, as part of a package of the same agreement.
Member states have the option of maintaining or adopting stricter measures on cross-selling, and the Minister intends to exercise this discretion in order to maintain the existing CPC rules which supplement the IDD requirements.
Information to Customer
The IDD permits member states to:
- limit or prohibit the acceptance or receipt of third party inducements in relation to the distribution of insurance products;
- allow the information required under Article 29(1) of the IDD in relation to insurance-based investment products to be provided in a standardised format;
- limit or prohibit the acceptance or receipt of third party inducements in relation to the provision of advice for insurance-based investment products;
- make the provision of advice mandatory for the sales of any insurance-based investment products; and
- require an insurance intermediary to meet specified requirements where it informs the client that advice is given independently.
The Minister intends to avail of discretions set out at (2), and (5) above. He also intends to avail partially of the discretion set out in (3) by prohibiting Distributors from accepting or retaining third party inducements in relation to the provision of independent investment advice for insurance-based investment products. This is to bring the requirements applicable to third party inducements in line with those applicable under the MiFID framework.
The Minister will review the discretions set out in (1) and (4) above, once the Central Bank of Ireland has completed its work on commission payments and consumer protection.
Assessment of Suitability and Appropriateness and Reporting to Customers
Undertakings and insurance intermediaries (but not ancillary intermediaries) must provide an assessment of suitability when providing advice on an insurance-based investment product. They must carry out an appropriateness assessment in relation to sales where no advice is given, eg execution only sales.
The Minister has decide to avail of a derogation which permits Ireland to allow execution only sales in relation to insurance-based investment products in limited circumstances.
Administrative Sanctions, Breaches and Other Measures
Article 31 allows member states to provide for criminal sanctions for breach of the IDD, in addition to administrative sanctions. The Minister does not intend to avail of this discretion in order to maintain the current sanctions regime.
Article 33 sets out the administrative sanctions applicable to certain breaches of the IDD but member states have the option of empowering competent authorities to provide for additional sanctions. The Minister intends to use this option, again in order to maintain the current administrative sanctions regime.
According to the Statement, the Minister expects to finalise the Statutory Instrument transposing the IDD into Irish law in the coming weeks, with a view to publishing it “well in advance” of the 1 July deadline.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.