The Insurance Distribution Directive (IDD) is to insurance what MiFID is to investments. It repeals the directive on insurance mediation and regulates specific insurance-based investments. It must be transposed into national legislation by 23 February 2018, although a delay in when the adopted measures must be applied is currently being discussed. Notably, the directive introduces additional requirements for insurance-based investment products (IBIPs).
Besides the IDD's new requirements, the IBIP regulatory framework consists of an EU Commission delegated regulation that addresses information requirements and conduct-of-business rules for IBIP distributors. In October 2017, the European Insurance and Occupational Pensions Authority (EIOPA) issued guidelines on those IBIPs whose structures make it difficult for the customer to understand the risk involved.
In this article, I'll discuss conflicts of interest surrounding IBIPs, as well as the IDD's definitions of suitability and appropriateness.
What's the best way to identify and handle conflicts of interest?
Insurance intermediaries and insurance undertakings have to identify conflicts of interest that may occur within themselves—meaning managers and employees, as well as anyone linked to them—or between one customer and another. The EU Commission's delegated regulation introduces criteria for identifying conflicts of interest and requires intermediaries and insurance undertakings to put a written conflict of interest policy in place. The policy must detail the circumstances that may give rise to conflicts of interest and the procedures, specifications for which are given in the regulation, for managing them. It must be reviewed annually, at least. Furthermore, a record must be kept of any instances of conflicts of interest that may have an impact on customers.
The delegated regulation also comments on the disclosure of conflicts of interest to customers, insisting on disclosure being a last resort, to be used only when effective organisational and administrative measures did not prevent or manage conflicts of interest.
How should you assess suitability and appropriateness?
When insurers or intermediaries provide advice, they must assess its suitability to the customer. In doing so, they determine how much customer information needs collecting, before examining the customer's objectives, financial situation, and knowledge of / experience in the given investment field. The customer must then be provided with a suitability statement with an outline of the advice, information on how it is suitable to him/her, and whether the recommended product is likely to necessitate a periodic review of suitability. When a periodic review is required it must occur at least annually, but the frequency could increase depending on the characteristics of the customer. Advice on IBIPs can also be provided through an automated or semi-automated system; the same rules about the frequency of the suitability assessment apply.
Appropriateness is relevant in sales where no advice is provided to the customer at all. If the intermediary or insurance undertaking determines that the customer lacks the necessary knowledge and experience to understand the risks, it must inform the customer that this is so, or, as the case may be, that there is insufficient information to decide.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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