Luxembourg: The Insurance Distribution Directive And Its Consequences For The Luxembourg Life Insurance Industry

Last Updated: 21 May 2018
Article by Ogier

Directive (EU) 2016/97 on Insurance Distribution of 20 January 2016 ("IDD" or "the Directive") harmonises national provisions concerning the distribution of insurance and reinsurance products and insurance-based investment products ("IBIPs") by insurance intermediaries, insurance companies, their employees, and ancillary insurance intermediaries in the European Union.

The objective of the present article is not to summarize the general European legislation, but more specifically to draw out areas of special interest for the leading Luxembourg industry; i.e. insurance companies and brokerage firms active in the field of wealth insurance.

The implementation of the European Directive and the application of corresponding Delegated Regulations has been postponed to 1 October 2018. The European Parliament substantiated this request for postponement by the need to give insurance undertakings and insurance distributors more time to better prepare for a correct and effective implementation of the Directive and to implement the necessary technical and organisational changes to comply with the Delegated Regulations.  

The aims and potential consequences of this overwhelming EU legislation on the insurance sector have been already presented and commented by many authors.

Clearly and because good balance between sustainable profits, i.e. remuneration schemes, in the first place, and monitored liabilities in the second place, is key for success, many authors have already commented on the first concern, i.e. the remuneration of distributions networks and the corresponding changes to be introduced.

Remuneration framework – IDD v. MiFID II (for memory)

Unlike Directive MiFID II which considerably restricts the possibility for firms providing the service of investment advice on an independent basis and the service of portfolio management to accept and retain fees, commissions or any monetary and non-monetary benefits from third parties, and particularly from issuers or product providers; IDD generally accepts such remuneration in connection with the distribution of an "insurance-based investment product" as long as the payment of fees, commissions or any non-monetary benefit does not have a detrimental impact on the quality of the relevant service and does not impair the distributor's duty to act honestly, fairly and professionally in accordance with the customer's best interests.

Distributors' liabilities – Life insurance – Specific Luxembourg focus

The specificity of the Luxembourg insurance industry not only pertains to the variety of distributors ('bancassurance' entities combining investments services, investment and insurance products, EEA banking institutions having created insurance brokerage units aiming at performing EU-wide services, asset management companies or wealth management advisers cumulatively licensed as insurance brokers, standalone brokerage firms, etc.) but also to the large portion of unit-linked / investment- based life insurance products and finally to the international (at least Europe wide) type of business which is conducted under the Freedom to provide services regime ("FPS").

3 major legal changes introduced by IDD will therefore need to be carefully considered and anticipated by the local insurance industry:

  • Scope of distributors – Dual responsibilities

The first impact of IDD directly follows from the new definition of so called "distributors". This term deliberately differs from the reference to the sole "intermediaries" mentioned in the previous Directive 2002/92/EC. 'Insurance distributor' means any insurance intermediary, ancillary insurance intermediary and insurance undertaking. Distributors, encompassing a large variety of persons or institutions (including the traditional agents, brokers and 'bancassurance' operators, insurance companies) will be subject to 'equality of treatment' (i.e. same level of duties, obligations and liabilities) considered necessary to ensure customer protection.

In short, anybody involved with insurance distribution (especially advising on, proposing, carrying out preparatory work to the conclusion of insurance or concluding insurance contracts) falls within the scope of IDD.

This level playing field is considered a guarantee for customers to benefit from the same level of protection.

In practice it may lead to situations of co-liability among the various types of distributors at stake (see the example of the customer receiving pre-contractual information and advice from the insurance broker and the insurance company's employee: who is fulfilling the duty to inform?) where national legislations had operated a 'clear' cut in terms of liability before.

Beyond the respective obligations laid down in Regulation (EU) 2017/2358 with regard to the terms of the collaboration agreement between the insurance intermediary and the insurance company, distribution agreements should be carefully reviewed on both sides (intermediary and insurance company) in order to precisely clarify their respective role, anticipate potential risk scenarios and achieve a good balance, especially as to their respective liability.

Luxembourg's core market is the distribution of insurance products "linked to investment funds". The Directive classifies this specific category as insurance-based investment products and underlines the importance to align their distribution with MiFID II (Directive 2014/65/EU).

  • Insurance-based investment products: the greater challenges

On top of PRIIP's Regulation EU/1286/2014, the distribution of insurance-based products generates a full range of additional obligations for the distributors:

Specific professional and organisational requirements must be abided by (art. 10, IDD). Buying an insurance-based investment product implies a risk and investors should be able to rely on the information and quality assessment provided. Insurance intermediaries and insurance undertakings that advise on, or sell, insurance-based investment products to retail customers are to possess an appropriate level of knowledge and competence in relation to the products offered and their employees should be given adequate time and resources to be able to exhaustively inform the customers.

Specific information standards (art. 29 & art. 30 of IDD and Regulation (EU) 2017/2358) aimed at addressing the investment embedded in insurance-based investment products shall apply and include provision of appropriate information, and requirements for advice to be suitable.

Restrictions on remuneration (art. 28 & art. 29 of IDD and Regulation (EU) 2017/2359) apply. The payment of remuneration (fee, commission, non-monetary benefits) in connection with the distribution of insurance-based investment products should not have a detrimental impact on the quality of the relevant service. In order to fulfil this condition satisfactorily the distributor should develop, adopt and regularly review policies and procedures relating to conflict of interests and ensure that the customer is adequately informed about fees, commissions or benefits. When advice is provided to the customer (Luxembourg anticipated rule according to draft Law n° 7215 and art. 295-10 of the Law in the Insurance Sector ('loi du 7 décembre 2015 sur le Secteur des Assurances') is that any distributor shall provide advice to a policyholder habitually residing in Luxembourg), the information on (1) all costs and related charges must be disclosed as well as (2) information relating to the distribution of the product, (3) including the cost of advice!

Surely, the main feature of Luxembourg's leading insurance industry resides in its international character and the passporting activities throughout the EU.

  • Impact of international activities (FPS)

For the first time - and if one may note, for a matter of change –, IDD specifies in a very clear manner at several places that the stricter requirements of a Member State have also to be complied with by insurance intermediaries operating under the freedom to provide services.

So far under the regime of Directive 2002/92/EC there is no clarity about the national law governing the duty to inform or advise the client living abroad when the insurance intermediary is active form his home country through FPS.

Even though consumer protection rules would logically imply that local general good provisions must be followed by a foreign insurance intermediary, this principle was never completely confirmed either by the Directive itself nor European case-law from the European Court of Justice.

Times are changing!

Intermediaries will need to particularly focus on these national rules in the context of the information provided to policyholders, i.e. in respect of advice given and disclosure of remuneration schemes.

For example: a Luxembourg based insurance broker will necessarily have to analyse and adapt the information given to the policyholder, depending on the specific national law governing the situation. The mere observance of Luxembourg pre-contractual information rules will definitely not suffice.

Interestingly enough, in the context of "national law governing the situation", IDD considers that stricter national provisions of the customer's habitual residence are the relevant ones. According to IDD (article 22 (2)), the provision of advice is mandatory if the customer's country of habitual residence so foresees.

This may create inconsistent legal situations and requires anticipation measures by the stakeholders as Directive Solvency 2 (see article 178 'Applicable law') expressly refers to the alternative provided for in Regulation Rome I, namely the possibility for the policyholder to opt for the law of his nationality.

Distributors will need to rethink their subscription process and decide upon the risk management options (advice: yes/no and how) in case, e.g. a French national who is habitually residing in Belgium, wishes to conclude a contract governed by French law (law of his nationality) rather than Belgian law (law of his habitual residence). An illustration of potential difficult situations can be found in the Belgian draft Bill for IDD's implementation. In fact, it indicates that "whenever advice is given, personalised recommendation is due". Advice is therefore not made compulsory.

Neighbouring countries such as France, Luxembourg, Germany and Belgium have thus taken or are about to take different positions in terms of the compulsory or facultative character of the duty to provide advice prior to the conclusion of the insurance contract.

CONCLUSION

The international character of the Luxembourg Life industry has an important impact on the preparatory work to the implementation of IDD:

The Directive aims at a so-called minimum harmonisation and for the first time in the EU legislative framework, insurance intermediaries, are expressly reminded of their obligation to follow the stricter requirements of their policyholders' country of residence. In practice, a Luxembourg insurance brokerage entity which would conduct business on an opportunistic approach and accept clients residing in various countries (e.g. 1 per year in Luxembourg, 20 in France, 5 in Spain, 2 in Sweden, 2 in the UK, etc.) will surely need to anticipate this aspect.

These stricter national rules will notably impact pre-contractual information duties, the type of advice to be given, the product documentation, authorised remuneration schemes and in particular the incentives gathered from underlying investment vehicles.

Insurance intermediaries and employees of insurance undertakings will also need to comply with continuing professional training and development requirements (including knowledge of financial risks, of the insurance market, of applicable laws governing the distribution of insurance products such as consumer protection law and relevant tax law, of assessing customer needs, etc.).

No doubt that the implementation may appear wide and burdensome, but it is a unique opportunity for all entities involved to (re-)negotiate distribution agreements (especially brokerage agreements, but also financial agreements such as asset management agreements) in order to achieve a good balance of liabilities between the professionals involved, review risk management options and look for sustainable business alternatives.

The Regulations supplementing the Directive do not involve transposition measures. The automatic result is that distributors will necessarily have to directly abide by their scope of obligations as early as 1 October 2018.

This, at least, leaves the door open for maximum harmonisation of operational processes and adequate internal and external advice!

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
ELVINGER HOSS PRUSSEN, société anonyme
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
ELVINGER HOSS PRUSSEN, société anonyme
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions