European Union: Regulatory Impact Of The Insurance Distribution Directive On The Investment Services Industry

Last Updated: 26 June 2018
Article by Ogier  

Directive 2016/97/EU on Insurance Distribution ("IDD"): a new regulatory trap for the asset management and private banking industry rendering services to clients based in the EEA?

This new EU legislation needs to be applied on 1 October 2018 by a vast group of providers, globally redefined as insurance "distributors".

The objective pursued by IDD is to ensure that "consumers" benefit from the same level of protection despite the differences between distribution channels, therefore a level playing field between distributors is presented as essential (see preamble of the Directive, recital 6).

The previous Insurance Mediation Directive was merely referring to "policyholders" versus "consumers". The deliberate choice to change terminology gives way to the introduction of completely new liability principles, including the ones applicable to product liability, depending on the civil law sanctions to be adopted on a national level.

Definition of ancillary insurance intermediary v. insurance intermediary

Throughout the EU legislative process, which aims at a minimum harmonisation, the importance of ensuring effective consumer protection across all financial sectors was particularly underlined, with an express reference to current and recent financial turbulence. As an immediate consequence, it was held important to take into consideration the specific nature of insurance contracts in comparison to investment products regulated under MiFID II.

Unlike the definition of insurance distribution which did not undergo substantial modifications (except the reference to electronic distribution activities), the altered definitions of "insurance intermediary" and "ancillary insurance intermediary" can be considered as taking into account the diversity of distribution channels in Member States. However, explicit clarifications also close the door to possible diverging interpretations.

Asset management firms and banking institutions which provide investment services to their private clients residing in the European Economic Area also use, propose and carry out preparatory work to the conclusion of insurance contracts. They may even be providing advice on such conclusion and assist in the performance of such contracts. These financial entities may either assume that they do not perform insurance activities or consider these activities purely ancillary, therefore not complying with specific regulatory requirements.

This is where IDD's new definitions come into play.

Ancillary insurance intermediary means any natural and legal person, other than a credit institution or an investment firm, who, for remuneration, takes up or pursues the activity of insurance distribution on an ancillary basis, provided that:

  • The principal professional activity of that natural or legal person is other than insurance distribution;
  • The natural or legal person only distributes certain insurance products that are complementary to the good or service;
  • The insurance products concerned do not cover life assurance or liability risks, unless that cover complements the good or service which the intermediary provides as its principal activity.

Therefore when investment firms and credit institutions (1) perform insurance distribution activities in addition to their principal professional activity and (2) receive remuneration for this activity, they actually pursue insurance distribution activities on a non ancillary basis according to the wording of the provision set above.

Ultimately, this means that, unless evidence is given that they do not perform insurance distribution services (see art. 2 (2) of IDD, e.g. mere "provision of information on an incidental basis"), upon implementation, these firms and credit institutions must abide by all rules applicable to insurance distributors. This includes, but is not limited to, compulsory registration requirements, information and organisational requirements as well as conduct of business rules.

Remuneration – Inducement policy – Principal activity

MiFID II (Directive 2014/65/EU on financial market instruments and the delegated Regulation 2017/565) has already introduced new disclosure standards for investment firms and remodeled the financial environment: the aim is to increase the protection of investors. MiFID II considerably restricts or in certain cases prohibits the payment of inducements (re. where investment advice is provided on an independent basis, see under  Section 2, article 24 (7) (b) "General principles and information to clients" of the Directive: "where an investment firm informs the client that investment advice is provided on an independent basis, that investment firm shall: (…) not accept and retain fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the services to clients").

The delegated Regulation (EU) 2017/2359 ("CoB") supplementing IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products provides a non-exhaustive list of criteria deemed relevant for the assessment of inducements paid or received by insurance intermediaries and insurance companies.

Effective conflicts of interest policies should be established, implemented and maintained by insurance intermediaries and allow them to identify the circumstances which constitute or may give rise to a conflict of interest entailing a risk of damage to the interest of customers. These policies should allow them to manage conflicts and prevent them from damaging the interests of the customer.

According to Article 5 of above mentioned CoB Regulation, procedures and measures under the conflict of interest policy shall notably include the "removal of any direct link between payments, including remuneration, to relevant persons engaged in one activity and payments, including remuneration, to different relevant persons principally engaged in another activity, where conflict of interest may arise in relation to those activities".

In order to keep remuneration ongoing, conflicts of interest will need to be excluded ex-ante.

In practice, different schemes enable insurance distributors to receive remuneration when promoting specific UCITS funds to serve as underlying to the insurance contracts.

In some jurisdictions, life insurance products include external asset management services on an advisory basis within the insurance wrapper.

Conflict of interest can typically arise out of the two situations cited above.

The industry will have to face additional challenges and may have to rethink (1) the way entities are structured and operate when it comes to providing investment services and distributing insurance, and (2) the contractual set-up when the conclusion of insurance contracts generates brokerage fees as well as financial fees (such as fund distribution fees).

The instruction given to the industry (article 6 of CoB Regulation) not to over-rely on disclosure, and that disclosure to customers is a measure of last resort when dealing with conflicts of interests will certainly not close the debate.

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
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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