Implementing IDD – the regulatory road ahead for the Belgian insurance sector in 2018
The EU Insurance Distribution Directive (IDD) is now rapidly approaching its 23 February 2018 deadline for transposition into national law. The legal framework of IDD is aimed at strengthening consumer protection and harmonising the rules on distribution of insurance products by introducing a “MiFID-style” regime for the insurance sector. While the Belgian insurance sector has already become subject to AssurMiFID, the rules imposed by IDD will nevertheless add an additional layer of regulatory complexity, while at the same time tweaking some of the recently introduced AssurMiFID requirements.
This new regulatory challenge comes on top of a series of recent FSMA inspections of Belgian insurance undertakings and intermediaries performed by the FSMA, with a particular focus on the duty of care, as well as the entry into force of PRIIPS as from 1 January 2018.
All things considered, and even with the application date of IDD possibly postponed until 1 October, 2018 promises to be a busy year for the insurance sector from a regulatory viewpoint. The present newsletter provides a brief overview of some of the key novelties of IDD, based on the present draft Belgian implementing legislation, which remains subject to further review.
What is new in IDD and how will it impact business operations?
- Towards a level playing field. IDD aims to create a “level playing field” between all players distributing insurance products, irrespective of the distribution model that is being used. As such, it applies to both insurance intermediaries (brokers, insurance agent), as well as insurance undertakings operating through direct distribution.
- Interaction with IMD, AssurMiFID and MiFID II. A clear point of attention relates to the interaction of IDD with other key pieces of legislation. In summary, IDD is set to replace the existing Insurance Mediation Directive (2002/92/EC). In addition, the Belgian legislation implementing IDD will (as the case may be) update, supplement and consolidate the existing AssurMiFID rules. Lastly, in respect of MiFID II, it is relevant to point out that while IDD has a different scope of application, the conduct of business rules of IDD have been largely aligned with those of MiFID II in order to avoid the occurrence of regulatory arbitrage.
- Product oversight and governance. Perhaps the single most important novelty from the viewpoint of business operations is the requirement for the manufacturer of an insurance product to put in place appropriate policies and procedures to manage the development, approval and evaluation of a new insurance product (as well as significant adaptations to existing products). As a central feature, a manufacturer will need to identify a “target market” for a particular insurance product, and make sure that the features of the insurance product are consistent with the needs of its target market. In addition, the manufacturer will need to monitor the distribution strategy of the insurance product, as well as evaluate its performance.
- Customer information requirements. IDD also aims to enhance transparency and the flow of information towards the customer, both during the pre-contractual phase and over the lifetime of the insurance relationship. For non-life insurance products, information will be made available through a standardised insurance product information document (IPID). In case advice is given concerning the suitability of an insurance product, the (potential) customer will be provided with a so-called “suitability statement”. Lastly, IDD also imposes a regular reporting obligation towards the customer and provides a framework for periodic suitability testing. While some information requirements were already previously introduced as part of AssurMiFID, others will be new to the insurance market.
- Inducements. Whereas the Belgian legislator seems to want to mostly keep in place the inducements regime introduced under AssurMiFID (i.e. applicable to all insurance products, and with no ban on inducements to insurance brokers or in case of advice given), it seems that the “quality enhancement” component of the inducement criteria, as introduced under AssurMiFID, will not be maintained going forward.
- Professional knowledge and competence. IDD also aims to strengthen requirements relating to professional knowledge, expertise and reliability, which are extended to employees of (re)insurance companies that engage in direct distribution. In addition, (re)insurance intermediaries will have to comply with continuing professional training of at least 15 hours a year (up from 30 hours per 3 years for agents and brokers, and up from 20 hours per 3 years for sub-agents). IDD also details the minimum professional knowledge and competence that is needed, depending on the type of risks covered.
- Cross-selling. Whereas Belgian legislation currently prohibits cross-selling (i.e. the joint offering of products or services where one element is an insurance product), IDD (as well as the new Belgian draft legislation) leaves room for cross-selling provided certain conditions are met.
- Exemptions for professional clients and large risks. The Belgian legislator is likely to use the possibility offered under IDD to make a distinction between professional and non-professional clients. Consequently, insurance distributors will not be required to provide professional clients with certain information (e.g. regarding inducements or in relation to insurance-based investment products). In addition, certain obligations do not apply to large risks insurance (e.g. the IPID delivery requirement).
- Ancillary insurance intermediaries. IDD introduces a clear legal framework (including a registration requirement) for ancillary insurance intermediaries that perform distribution activities as an ancillary activity (e.g. a travel agent offering cancellation insurance). Furthermore, the directive specifies that even in case ancillary insurance intermediaries fall outside the scope of the IDD ruleset, a minimum number of information requirements still apply.
- Risks located outside the EU. IDD indicates it only applies to risks located within the territory of the EU. However, Belgium is likely to expand the scope of the new legal framework to risks that are located outside the EU.
In the meantime… the FSMA’s AssurMiFID inspections are a call to action
In this context it is also important to point out that the Belgian regulator (FSMA) has not awaited the full implementation of IDD in order to submit the insurance sector to increased scrutiny. Its recent inspections of insurance undertakings and brokers have identified a wide variety of issues and points of regulatory non-compliance (as tested against the current AssurMiFID regime). Moreover, the FSMA has indicated that further inspections are still to be expected, which are likely to be more assertive in nature.
How to prepare and how we can help
While some work is still ahead for the Belgian legislator over the coming weeks and months, it is clear that for insurance undertakings and intermediaries the time to act is now, whereby particular attention is likely to be needed in any or more of the following areas:
- preparing and/or updating documentation;
- reviewing internal policies and procedures (including on information collecting, client testing, conflicts of interest, inducements, reporting, diffusion of information, etc.);
- putting in place product oversight and governance procedures;
- continuing follow-up of the ongoing legislative process and staff training.
Our team of experts is available to support you in analysing particular business needs and to advise you on
a specific implementation process.
For further questions on this topic please contact Isabelle Blomme and Walter Jacob.