On the 20th of January 2016 the European Parliament and the Council of the European Union adopted Directive 2016/97, known as the Insurance Distribution Directive (“IDD”). The IDD is aimed not only at insurance agents, brokers and managers, which are already regulated under Directive 2002/92/EC, known as the Insurance Mediation Directive, but also at insurance undertakings which, likewise, distribute insurance products, thereby establishing a level playing field between all insurance distributors.
The IDD’s main scope was not to introduce additional solvency and capital requirements, but rather to lay down rules regarding product governance and oversight, conflicts of interest, knowledge and ability and to introduce suitability and appropriateness assessments, similar to those found under MiFID (2014/65/EU). The IDD also introduces a number of disclosures which must be made to clients prior to entering into contracts of insurance.
Although the IDD had to be transposed by the 23rd of February 2018 in all European Member States, the European Union agreed to postpone the date by 7 months to the 1st of October 2018.
On the 10th of July 2018, the Maltese Parliament enacted Act No. XXVI of 2018, which was primarily intended to transpose the IDD into Maltese law. Amongst others, the ‘Insurance Intermediaries Act’ (Cap. 487) was renamed to ‘Insurance Distribution Act’ (“IDA”). The Insurance Business Act (Cap. 403) will also be amended by virtue of Act No. XXVI of 2018.
Act No. XXVI of 2018 comes fully into force by virtue of L.N. 235 of 2018 on the 1st of October 2018.
On the 12th of July 2018, the Malta Financial Services Authority (“MFSA”) issued a Circular announcing the publication of the new Insurance Distribution Rules (the “IDRs”) which are intended to replace the Insurance Intermediaries Rules as of the 1st of October 2018 and to transpose the remaining provisions of the IDD.
The IDRs consists of fifteen chapters, divided into two parts and consolidated into one single rulebook. The first four chapters entitled ‘Authorisation Requirements applicable under the Insurance Distribution Act’ are found in Part A of the IDRs, while the remaining eleven chapters entitled ‘Conditions for carrying out Insurance Distribution Activities and Reinsurance Distribution Activities’ are found in Part B of the IDRs.
The Circular issued on the 12th of July 2018 also announces the introduction of minor amendments which were carried out on Chapters 1 and 2 of the Insurance Rules which become applicable as of the 1st of October 2018. Among others, insurance undertakings are now required to identify a member of the Board of Directors who shall be responsible for the oversight of insurance or reinsurance distribution activities within the insurance undertaking.
The key requirements which were introduced by the IDD and which were transposed in the Maltese regulatory framework are summarized below:
Product Oversight and Governance
Similar to the obligations introduced by MiFID II, the IDD now requires insurance distributors – insurance undertakings and insurance intermediaries – to establish and maintain a Product Governance and Oversight Policy, by means of which they will govern any arrangements and procedures relating to the insurance products they intend to distribute.
This Policy should, inter alia, introduce and maintain processes relating to i) the product approval process wherein insurance products, including insurance-based investment products (“IBIPs”) are reviewed at a sufficiently granular level, taking into account the characteristics, risks, profile, complexity and nature of the product and approved for distribution accordingly; ii) the identification of a target market for each and every approved insurance product; and iii) the distribution channels by means of which distributors intend to do distribute the approved insurance products to the respective identified target market.
Conflicts of Interest, including Inducements and Remuneration
The IDD requires insurance distributors not only to disclose any conflicts of interest, but to also seek to identify, prevent and manage them in so far as this is possible.
The most common forms of conflicts of interest which the IDD seeks to regulate relate to scenarios wherein licensees would have interests of their own conflicting with that of their clients. Such scenarios generally arise from i) the remuneration arrangements between the insurance manufacturers and the insurance distributors; ii) any inducements, whether monetary or non-monetary, received by distributors on the basis of volumes or sales; iii) employee remuneration and incentives based on sales targets les iv) distributors’ own interest in selling products manufactured by closely related entities; or v) sales made on the basis of inside or sensitive information which is not available to the public at large.
In this regard, insurance distributors are required to establish and maintain a comprehensive Conflicts of Interest Policy, and a Remuneration and Inducements Policy, which set the necessary organisational and administrative arrangement to mitigate, manage and disclose any conflicts of interest, whether monetary or otherwise.
Suitability and Appropriateness Assessments
One of the more onerous obligations introduced by the IDD relates to the carrying out of assessments of demands and needs, suitability assessments and appropriateness assessments, as the case may be, similar to those currently carried out by investment firms regulated under MiFID.
Prior to concluding insurance contracts, distributors must now provide clients with objective information about insurance products in a comprehensible form to allow them to make informed decisions, according to their demands and the needs.
When providing advice on IBIPs, insurance distributors are now required to conduct a suitability assessment, by means of which they will be able to determine whether the recommended product meets the objectives of the client, whether the client can withstand the proposed investment in the light of his financial circumstance, and whether the client has sufficient experience and knowledge of the recommended products.
Pursuant to giving advice and before the conclusion of any resulting sale, insurance distributors are also required to provide their clients with a suitability statement, stating the reasons as to why such a recommendation was made, in light of the information gathered in the suitability assessment.
In the context of IBIPs; where no advice is given, insurance distributors are still required to conduct an appropriateness assessment, by means of which they will be able to determine the experience and knowledge of their clients so as to enable them to assess whether the IBIPs envisaged are appropriate for their clients. The IDD also allows for exemptions from this requirement when a set of criteria are met.
Product information and Disclosures
Client protection is undoubtedly one of the main objectives behind the IDD. In this respect, the directive introduces a number of obligations intended mostly to equip clients with better information, knowledge and understanding of the insurance products they’re buying, and certain disclosures which must be made by insurance distributers before, during and after a sale is concluded.
The Product Information Document (“PID”) is one of the main documents by means of which distributors shall pass information about non-life insurance products onto their clients at the pre-contractual stage. The IDD describes the PID as a “short, stand-alone document”, “presented and laid out in a way that is clear and easy to read, using characters of a readable size”, “comprehensible” and “accurate and not misleading”. Key information disclosure relating to IBIPs, on the other hand, are regulated under the Packaged Retail and Insurance-based Investment Products Regulation (“PRIIP”).
The IDD further requires distributors to disclose information on the nature of the remuneration received in relation to the insurance contract, any fees payable by the client, or where that is not possible, the method for calculating such fees, and any other payments other than the ongoing premiums which must be made by the clients under the insurance contract after its conclusion. Furthermore, when bundling products, distributors will have to disclose prices separately for each of the different components within the bundled product.
In addition, when advice is given, insurance distributors shall disclose to their clients whether such advice is based on a fair and personal analysis or on a more restricted analysis of different types of insurance products and, in particular, whether the range is limited to insurance products issued or provided by entities having close links, so close as to pose a risk of impairing the independent basis of the advice provided.
Knowledge, Ability and Continuous Professional Development
Persons within management, persons registered as intermediaries and employees directly involved in the carrying out of distribution of insurance contracts are now required to possess and show that they possess the necessary knowledge and ability. In this regard, the IDD allows distributors a transitional period of up until the 23rd February 2019 to ensure that the relevant personnel have the necessary skill and competence in the area of insurance and that they can understand and comprehend the demands and needs of their clients.
Furthermore, said personnel are also required to register a minimum of fifteen (15) hours of continuous professional development (“CPDs”) in any given year, as of the 1st of January 2019. Notwithstanding this, the MFSA expects such persons to dedicate a few hours of CPDs between the 1st of October 2018 and 31st of December 2018. In addition, distributors are required to maintain and keep appropriate records to demonstrate compliance with CPD requirements.
In conclusion, insurance distributors, whether insurance undertakings or insurance intermediaries, may need to carry out gap analyses to identify any deficiencies within the context of the IDD and potentially reassess their business models in order to cater for the newly introduced obligations under the IDD, IDA, and IDRs.
To find out more, please contact Mr. Patrick Gatt