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19 September 2013

Letter from EIOPA/Bernardino to DG MARKT/Faull on enhancing consumer protection in insurance investment products

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"Consumer protection is in the DNA of EIOPA and ranks highest on our agenda", said Bernardino.

"I see the inclusion in the EU legislation of specific rules on conflicts of interest and assessment of suitability and appropriateness regarding sales of insurance investment products as crucial in promoting a high level of protection for consumers. This is clearly an area where a higher level of regulatory intervention is necessary to reinforce the protection of policyholders’ interests.

In that respect, EIOPA stands ready to play its role in ensuring better consumer protection and enhancing consumer confidence both in its role as a European Supervisory Authority and in close cooperation with the other ESAs under the Joint Committee.

I fully support the general objectives of enhancing cross-sectoral consistency and ensuring a level playing field for financial institutions by having in the IMD, provisions similar to those contained in MiFID II because, if supervisors from different financial sectors treat the same issues differently, it will not mean a “consistent level of protection” for consumers, which is our final aim.

Nevertheless, I am particularly concerned about the potential for a lack of regulatory consistency and a detrimental impact on consumer protection to arise, were provisions on the sale of insurance investment products to be included under the scope of MiFID II. This would, in my view, run the risk of such products being sold in accordance with sub-optimal requirements, with the consequent potential for a detrimental impact on consumers and significant upheaval in a market characterised by very diverse distribution channels.

I would like to provide you with three examples why the inclusion of rules on the sale of insurance products with an investment element under the regime of the IMD, is preferential:

• Keeping rules on the sale of insurance PRIPs in legislation designed for diverse forms of insurance distribution & the original Directive 2002/92/EC on insurance mediation (“IMD1”) was designed to specifically take account of the diversity of distribution channels in the insurance and reinsurance sectors, namely everything from a vast number of natural persons to large multinationals who currently carry out the activity of insurance mediation across Europe. IMD1 recognised the specificities of insurance distribution, namely the fact that an insurance intermediary exercises contractual rights and fulfils pre-determined contractual obligations by the insurance undertaking, whereas an investment firm executes orders from, or transactions on behalf of, clients. The unique aspect of this existing legislative framework for insurance distribution would be lost if insurance products with an investment element were included under MiFID II, but, more specifically, if they were included under the detailed Level 2 MiFID legislation, which is designed for investment firms such as investment banks and stock brokers.

  • Avoiding MiFID-style client categorisation: Notwithstanding the existence of a “large risks” exemption in Article 12(4) IMD1, there is no differentiation between retail and professional clients under IMD1, in the same way as MiFID. The objective of IMD1 is to grant the same protection to all customers concluding a contract of insurance, irrespective of their classification. Applying MiFID retail/professional client categorisation rules to the sale of life insurance, for example, could cause confusion and lead to less protection, particularly in cases where the insured person is different to the actual policyholder. This is classically the case for group (or collective) insurance policies where, for example, an undertaking (the policyholder) concludes a life insurance contract on behalf of its employees (the insured). Indeed, the 3L3 Committees stated in their Task Force Report on PRIPs in October 2010 that, “as the PRIPs requirements would only be applicable when a product in the scope of the regime is to be sold to retail investors, MiFID-style client categorisation would not add much value for insurance-based PRIPs”.
  • Maintaining the “demands and needs” test: Bearing in mind our objective of enhancing consumer protection, I am not convinced that applying the appropriateness test in Article 25(2), MiFID II in a non-advised sale of a complex product such as an insurance PRIP, achieves an optimal outcome for consumers, since this test does not include specifying the “demands and needs” of customers as is currently contained in Article 12(3), IMD1, thus reducing consumer protection. I understand that some Member States such as the UK have preferred to retain the IMD’s “demands and needs” test in relation to non-advised mediation of life insurance policies in order to ensure a more coherent regime specifically for insurance.

I believe it is particularly important to reach a legislative solution that avoids regulatory arbitrage, ensures a coordinated supervisory approach and preserves the legitimate specificities of each sector. I understand that different proposals have been put forward, but an agreement has not been reached yet.

In light of the fact that the negotiations on the IMD2 proposal are currently not progressing very rapidly, I believe that a possible way forward could be to include in the current MiFID II legislative process a number of simple amendments to the existing IMD1 so as to include provisions on the sale of insurance PRIPs, which are similar to those in MiFID II. This would have the benefit of keeping the sale of insurance-based investments still within the regulation of insurance mediation and at the same time preventing regulatory arbitrage. Any amendment would also make sure that the direct sales of insurance PRIPs is included.

The advantage of such an amendment would be that it would make it feasible for it to be adopted swiftly by the co-legislators within the MiFID II legislative process.

A drafting proposal is contained in the Annex to this letter."

Full letter with annex


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