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Changes to EU law on insurance distribution

This article is part of
Guide to advising overseas clients

Changes to EU law on insurance distribution

Advisers looking to passport will also need the Insurance Mediation Directive (IMD) passport for advice on insurance-based products.

The 2002 Insurance Mediation Directive (IMD) aimed to regulate selling practices by brokers and other intermediaries selling insurance products.

It covered the sale of general insurance products such as motor insurance as well as life insurance policies, including those which contain investment elements such as unit-linked life insurance products.

But the EU is updating the IMD under the new Insurance Distribution Directive. The name changed in September 2014 to reflect the directive’s focus on regulating the distribution of insurance products, including by insurers directly where no intermediation occurs.

The IDD has made several key revisions, to incorporate all sellers of insurance products and aims to usher in more transparency and professionalism.

According to a statement from the European Commission: “The agreed rules include stronger requirements for the sale of life insurance products with investment elements.

“In addition, the new text also introduces rules on mutual recognition of professional knowledge and ability, where professionals obtain qualifications in another member state.”

The IDD does not impose a specific business model for the sale of insurance products, meaning that current practices of ‘execution-only’ sales or sales with advice can continue to be carried out.

In line with Mifid II, member states may allow insurance distributors to continue to earn revenue through commissions or third-party payments, but only if they can show this commission also benefits the customer.

The IDD - which may be gold-plated by member states (i.e. a regulator can decide whether to impose even more stringent rules on top of the EU standard) is going through final votes within the European Parliament and is expected to come into force in 2017.

So from 2017, advisers must make sure they have the latest passporting permission for the IDD as it will replace the IMD.

Jason Porter, director of international tax and wealth manager Blevins Franks, says there has in the past been a difference between the levels of disclosure of commission and remuneration between UK-based advisers and those operating outside of the UK and passporting in.

However, he adds: “There is likely to be a closing of this gap when both Mifid II and the IDD come into effect, as these will raise the requirements in a number of countries around Europe.”

Key changes under the IDD

The Chartered Insurance Institute has outlined several of the key changes the IDD will bring in for advisers:

1) Professionalism: the professionalism requirements have been increased from just continuing professional development in the initial proposal to more enhanced knowledge and competence requirements.

2) Commission disclosure: after much debate, the current draft settles on pre-contractual disclosure of the intermediary and the nature, not amount, of their remuneration (whether commission, fee or other type of arrangement).