Responses of the Association of German Public Insurers to the EIOPA Consultation Paper on Technical Advice on possible delegated acts concerning the Insurance Distribution Directive (IDD), 4th July 2016
The public insurers welcome the fact that EIOPA has been timely in submitting its preliminary considerations as regards technical advice for Product Oversight and Governance, Conflicts of Interest, Inducements and Assessment of Suitability – areas in which the IDD has empowered the European Commission to flesh out the regulations by means of delegated acts. The most important thing in relation to these recommendations is that they be proportionate. Only if the principle of proportionality is faithfully and systematically applied, will small and medium-sized insurance companies and intermediaries be in a position to properly implement the IDD. If it is not, the diversity of the European insurance landscape would be in jeopardy – and that would not be in the true interests of the customers.
The following General Comment refers solely to the areas of conflicts of interest and inducements, as these are of paramount importance. The IDD is aimed at minimum harmonisation (explicitly stated in Recital No. 3 of the Directive). The commission system was the subject of intensive discussions during the trialogue negotiations, with the result that the IDD does not contain any EU-wide ban on commission. The Directive merely contains the requirement that commission should not have any detrimental impact on the customers. The IDD wording thus deliberately departs in a materially significant way from the MiFID rules. Moreover, in Art. 29(3) the IDD grants the EU Member States – and no other EU institutions – the right to impose stricter national requirements as regards commission systems (up to and including the right to prohibit commission altogether). Consequently,the IDD regulations differ considerably from the MiFID, a fact that also reflects the material differences between the insurance industry and the investment sector.
The IDD deliberately grants each EU Member State leeway to regulate commission systems differently, and this scope must not be restricted after the fact. Delegated acts are designed to make Level-1 legislation more specific, not to contradict it. In the present paper, however, EIOPA imposes stricter requirements, which would in fact lead to a Europe-wide prohibition of commission systems in their accustomed, tried-and tested form. This, however, is neither consistent with the IDD, nor do we consider it to be appropriate or even necessary. The delegated acts must respect both the framework given at Level 1 and adhere to the meaningful diversity of structures across the EU Member States.
From the public insurers’ standpoint, there are a number of different points to which special attention should be given during the consultation process:
• We believe it much more appropriate to formulate principles-based regulations, rather than the detailed provisions that appear in many instances throughout the consultation paper. Individual aspects are always the result of viewing things in isolation, and are of only limited informational value because they often do not adequately reflect actual practice in the insurance industry. The focus must always fall on the service as a whole. Individual aspects of this kind can be found, in particular, in the negative list drafted by EIOPA, which should not be included in either the Technical Advice or the delegated acts. If, despite all reservations, EIOPA insists on a negative list, it is then absolutely necessary to include a non-exhaustive positive list in the Technical Advice as well. However, the points in the positive list included in the consultation paper are inadequate and do not reflect the features of appropriate, customer-oriented insurance practice.
- EIOPA asserts that conflicts of interest typically arise in certain situations. It is worth noting that conflicts of interest do not typically arise in the circumstances given, but only in exceptional cases. The list of situations in which EIOPA assumes a conflict of interest is far too long:
- It is inexplicable to assert that a conflict of interest arises when the distributor has an interest in selling insurance products from his/her own group. In particular, the tied intermediaries that play such a central role in the insurance industry are subject to a conscious and sensible contractual obligation to sell precisely these products. Art. 19 of the IDD makes detailed prescriptions of what information distributors have to provide to customers (e.g. their status as an intermediary, any holdings they have in insurance companies, etc.). That information already puts the customer in a position to make an informed decision to his/her own benefit.
- EIOPA assumes a conflict of interest when a distributor gains financially from the sale of insurance products. This assumption does not reflect the realities of the insurance market. A commission paid to the distributor is primarily intended to cover the latter’s costs, i.e. appropriate remuneration for the services rendered to the customer. What is more, in the case of pension insurance products, the distributor has to provide the majority of his/her consultation/support service when the contract is concluded. Service of this nature justifies payment of corresponding remuneration at the time the costs are incurred. Multi-year cancellation liability periods help to avoid any conceivable conflicts of interest between distributors, on the one hand, and customers/insurers, on the other.
- EIOPA does not consider the potential conflicts of interest posed by other forms of consultation, e.g. fee-based consultation. Remuneration based on the time spent advising the customer can also create incentives that result in consultation that is neither purely customer-oriented nor in line with the latter’s requirements.
- The consultation paper incidentally leaves aside the socio-politically positive aspect of the commission system. In a system with an insurance infrastructure for everyone consultation is carried out in accordance with the needs and wishes of the customer and without any financial risk for the individual. The scope and intensity of the support provided do not depend on whether the customer ultimately concludes a contract or not, nor on what contract volume or amount of commission is attached to it. At a time when making provision for old age is of key importance only a commission-based system can ensure everyone access to adequate insurance products.
- It is problematical to link the admissible commission solely, or even predominantly, to qualitative criteria, which are, generally speaking, not objective. Only quantitative criteria can be measured objectively. In the interests of costing certainty, and to avoid economic risk for insurance companies, the remuneration paid to intermediaries – who are free to decide independently of the insurer the amount and scope of their work – must be geared to the sales they generate and thus to quantitative criteria.
At various points, EIOPA asks whether supplementary guidelines for the Directive or the delegated acts are necessary and a sensible option. As the IDD and the delegated acts already provide comprehensive regulations, we do not consider any supplementary guidelines to be needed. Otherwise, there is a danger of too much regulation and of unnecessary red tape.
As the delegated acts were formulated as guidelines to supplement MiFID, the delegated acts for the IDD should also be issued as Directive which needs to be implemented nationally. This would also accord with the spirit of the IDD, which aims to achieve a minimum of harmonisation.