European Commission 28.2.2011
Insurance and Pensions Unit
On 26 November 2010, the Commission launched a consultation which outlined the upcoming review of the IMD. The Commission requested feedback and responses on a number of questions. The Associations have drawn up a response together with the European Insurers´ Federation CEA. However, the Danish, Estonian, Finnish, Latvian, Norwegian and Swedish National Associations (hereinafter “the Associations”) would like to highlight some important issues in this joint response, which relate to particular aspects in our respective markets and regulatory environments.
Level playing field and minimum harmonisation
We support a high level of consumer protection for the same products, regardless of the distribution channel used. This is in particular important in relation to rules on disclosure, advice and conflicts of interests. However, the objective should be to create the same operational environment for all market players, instead of extending a uniform set of rules to everyone. Differences in the distribution channels and in the products create different needs for regulation, and this should be taken into account. With the appropriate consideration and introduction of rules that fit the characteristics of each distribution channel it is possible also to ensure a level playing field between the market players.
We feel that minimum harmonisation is the best way to respect the diversity in the distribution structures in the national markets across Europe. We support the Commission's efforts to strengthen consumer protection and consumer confidence horizontally as regards distribution of insurances. However, we urge the Commission not to introduce rules that will force the consumer protection to be lowered in the Nordic, Estonian and Latvian markets.
The role and status of brokers, agents and direct sales personnel
The key issue when it comes to regulating brokers, agents and direct sales forces lies in the differences between their status and roles. Unlike an agent or a sales person of an insurance company, an insurance broker is a representative of the customer. Core characteristics of a broker should therefore be impartiality and independence from insurers. The customer should always be able to trust that the broker is truly independent in the sense that the broker does not have an economic or other interest in recommending a product from a specific insurance undertaking. The situation is fundamentally different for insurance agents or direct sales persons, who represent the insurance undertaking or several undertakings. In these cases the insurance undertakings are liable for their actions. We are therefore dealing with two entirely different business models and we feel that this difference should be the starting point for the Commission when reflecting on the scope and rules in the revised IMD.
Applying the same rules on eg. registration, PII, notifications and conflicts of interest for direct selling, agents and brokers alike does not take account of these fundamental differences. In our view, it might result in regulating direct sales and agents in a disproportionate and inappropriate way, at the same time as brokers would be insufficiently regulated.
Handling conflicts of interest
Depending on the status of different market players, the risks regarding conflicts of interest might emerge in very different proportions and situations. We fear that introducing the same rules on conflicts of interest to all market players would not take account of these differences. Furthermore we fear that such an approach would lead to insufficient requirements for brokers that will not effectively guard the consumers against hidden conflicts of interests. The Associations would like once again to stress that it is key that consumers can trust the objectivity of advice given by a broker on the basis of a fair analysis. In addition, this is the only way to ensure a healthy market for independent advice and strong competition among the distribution channels to the benefit of the consumers.
The Nordic markets have all introduced bans on commissions in different forms and to different extents. The bans have been introduced in order to manage brokers´ conflicts of interest vis-á-vis the customer. However, a ban on commissions also ensures transparency and competition, and facilitates the development of a market of independent insurance and pensions advisors. By banning commissions it is ensured that the broker has to negotiate payment for his services directly with the customer. To allow for long term profitability a broker must ensure that the customer gets value for his money. This will contribute to a healthy market for independent advisors. As the Commission is aware of, other markets like the Netherlands and the UK are also moving away from a commission-based system for independent advisors and towards a fee-based market structure.
As a minimum rule at the EU level, automatic disclosure of remuneration should be mandatory. We strongly feel that disclosure of remuneration “on request”, favoured by some, is not a solution to the problem of conflicts of interest, because in most cases the customer will not take the initiative to exercise this right. Thus we believe that a right for a customer to ask for information on remuneration represents limited value in practice for the customers. The remuneration is still – in this case – negotiated between the broker and the insurance undertaking and not by the customer himself. Considering brokers, such a rule on disclosure would not be sufficient to prevent conflicts of interest.
We would also like to recall the findings of the Commission Business Insurance Inquiry (2007), in which the Commission expressed severe concerns about the problems relating to the present provisions and practices on broker remuneration in the Member States. According to the inquiry, non-transparent remuneration practices cause conflicts of interest between the brokers’ own commercial interests and the impartial nature of the advice given to the customer. Attention should be given to the fact that the remuneration practice does not promote fair competition. Insurance undertakings might be competing against each other on the level of remuneration afforded to brokers in an attempt to “buy” distribution, or at the very least influence the broker’s choice. These conflicts of interest might raise insurance premiums.
In addition, the Associations have read the consultation of the Commission on the MiFID review
with interest. In particular the section on investor protection and the provision of investment
services offers some valuable inspiration for the work on the review of the IMD. The Commission Services suggest that new rules on inducements should be introduced when an investment firm gives advice based on an independent and fair analysis. The Commission considers that a firm in this case could be prohibited from accepting any payments or benefits from any product provider (section 7.2.2 of the MiFID consultation paper). The Commission Services also suggest (section 7.2.4): "In the case of investment advice provided on an independent basis, third party inducements would be incompatible with the independent nature of the advice provided. Ban of third party inducements for the intermediary providing independent advice would consequently be envisaged."
Comments regarding specific questions in the consultation
We believe that it is important to ensure that non-advised sales of insurance products in certain situations would remain possible, such as when advice is not requested by the customer or where the product is standardized or designated through collective agreements between the social partners. Appropriate information requirements would of course apply also in these situations.
Since insurance undertakings are liable for their agents, we feel that the IMD requirements for agents could in some cases present an unnecessary burden for supervisory authorities and insurance undertakings, without the corresponding benefits for consumers. It could for example be considered to abolish the registration requirement.
Our view is that the future EU regulation in this area should respect the diversity of insurance markets and distribution channels in different Member States. The high level of consumer protection in EU member states with a long tradition of strong consumer protection rules should not be jeopardised. Fundamental differences in distribution channels´ status, roles on the market and risks to consumers should be taken into account. The rules need to be adapted and applied in a proportionate manner depending on the status of the market player in question.
The future EU legislation on insurance distribution should consist of high level principles on conflicts of interest and remuneration. In particular, the Associations urge the Commission to introduce effective high level principles that will reflect the independent nature of brokers as an important distribution channel for insurances. The future rules must ensure the objectivity of brokers' advice. This is essential in order to restore consumer confidence in the markets and to stimulate strong and fair competition between and among the distribution channels.
In our view, the Commission should focus their efforts on introducing a minimum level of strong consumer protection rules across the EU that will ensure the fair treatment of consumers regardless of the channel by which an insurance product is sold. The detailed implementation of these high level principles should be left to the discretion of the Member States.
The Danish Insurance Association Latvian Insurers Association
Estonian Insurance Association Finance Norway
Federation of Finnish Financial Services The Swedish Insurance Federation