Belgian IDD legislation voted into law
The legislative proposal implementing the EU Insurance Distribution Directive (IDD) has been approved by Belgian Parliament on 14 November 2018. The Belgian IDD law will enter into force 10 days following its publication in the Belgian State Gazette, which is to be expected shortly.
The legal framework of IDD is aimed at strengthening consumer protection and harmonising the rules on distribution of insurance products by introducing a “MiFID-style” regime for the insurance sector. While the Belgian insurance sector has already become subject to AssurMiFID, the rules imposed by IDD will nevertheless add an additional layer of regulatory complexity, while at the same time tweaking some of the recently introduced AssurMiFID requirements.
The present newsletter provides a brief overview of some of the key novelties of IDD, based on the newly approved legislation.
What is new in IDD and how will it impact business operations?
- Towards a level playing field. IDD aims to create a “level playing field” between all players distributing insurance products, irrespective of the distribution model that is being used. As such, it applies to both insurance intermediaries (brokers, insurance agent), as well as insurance undertakings operating through direct distribution.
- Interaction with IMD, AssurMiFID, MiFID II and PRIIPS. A clear point of attention relates to the interaction of IDD with other key pieces of legislation. In summary, IDD is set to replace the existing Insurance Mediation Directive (2002/92/EC). In addition, the Belgian legislation implementing IDD will (as the case may be) update, supplement and consolidate the existing AssurMiFID rules. In respect of MiFID II, it is relevant to point out that while IDD has a different scope of application, the conduct of business rules of IDD have been largely aligned with those of MiFID II in order to avoid the occurrence of regulatory arbitrage. Lastly, both IDD and PRIIPS cover insurance-based investment products (IBIPs), whereby the PRIIPS KID will continue to be used as information document alongside IDD. IDD will provide for a number of additional requirements that are specific to the IBIPs.
- Product oversight and governance. Perhaps the single most important novelty from the viewpoint of business operations is the requirement for the manufacturer of an insurance product to put in place appropriate policies and procedures to manage the development, approval and evaluation of a new insurance product (as well as significant adaptations to existing products). As a central feature, a manufacturer will need to identify a “target market” for a particular insurance product, and make sure that the features of the insurance product are consistent with the needs of its target market. In addition, the manufacturer will need to define and monitor the distribution strategy of the insurance product, as well as evaluate its performance. This exercise will require a regular interaction between the manufacturer and the distributor.
- Customer information requirements. IDD also aims to enhance transparency and the flow of information towards the customer, both during the pre-contractual phase and over the lifetime of the insurance relationship. For non-life insurance products, information will be made available through a standardised insurance product information document (IPID). In case advice is given concerning the suitability of an insurance product, the (potential) customer will be provided with a so-called “suitability statement” (including, where applicable, a periodic suitability testing). Lastly, IDD also imposes a regular reporting obligation towards the customer which will normally replace the obligation related to the actual Belgian reporting under AssuMifid, but with another content and a restriction of scope (only IBIPs). While some information requirements were already previously introduced as part of AssurMiFID, others will be new to the insurance market.
- Inducements. Inducements under the IDD regime are conditional upon not having a detrimental impact on the quality of the service. This is a less stringent rule in comparison with the AssurMiFID rule which provided that inducements must contribute to a better quality of the service provided to the client. In addition, IDD only requires transparency about the nature of the remuneration, as compared to transparency about the nature and the amount under the current AssurMiFID regime. Furthermore, insurance companies are required to provide transparency about the type of compensation provided to employees active in the distribution process. Finally, the sector is requested to establish a “black list” of prohibited inducements and to establish certain criteria enabling to determine whether or not the inducements are acceptable.
- Professional knowledge and competence. IDD also aims to strengthen requirements relating to professional knowledge, expertise and reliability, which are also extended to employees of (re)insurance companies that engage in direct distribution. (Re)insurance intermediaries and certain employees of (re)insurance companies involved with the distribution process will have to comply with continuing professional training of at least 15 hours a year (up from 30 hours per 3 years for agents and brokers, and up from 20 hours per 3 years for sub-agents). IDD also details the minimum professional knowledge and competence that is needed, depending on the type of risks covered. The precise rules will be further specified by Royal Decree.
- Cross-selling. Whereas Belgian legislation currently as a general rule prohibits cross-selling (i.e. the joint offering of products or services where one element is an insurance product), IDD leaves additional room for cross-selling provided certain conditions are met.
- Exemptions for professional clients and large risks. The Belgian legislator used the possibility offered under IDD to make a distinction between professional and non-professional clients. Consequently, insurance distributors will not be required to provide professional clients with certain information (e.g. regarding inducements or in relation to insurance-based investment products). In addition, certain obligations do not apply to large risks insurance (e.g. the IPID delivery requirement).
- Ancillary insurance intermediaries. IDD sets out a clear legal framework (including a registration requirement) for ancillary insurance intermediaries that perform distribution activities as an ancillary activity. Furthermore, the directive specifies that even in case ancillary insurance intermediaries fall outside the scope of the IDD ruleset, a minimum number of information requirements still apply. The new IDD legal framework will also capture existing ancillary insurance intermediaries that were previously excluded from AssurMiFID. For those ancillary insurance intermediaries a transitional regime will apply.
How to prepare and how we can help
With entry into force now around the corner, it is clear that for insurance undertakings and intermediaries the time to act is now, whereby particular attention is likely to be needed in any or more of the following areas:
- performing a gap-analysis between current practices and the new IDD framework;
- preparing and/or updating documentation;
- reviewing existing internal policies and procedures and putting in place a product oversight and governance procedure.
Our team of experts is available to support you in analysing particular business needs and to advise you on a specific implementation process.