Demystifying the Insurance Distribution Directive. Part.5: Two months on, what do we know?

The article has originally been published in eprivateclient in English and, in French, in Paperjam. 

By Valérie Mariatte-Wood Associate Director - Head of Regulatory Proposition Lombard International Assurance

The IDD came into effect on 1^st October 2018 and our first key observation is that, despite having been granted more time for implementation by the European authorities, many Member States still haven’t communicated the requisite laws and regulation. As at the middle of November, only slightly more than half of EU Member States had completed the implementation phase. Many countries missed the 1^st July deadline for issuing legislation, although a fair number ensured that the framework was in place for 1^st October. This was however not the case in key markets for Luxembourg undertakings such as Belgium, Spain or Portugal.

 
Our second observation is that we have seen inconsistent implementation, with Member States taking full advantage of the many options available in the Directive. Conduct of business rules were already quite diverse in the Single market (with regimes such as RDR – introduced by the Retail Distribution Review – in the UK, AssurMifid in Belgium and bans on commission for independent distribution in several Nordic markets). These will not generally be displaced by IDD, but in several cases (e.g. AssurMifid) standards will be revised down to dovetail with IDD. While recitals of the MiFIDII directive suggest that investment-insurance should be subject to similar standards as investments (although MiFIDII concedes that it is more appropriate to capture those in a revision of the Insurance Mediation Directive rather than expand the scope of the MiFID Directive to insurance), the IDD has not followed this initial pronouncement. Existing regimes, which had implemented full MiFID standards, are now expected to relax their rules slightly to align with insurance standards.
 

 
Thirdly we’ve seen that in the field of insurance distribution as well as for insurance (manufacturing) itself, the principle of Home State supervision is losing ground to Host State rule. Insurers and intermediaries are of course no stranger to the concept of “general good rules”, and would not entertain providing services in a Member State without understanding the applicable public order provisions. However, until now such rules were typically limited, and in the context of insurance distribution reserved their most salient provisions for independent distribution. Under the IDD, the conduct of business rules relative to establishment become a clear Host State concern and the distributor’s Home State may agree to delegate some of its powers to the Host State. Under the freedom to provide services, the intervention powers of the Host State are also reinforced.
 

It has also become clear that one (MiFID) size does not fit all! A number of requirements introduced by IDD are modelled upon MiFID and the insurance industry has been looking to the investment world for guidance and best practice. But the reality is that MiFID templates (such as the EMT for the Target Market under the product oversight and governance rules) or MiFID questionnaires (such as the questionnaire for assessing the suitability of the insurance-based investment product) cannot be used directly and need adapting. This creates a degree of complexity for banking distribution, which will need parallel processes and tools to distribute investment or insurance products.
 
Finally, we have yet to see whether the IDD will transform the industry or simply aid in its development. Key provisions relative to the criteria for access to the profession and continuous professional development are essential to ensure that customers are served by qualified and up-to-date professionals, but overall the Directive falls short of imposing Europe-wide binding standards in this respect. It does provide a list of subjects to be covered as part of the initial and continuous training, but leaves much to be decided by each Member State. Similarly, despite initial intentions, distributor remuneration will only be disclosed in nature and source, with an on-demand disclosure of the cost of distribution (which will necessarily include the remuneration of the distributor but may also include other elements). This contrasts sharply with initial thoughts towards hard disclosure of remuneration (or even a ban on commissions for independent distribution) and will perhaps have less of a transformative effect.
 

Read all about the Insurance Distribution Directive 
in our "Demystifying the IDD series"