25 th February 2011

Transcription

1 European Commission B-1049 Brussels 25 th February 2011 Sirs, IMD2 consultation The Association of International Life Offices 1 ( AILO ) is grateful for the opportunity to comment on the European Commission s Consultation on the Review of the Insurance Mediation Directive ( IMD2 ). 1. Introduction to AILO AILO represents the interests of a number EU/EEA and other life insurance companies, many of which are members of internationally recognised groups. AILO members market life insurance contracts in the EU/EEA and in other regions of the world. The customer base encompasses residents in EU/EEA States, international and European expatriates and also the international business community. Operating either on the basis of the EU s freedom of services or branch passport, AILO member companies make full use of possibilities offered by the EU Insurance Directives. In 2009, we estimate that AILO member companies received premiums within the EEA totalling 10 billion. AILO members have over five million policyholders comprising EU nationals either in their home country or working in another Member State. Member companies are responsible for nearly 80 billion of policyholders monies. Each year, they write substantial new premium income in Europe, providing policyholders with choice, security, transparency and value. For further details please see our website: 2. Introductory remarks on IMD2 AILO supports the IMD2 initiative. Our main points are set out below. Legislation which restricts the ability for gold-plating by States. All distributors to be subject to the same requirements of professional standing and disclosure requirements. Freedom for both intermediaries and their clients to choose the remuneration model that best suits their needs and for the client ability to pay in the interests of consumer choice. Need for clarity on the registration requirements for any person who will carry out insurance mediation activities. 1 AILO s registration number on the European Commission s register of Interest Representatives is Secretariat: P.O. Box 1747 L-1017 Luxembourg Grand Duchy of Luxembourg Telephone: Telefax: secretariat@ailo.org website: Registered Address 3rd Floor Natwest House, Le Truchot, St Peter Port, Guernsey, GY1 1WD, Channel Islands

2 Need for clarity in regard to passporting particularly on a Freedom of Services basis and distinction between acting under that licence and registration requirements. The requirement for the definition of an insurance PRIP. Recognition of the specificities of insurance PRIPS (in particular nature of unit linked insurance policies) when considering ability to compare with non insurance PRIPS. I attach our replies to the questions raised in the consultation. Thank you for reviewing our comments and please contact me (john.beaney@skandia.co.uk) with any enquiries you may have. Yours sincerely, John Beaney Deputy Chairman Association of International Life Offices 2

3 Section A It would appear logical to require similar requirements from insurance undertakings and insurance intermediaries where distributing insurance policies, taking into account the specificities of existing distribution channels Q A.1 Do you agree with the Commission services general approach outlined in the box above? Should information requirements as contained in Article 12 of the IMD be extended to direct writers taking into account the specificities of existing distribution channels? In general, AILO believes that these requirements should apply to all distribution channels, including direct sales, in order to achieve maximum consumer protection. However, to avoid unnecessary administrative burden on competent authorities, States could provide that insurance undertakings will register their direct sales persons provided: (i) the information is kept constantly up to date; (ii) it is available for inspection by the public; and (iii) it is referred to in the information requirements in Article 12.1.(b). As stated in answer to question E.2, the same professional requirements should apply to this distribution channel. Q A.2 Should the exemption from information requirements for large risk insurance products as laid down in Article 12(4) of the IMD be retained? Please provide reasons for your reply. Although its members are only providers of life insurance and pensions, AILO considers that the provisions of Article 12 should apply to all insurance and reinsurance products. However, the exemption for large risks under point 4 should be retained as this category of insurance does not involve retail consumers and does not create the same need for information and consumer protection. Q A.3 In the context of the information requirements for the mediation of insurance products other than PRIPS, do you think that the possibility for member States to impose stricter requirements should be maintained? Please provide reasons for your reply. AILO believes that harmonisation of distribution and mediation rules should be at European level and so avoid gold-plating by Member States and facilitate cross border mediation activities. Q A.4 In the context of the information requirements, do you think a definition of advice should be introduced? Please provide reasons for your reply AILO would support the introduction of a definition of advice. Article 12 already refers to advice in Articles 12.1, 12.2 and 12.3 and clarity in that aspect can only be positive for practitioners and consumers alike. Q A.5 If you think that a definition of advice is needed for the mediation of insurance products other than PRIPS, would a definition similar or identical to the definition in MiFID be appropriate? Please provide reasons for your reply. The definition introduced under MiFID centres around the notion of personal recommendation, either on request from the client or at the initiative of the (investment firm), which AILO believes is highly appropriate in a life insurance (PRIPs and non-prips) context. AILO would recommend that the definition include the notion of personal circumstances of the client, perhaps expanding upon the current wording of Article The responsibility of the distributor should not extend beyond information that has been provided by the client, so that it should be permitted for a distributor to sell a product with either no advice ( execution only ) or advice based on limited information so long as that is clearly stated and agreed to by the client. 3

4 Q A.6 Do you consider that certain insurance products (other than PRIPS) can be sold without advice? If yes, which products would you have in mind and how could possible detriment for consumers be mitigated? As indicated in answer to question 5 AILO supports freedom for an individual to decide whether or not advice is wanted. Currently many everyday insurance products such as domestic buildings and contents, motor and holiday insurance are purchased through the internet. We believe that the key is adequate disclosure by the provider not only of the benefits but also of the risks and exclusions from the cover to be provided. Similarly, as stated in answer to question 5, a distributor should be able to sell his client a particular insurance product if the client asks for that and does not wish to receive any personal information or seek advice. Again, the key is disclosure, in particular that the client agrees that: (i) no advice has been given; and (ii) the distributor is not in a position to know if the product is appropriate to the client s situation. Q A.7 What practical measures could be envisaged for reducing the administrative burden in this area? Section B We believe that the use of common templates by member states irrespective of the distributor being an intermediary or a direct sales insurer with, so far as practical, common requirements would aid consumers and distributors. Q B.1 What high level principles would you propose to effectively manage conflicts of interest, taking into account the differences between investments packaged as life insurance policies and other categories of insurance products. Principally AILO considers that any standards developed for the management of conflict of interest should be applied to all forms of insurance products. However, it is accepted that there are additional considerations applicable to insurance PRIPS. The prime objective from AILO s perspective is an informed consumer making an informed decision. When it comes to conflict of interest, even if only potential, as part of the sales process full disclosure and transparency should be mandatory. Interpretative rules are required to narrow the scope of divergence on implementation by member states. Q B.2 How could these principles be reconciled for all participants involved in the selling of insurance products? AILO has consistently stated that the prime objective should be full disclosure of the full costs of an insurance product, including the distribution costs, to enable the consumer to make an informed decision. AILO considers that, in order to enable comparison between different non-prip insurances, an information sheet along the lines of a simplified KIID should be devised. There is at once a potential difficulty: many intermediaries are remunerated by payment of commission from the insurer, whereas, in direct sales, the insurer may remunerate in the form a salary or, for example, part salary, part commission or bonus. AILO does not accept that remuneration by commission necessarily leads to bias. Bias can arise if an insurer offers enhanced commission for a product to encourage sales. But, in any event, the direct sales person is always biased all the more so if they are under pressure to meet sales targets. 4

5 It is also important that direct sales by other means such as advertising or through the internet are required to show the total costs in a similar format to aid comparison. Otherwise the consumer could assume that, as there is no direct contact, the product must represent better value for money. Q B.3 Do you agree that the MiFID level 1 regime could be regarded as a starting point for the management of conflicts of interests? If not please explain why. AILO agrees that the MiFID level 1 regime offers a starting point. Q B.4 How can the transparency of remuneration in the sale of non-prips insurance policies be improved for all participants involved in the selling of insurance products, taking into account the need for a level playing field? As indicated in answer to question B.2, AILO fully supports transparency of the impact of remuneration for all insurance products. While the PRIPS initiative should enable the consumer to be able to gauge the effects of remuneration through illustration of potential returns, the same does not apply to other insurance products where there is no investment return. The consumer is simply presented with a statement of the extent of cover; exclusions; and the amount of the premium. Using the simplified KIID the distributor should at least disclose the basis of their remuneration. Further considerations would apply where the sales person was one of a number of entities within the chain of a network or associated with a wholesale intermediary. For example disclosure of the existence and responsibility of a network or wholesale broker and the fact that others apart from the face to face intermediary would receive remuneration. Q B.5 Do you agree that all insurance intermediaries should have the right to be treated equally in terms of structure of their remuneration, e.g. that brokers should be allowed to receive commissions from insurance undertakings as insurance agents? As AILO has consistently maintained, it should be an enshrined right and freedom for the consumer and the intermediary to agree upon the form of remuneration that best suits their requirements, whether commission, fees or a combination and whether immediate or payable over a period of time. AILO considers that the Finnish model has demonstrated the fallacy of the commission is biased and bad for the consumer argument, since independent intermediaries have all but disappeared. Most have become tied agents or left the industry. The result is a reduction in the availability of advice (i.e. advice only for the wealthy) and almost certainly a market which will see less innovation because, in the absence of pressure from an independent intermediary sector, insurers having little or no need to innovate. As AILO has previously indicated to the Commission, research by a number of well respected organisations points to the consumer detriment of a commission ban and, to the best of AILO s knowledge, no research has identified an overall consumer benefit from such a ban. AILO urges the Commission to avoid consumer detriment, which a ban on commission would cause, and to affirm that full disclosure - and not the form of remuneration - is the fundamental objective. The Commission should only consider a restriction on freedom of choice in the form of remuneration if thorough, independent research, based on a cost benefit analysis, indicates demonstrably and unequivocally, that to do otherwise would be wholly to the detriment of the consumer. 5

6 Q B.6 What conditions should apply to disclosure of information on remuneration? AILO believes disclosure should be mandatory and must be pre-sale as indicated in answer to question B.4. For non PRIPS insurances, a simplified KIID is a possible vehicle for disclosure of the identity and status of the intermediary (broker, tied agent or network or bank employee), total charges and earnings from the sale of the product. Q B.7 What types/kinds of remuneration need to be included in the information on remuneration? Section C All forms of earnings need to be disclosed, for example: hard and soft commissions; second level commissions payable through influencing the investment placement for unit-linked insurance PRIPS; subsidised benefits such as office accommodation, telephone services, internet services, travel, conventions, bonuses, etc. payable to bank or network employees are all forms of remuneration. Agreement on how these forms of earnings should be defined and disclosed is needed at European level. On-going commission, such as trail or renewal commissions, should also be disclosed with the explanation that such future regular payments are conditional on the intermediary continuing to provide services to the policyholder and their changing circumstances. Q C.1 In order to guarantee a real level playing field between all participants involved in the selling of insurance products, to what extent should the current IMD requirements also be applicable to direct writers and their employees? Please specify which particular requirements should apply and reflect on the particularities of direct sales with examples (how, where, and under what circumstances etc.) AILO considers that the second paragraph of the definition of insurance mediation in Article 2.3 should be deleted or amended to make clear that direct sales is considered to be such mediation. Articles 3.1 and 3.3 would need to be amended to include direct sales, though, as noted in answer to question A.1, it may be appropriate for registers to be maintained and made public by the direct writing insurers. Articled 4.1, second paragraph would need to be mandatory and the same knowledge and ability requirement should apply to all distributors, It should not be left to the insurer (or, indeed, individual states) to decide what the standards are as this will undoubtedly lead to abuse and regulatory arbitrage. Articles 4.1, third paragraph and 4.2 would need amendment to include direct sales and 4.3 would also need amendment to enable direct insurers to carry professional indemnity/pi insurance for their employees. Of course, not all the provisions of Article 4.4 would apply to direct sales. Article 7 would need consequential amendments. Finally, Article 12.1 (e) would need to be extended to cover informing the customer if the distribution was direct sales; in other respects the obligations would be as stated there. Q C.2 A lack of clarity about the scope of the IMD could lead to unnecessary administrative burden. What are the possible clarifications that could be brought to the current scope of the IMD in this respect? AILO believes that the underlying principle for IMD should concentrate on the activity being carried out. The definition of insurance mediation should be refined to include comparison websites as an introducer. AILO also believes that every natural person who carries out insurance mediation should be registered by the competent authority in their State of residence and so satisfy the professional standards irrespective of any legal person or organisation on whose behalf they may carry out mediation. This is of course in addition to the requirement that all legal persons are registered. While we believe this is the import of the 6

7 current text our members have concerns that this may not always be observed by intermediaries and competent authorities and indeed there may be different interpretations in the market place. AILO believes that with such clarifications, the status e.g. independent intermediary; tied agent; subagent; network member; direct sales, becomes irrelevant so far as the need for registration is concerned although clearly it is relevant to matters such as responsibility. By making these fundamental requirements clearer then it seems to us that there can then be no doubt as to the status of any legal or natural person. Another major concern to AILO members is the position of passporting intermediaries who are legal persons and the status of natural persons who they employ in other States to carry out insurance intermediation - a situation perhaps not foreseen at the time of the original legislation. For example members have concerns that some intermediaries registered in one member State are holding out nonregistered individuals resident in another State as their agents, on the basis that they are employed by the intermediary in the other State As such they do not need to be registered, or cannot be registered by the employing intermediary s competent authority and are not required to be registered by the authority in their State of residence. This view seems to rely solely on the employer s licence and ignore the explicit wording of first paragraph of Article 3.1 IMD. We do not believe this can be the legislative intent for this would render consumer protection potentially meaningless. For employees of non passporting intermediaries the consumer should be able to check from the authority s website under the entry for the employer that the individual is indeed registered. To achieve the same result in the case of passporting intermediaries would seem to require co-operation between authorities and ideally reference in the employee s home State register that he is employed by an inward passporting firm. We appreciate that this may impose additional administrative burdens on competent authorities but firmly believe that without a solution to this situation the aim of consumer protection will be endangered. C.3 What conditions/reasons for exemption fromimd2 should be in place taking into account the need to ensure legal certainty and consumer protection? AILO favours retaining the current exemptions from IMD.. Q C.4 Should a website or a person who just gives information about insurance fall under the scope of the IMD? How could the boundaries be more clearly defined in respect to insurance intermediation? Comparison tool providers can have a significant impact on customer (and intermediary) choice and comparison websites (that have links to insurers websites) should be treated as introducers. Having a definition of advice may assist in distinguishing between recommendations and information. For example, a financial journalist may write articles pointing out the benefits of a particular type of insurance policy purely in a factual, informative manner; this should not be insurance mediation. If another financial journalist writes an article about a particular type of insurance policy and either implicitly or explicitly directs readers to insurer X, then that could be insurance mediation - unless the revised IMD includes a definition requiring a personal recommendation rather than general recommendation. An employee of an insurer who answers questions from, or deals with a policyholder factually, should also not be considered as carrying out insurance mediation. Only persons specifically employed by the insurer to carry out that activity as their occupation should be within IMD scope. Finally consumer organisations may give specific advice to clients about existing policies, sometimes with detrimental results, and AILO consider that these organisations should be subject to the same professional and registration requirements in such circumstances. 7

8 Q C.5 Do you have examples of activities which, in the majority of Member States, fall under the IMD but which you believe should not be covered, such as sales of certain insurance products by car rental companies? Or conversely, do you have examples of activities which currently do not fall under the IMD but which should be covered? Please see the comments under C4 regarding journalists and consumer organisations. Q C.6 Which particular requirements stemming from the Directive on the Distance Marketing of Financial Services (DMFS) need to be taken into account in IMD2? How does the definition of supplier in the DMFS Directive affect the definition of insurance intermediation? Section D It would be helpful to clarify that, if an intermediary assists at some stage in the conclusion of a contract between consumer and insurer, then that contract will not be considered a distance contract. The definition of a supplier requires the contractual provision of services subject to a distance contract. As such, it will clearly apply to direct sales by advertising and internet. Equally, it would seem to apply to internet brokers. It would not seem to apply to comparison websites for they will not so far as the consumer is concerned be a contractual provider of services. Q D.1 Do you agree with the inclusion of the definition of the freedom to provide services (FOS), as laid down in the Luxembourg Protocol of CEIOPS, in the text of the IMD? Yes - but as stated in answer to question C.2, the Commission should consider, for example, 'Network structures' where the network centre is in one territory and its agents 'employed' or 'self-employed' are selling for the network in other territories. Clarity is required in order for intermediaries and product providers to understand who needs to be regulated where. The network members could be individuals (employed or self-employed), or corporates. It would also be helpful to clarify the position and passporting requirements if an intermediary uses the internet. In particular under what circumstances will the intermediary be considered to be carrying out mediation in another member State. Q D.2 Is there a need to further clarify the rules regarding freedom of establishment (FOE) and integrate these rules in the IMD? Yes - particularly in the 'Network structures' mentioned above in our answer to D1. Q D.3 How can the notification process be made more efficient and useful? On notification the host competent authority should supply the intermediary with the local disclosure requirements applicable to the intermediary, including, for example, copies of a consumer code if relevant. The host State competent authority should also: (i) notify changes to these requirements to intermediaries who have exercised passport rights into the host State; and (ii) maintain lists on the host State authority s website of those who have notified exercise of passport rights (this currently happens in some States, but not all, and would act as a double check as not all authorities up-date their sites promptly). Intermediaries should also be required to notify Host States when they cease carrying on mediation activity on the host State s territory. 8

9 Q D.4 Do you agree that further rules on FOS and FOE should be included in a revised IMDF in order to provide more legal certainty? Yes - see point above in D1 in relation to Networks. While not directly and obviously related to the question, some members have found some intermediaries have put PI insurance in place in order to meet the initial regulatory requirements, but, as the local competent authority does not check systematically thereafter, they have let it lapse. Home state competent authorities should require a copy of renewal certificates annually and it should not be left to insurers to act as their policeman. Insurers should not face sanctions if an intermediary, although registered, is later found not to have current PI cover. In this respect, AILO emphasises a broader concern, namely the extent to which competent authorities carry out supervision: given that the authorities require registration, policyholders and insurers assume that the authority also supervises the intermediaries; all interested parties suffer harm if the authority does not ensure this implicit outcome of the IMD. In practice, regulation varies greatly from State to State. Most regulators do not appear to be have sufficient staff to carry out the oversight required, and some are trying to push such oversight onto the product providers. This, of course, cannot work as conflicts of interest enter into the relationship. Regulators need to assume this responsibility and ensure that the 'quality mark' afforded by the regulated status of intermediaries actually has real significance. Currently a consumer may well believe themselves to be in safe hands when selecting a 'regulated adviser' - but if that regulation means very little, it is misleading and gives consumers a false sense of security. From the insurer s perspective the only independent check it can (and does) make is against the regulatory record to ensure the intermediary remains registered. If that information is not kept up to date electronically in real time (ideally in the local language and English) then consumers and insurers are potentially harmed. In sum, it cannot be reasonable for an insurer to be considered the unpaid policeman for the regulator and also to potentially face sanctions retrospectively if an intermediary is belatedly removed from a register. Q D.5 Are there any issues with regard to the general good rules in relation to the cross-border dimension of insurance intermediation? If so, please provide further details. A practical issue that can be faced by passporting intermediaries is inconsistent interpretation of the applicable general good (conduct of business) provisions by regulators. For example regulator A may insist that intermediaries it regulates apply its Home State general good provisions if of a higher standard than State B s where the intermediary is carrying out passporting activities. A more complex situation could be an intermediary registered in State A passporting on a FoE basis into State B and then also passporting from State B into State C. The intermediary finds the requirements in each state different and so which should apply? We would suggest that logic points to the requirements in the State where the policyholder is resident. Q D.6 What problems do insurance intermediaries face today when selling cross border? How should the IMD be amended to improve the conditions for FOE/FOS activities? They face the same problems that insurers do in keeping up-to-date with changes in host State rules - they are not included systematically in consultation notifications and not usually included in notifications when changes occur. They can therefore easily find themselves non-compliant until they do discover such changes. To keep a watch on all territories is very costly, and economically inefficient if every intermediary has to pay separately for such a watch. The key stage at which intermediaries should be included is the consultation stage, since this stage is a warning of impending change. However, if there is no consultation, then any changes should be notified to those intermediaries known to the regulator as doing FOS or FOE into their territory. 9

10 Q D.7 Would the integration of the CEIOPS Luxembourg Protocol clause on mutual recognition in a revised IMD be useful in this respect? We do not consider that integration of that clause will provide sufficient certainty for either intermediaries or competent authorities. Reliance on Title III Chapter I of Directive 2005/36/EC on mutual recognition of professional qualifications would not appear to offer certainty for intermediaries as it is written in extremely broad terms and requires much cross referencing. As to exactly which category the activity falls within often seems to be a difficult question of judgement. There are currently many different categories of intermediary across Member States and potentially different professional standards applicable to them, which would make integration all the more difficult. As commented in question E.1, more clarity for consumers and all actors could be achieved if IMD2 were to concentrate on the activity rather than the distributor s description and whether it is the main or secondary activity. It is also relevant that insurance mediation covers a vast potential scope, as will the extent of experience and qualification necessary to perform the activity. For example products such as unit linked life insurances and marine insurance are complex and they warrant more extensive knowledge and experience than, for example, domestic building and contents insurance. It is probable that these differences are recognised by competent authorities in their domestic professional requirements so restricting the mediation activity that can be performed without further qualification. It is our opinion that the best way to achieve certainty is to include mutual recognition provisions within the revised IMD to take account of the particular nature and complexity of the activities rather than the description of the distributor. The provisions of the repealed Directive 1977/92/EEC could provide a useful starting point. Alternatively and subject to the points discussed under question E.1, development of a European Professional Card as mooted in the discussion paper on the Professional Qualifications Directive could have merit for consumers and intermediaries (subject of course to the existing passporting rights requiring only Home State qualification). Q D.8 Could provisions similar to those contained in the E-Commerce Directive regarding an appropriate and transparent use of the general good rules be integrated into the IMD2? In principle AILO believes that such an approach could be beneficial in giving greater certainty beyond that provided currently by the Commission Interpretative Communication 2000/C 43/03. AILO would be concerned though that use of generalised expressions such as protection of consumers including investors would leave scope for gold plating. An example would be remuneration of intermediaries. As indicated in the answer to question B.5 AILO believes that, subject to adequate disclosure, consumers and intermediaries should have freedom to mutually agree the remuneration basis best suited to their needs. AILO understands that in a recent letter to an intermediary on behalf of M.Barnier Internal Market Commissioner, it was stated that the UK regulator could not impose its qualification requirements on passporting intermediaries or its proposed ban on payment of commission. In response, the UK regulator has stated it will include such provisions on remuneration in its conduct of business rules in other words, general good requirements. Many others may not share this interpretation of general good and, in fact, this interpretation is not demonstrably in the consumer s interest. We would suggest such practices be permissible only following adequate research, including cost benefit analysis. 10

11 Q E.1 What high level requirements on the knowledge and ability of all participants involved in the selling of insurance products would be appropriate in view of the existing differences in the applicable qualification systems in the Member States? AILO considers that IMD2 should include minimum knowledge and ability requirements which are consistent across all Member States for the particular activities to be carried out. These should apply to all persons carrying out mediation activities irrespective of whether the activity is the main or secondary activity. They should also apply to: self employed persons; employees of intermediary companies; tied agents; sub-agents and direct sales persons of a direct writing insurer. It may be necessary to include grandfathering provisions so that persons with an agreed number of years experience and continued good repute are automatically treated as qualified. It should also be recognised that, because of their complexity, certain forms of insurance and their attendant mediation require higher standards of knowledge and experience. AILO believes that the establishment of pan European mediation qualifications is the only way to ensure consistency of standards which will be in the interests of consumers and the industry. Logically these would have to be offered by either organisations founded by the insurance industry itself or commercial organisations which may exist today. The examinations and pass levels would need to be vigorously monitored to ensure consistency and that sufficiently high standards were maintained. It is also essential to impose continuous professional development. Taxation, consumer protection and many other subjects constantly evolve; intermediaries must demonstrate to the competent authorities that they monitor and understand these developments. Agreement on standards may be difficult to achieve but without agreement the existing, fragmented situation will continue as also referred to in question D.7 above. This may also encourage intermediaries in a member State with lower standards to passport on a Freedom of Services basis into one with higher standards in the knowledge that the standards will not apply to them. Q E.2 Should these requirements be adapted according to the distribution channel? If so, how? AILO does not believe that different requirements should apply to different distribution channels. While this is a complex issue, AILO believes it is fundamental in order to obtain consistency and a level playing field, and avoid regulatory arbitrage. The same qualification requirements should be standard. So, if for example an independent intermediary has to pass an examination of the independent XY organisation then the direct sales equivalent person should also have to pass the same examination of XY organisation. If that is not the case then we do not see that there can be a level playing field. Should it be decided, despite the merits of integration, to maintain the existing position then AILO would strongly recommend that competent authorities recruit sufficient staff to closely monitor the methods and standards adopted by direct sales providers, including continuous professional development, and that this information be published to enable comparison of the standards between different distribution channels. 11

12 PRIPS Q 1 What practical challenges do you think should be addressed when drafting new legislation on the distribution of insurance PRIPS? The first challenge is to ensure, as AILO has set out in its response to the PRIPS consultation paper, that there is precision as to the definition of an insurance PRIP. AILO suggests as a starting point the following high level definition: An insurance PRIP is a policy other than a pure protection policy where the amount payable to the policyholder or beneficiary is exposed to fluctuations in the market value of assets or payouts from assets, through a combination or wrapping of those assets, or other mechanisms than a direct holding This should ideally be accompanied by examples of what is and what is not an insurance PRIP within a non-exhaustive list. Without this list, it will be difficult to differentiate clearly between two types of insurance products and could lead to arbitrage. It will be important to ensure that new legislation does not duplicate existing requirements of, in particular, the Consolidated Life and Solvency II Directives. As stated in AILO s submission on the PRIPs consultation paper, unit-linked insurance policies are facilitators for PRIPs. The legislation needs to clearly differentiate between: (i) unit-linked policies (where the client can choose from two or more funds or assets) and other insurance policies which will be PRIPs such as with profits and traditional policies; and (ii) unit-linked policies where the client can only link to a single fund. For these latter contracts, the insurer should be responsible for providing the necessary PRIPs pre-contract disclosures additional to the existing Life Directive requirements. For the unit-linked policies with a choice of two or more funds, the insurer should be responsible only for producing PRIPs disclosures in respect of its own internal unit-linked life funds to enable the intermediary to advise their clients. It should be the responsibility of the intermediary to provide information and advise on external funds and other eligible assets. In sum, the distributor should be responsible for ensuring the client receives the relevant disclosures, including, in the case of a unit-linked policy, any relevant disclosures in respect of the assets the client chooses to use as links for the policy benefits, such as UCITS KIIs. Q 2 What are the most important practical issues to be considered when applying the MiFID benchmark to the selling of PRIPS? The first practical issue is how to ensure that the required PRIP disclosure enables the consumer to understand that there are added benefits and risks of an insurance PRIP which need to be considered - not simply the costs displayed as against the cost of a non-insurance PRIP. A requirement for the total costs of product and distribution to be disclosed should enable the consumer to reach an informed decision based on all the relevant facts, not just investment. If the consumer has face-to-face contact with a distributor, then irrespective of the status and distribution channel AILO considers that the same principles should apply: the distributor should be required to advise based on the information the consumer provides (including their demands and needs) and including information on their investment objectives and knowledge and experience of the type of PRIP proposed. The ultimate responsibility for the advice will lie with the insurance undertaking in the case of tied agents and direct sales. 12

13 Some sales might occur where advice is not required, i.e. execution only, or where the consumer gives no or limited information. In such cases it should be a requirement for the consumer to confirm that either no information, or limited information, has been provided. In that event the distributor is unable to assess the suitability of the product for the consumer s needs. It might also be helpful to have provisions relating to products which are not generally available to the retail consumer so called sophisticated investor funds. Rules might prescribe additional disclosure requirements or, more apt, consumer acceptance of the additional risks such funds may present. An alternative approach could be that adopted in for example the USA and Singapore of the accredited investor using an income/wealth parameter to decide availability of the investment. It will also be necessary to include distance contracts between consumers and insurance undertakings to ensure the same provisions on disclosure and provision of information apply. AILO does not advocate imposing restrictions on the ability of the consumer to transact in this manner, but it might be prudent to impose requirements for additional consumer protection warnings. Such contracts are complex, long-term and require advice for many reasons, including, for example, taxation, investment choice and succession planning. Without advice, consumers could very easily purchase policies which, rather than solve their financial planning needs, actually create unnecessary future tax liabilities. In regard to remuneration (see answers to questions 4 7) the key is disclosure of the total costs of the product including the costs of distribution. As indicated, there will need to be agreement as to precisely what is viewed as distribution costs across the different distribution channels. On that basis, AILO concludes that an intermediary face-to-face with the consumer need not declare more than the basis of remuneration or at most their share. Future legislation should provide that any conflict of interest is managed, failing which the conflict must be disclosed to avoid damage to the client s interests. Articles 12.1.(c) and (d) already require disclosure of potential conflict of interest in respect of intermediary ownership of holdings in insurance undertakings and vice versa and would appear adequate. Provided full disclosure is made then it is for the client to decide whether to proceed with the transaction in the light of that disclosure. For example if the intermediary discloses that, if the client links the policy benefits to a particular collective fund, he will receive a payment from the fund manager that should be permitted. Likewise if the intermediary advises that the PRIPs insurance contracts of insurers A and B are both equally suitable for the client s needs but, if insurer B s policy is chosen, then the intermediary will qualify for a sales convention, that should be permitted. 13