Commission Consultation on the Review of the Insurance Mediation Directive (IMD)
Response by the Federation of Finnish Financial Services (FFI)(Interest representative ID 7328496842-09)
On 26 November 2010, the Commission launched a consultation on the review of the Insurance Mediation Directive (IMD). This is the FFI's response to the questions in the consultation.
Main objective of the review
We believe that the main objective in the directive review should be to increase the clarity and transparency of the products’ sales as well as making the products easier for customers to understand and compare. The administrative burden of service providers should also not be added to without good reason. Our opinion is that, in order for the Commission’s legislative measures to better attain these goals, the following views should be taken into account in the forthcoming review.
Level playing field
FFI supports the general objective of establishing a level playing field between all market players in the financial sector.Regulation should seek to attain an equal end result for consumers as well as an equal operating environment for all market players, but only to such extent as is necessary, instead of establishing a set of identical rules for all of them.
In our opinion it is fundamental for the review of the IMD to take into account the different natures of distribution channels. Different distribution channels cannot be regulated identically in all respects, and the ideal of a level playing field should therefore not be taken too far. This is particularly apparent in situations where conflicts of interest may arise – for example an insurance company’s direct sales or agent sales are usually unlikely to arouse conflicts of interest.We also believe that the regulation should account for differences in the complexity and risks of products.
The extension of MiFID rules to various insurance products should not be the sole modelwhen developing the conduct of business rules. The MiFID principles have been formulated for a different market with different participants, and include concepts which in many respects are alien to the insurance sector. It is necessary to retain sector-specific regulation in force in the sales of different investment products. The Commission should also justify those specific issues which it believes warrant changes to the principles in insurance sector directives.
Degree of harmonisation
In FFI’s opinion the regulation should be based on minimum harmonisation which takes national differences in distribution channels into account and continues to permitMember States` discretion when they choose how the objectives of the directive are implemented.The more extensive harmonisation of conduct of business rules is not the right means to increase the cross-border sales of services, because the challenges related to cross-border sales are mostly related to issues of culture, language, contract law and taxation.
National regulation can be exemplified with sections 5 and 9 of the Finnish Insurance Contracts Act (543/1994), which determine a generalduty of disclosure and a related responsibility for this obligation (see Appendix 1 for the legal provisions). These general provisions are widely applicable to various insurance products as well as the different distribution channels of insurance companies. An insurance company and its representatives have an obligation to provide the insurance applicant with all the necessary and correct information related to the insurance, unprompted and before the insurance contract is formed. This duty is supplemented by the provision on the consequences of neglecting the obligation: if the insurance provider or its representative neglects their obligation to inform, the insurance enters into force to the effect understood by the policyholder on the basis of the information he/she has received. The insurance company is similarly responsible for the actions of both its own personnel and its agents. In our opinion EU-level regulation of the obligation to informis unnecessary andwould overlap with such national regulation as described above.
Responses to the Commission’s questions
A.1 : We disagree with the suggestion that the IMD Article 12 be extended to direct sales. We regard the provision as generally inapplicable to direct sales situations. For instance, the obligation of fair analysis cannot be extended to direct sales channels, because fair analysis is essentially impossible in such a situation.
A.3 : The directive should be based on minimum harmonisation, see above for our response.
A.4–A.5 : It is unclear what the MiFID definition of ‘advice’ would stand for in the insurance sector. The extension of ‘advice’ in its present form would, in our opinion, be artificial in the insurance sector, as it is not always possible to distinguish advice from the general duty of disclosure.
A.6 : If the commission decides to introduce the definition of ‘advice’ to IMD regulation, we consider it necessary to allow non-advised sales in situations which do not require advising (e.g. in the sales of non-complex products) or in which the customer does not want advice (e.g. in online sales). For instance, the customer doesn´t usually need advice in a situation in which either an agent representing an individual insurance company or an insurance company employee sells a motor third party liability policy, the contents of which areprescribed by legislation.
A.7 : Administrative burden could be reduced by permitting non-advised sales.
B.1–2, B.5 : In FFI’s opinion, the management of conflicts of interest should be based on the fundamental differences in the nature of distribution channels. A broker should be an independent representative of the customer, and the risk that conflicts of interest may arise is larger than with insurance agents or direct sales. An insurance agent is part of the insurance company’s sales network and acts for and on the responsibility of the insurance company. Both consumer and corporate customers should always be aware of what kind of intermediary they are dealing with. It is important to make this distinction, because an insurance agent and a broker have different roles in the insurance market.
Our opinion is that the potential high-level principles of the reviewed IMD should nonetheless continue to allow national discretion in the realisation of the management of conflicts of interest. We consider it of utmost importance to account for national differences in the structures of the insurance market and distribution channels as well as in the regulatory complex of national consumer protection. In Finland the management of brokers’ conflicts of interest has been realised with a ban on remuneration of commissions, which is, in our opinion, an excellent solution to the risk management and transparency of conflicts of interest. For insurance agents and direct sales, conflicts of interest are controlled by the previously mentioned sections 5 and 9 of the Insurance Contracts Act.
European discussion has brought up the assertion that the Finnish remuneration ban has affected the amount of brokers or caused significant decrease in the volume of their premium income. The information given on the consequences of the remuneration ban is incorrect in FFI’s opinion. First of all, it is essential to make a distinction between life and non-life insurance in the discussion. The impact of brokers on the Finnish market has traditionally centred on the voluntary and statutory non-life insurances of corporate clients, and this volume has grown during the past years. This is due to the fact that the operations of brokers in non-life insurance have been genuine brokerage. The volume of brokers’ premiums written has unquestionably decreased in life insurance and statutory pension insurance.[1]In consequence of the 2005 Insurance Mediation Act (Vakuutusedustuslaki 570/2005), the operations of life insurance brokers havesettled closer to the actual nature of their operations, i.e. agency services. Before the new Act, life insurance brokers were often practically tied to companies as agents, even though they operated under the status of a broker and incorrectly advertised their services as independent and unbiased advisors. Now the Insurance Mediation Act has contributed to the change of status of these service providers to match their true nature. We believe that this increases transparency and promotes consumers’ interest, becausethey are no longer misled as for the nature of the intermediary they are dealing with.
B.3 : If the Commission intends to take the MiFID principles on the management of conflicts of interest as a model for the regulation of other products in addition to PRIPs, it must be ascertained that no additional requirements are imposed upon service providers who are under the scope of IMD, compared tothose covered by the MiFID. We consider the obligation to disclose remuneration an additional requirement which is not directly comparable with the regulation of conflicts of interest provided in the MiFID.
B.6 : We do not consider the disclosure of remuneration sufficient regulation that could prevent the potential occurrence of conflicts of interest in the sales operations of brokers. We have previous experience of this from the earlier Insurance Mediation Act that was in force in Finland. The old practice, according to which the remuneration of an insurance broker was charged non-transparently as part of the insurance premium, led to a confusion of roles between insurance agents and insurance brokers. On the one hand, insurance brokers advertised their services as independent specialists, but on the other hand wanted to be comparable with insurance companies’ own distribution channels, such as agents. SME customers and consumers were especially in the dark as for the actual cost of the brokerage service they purchased. Doubts arose on whether all brokers acted with their customer’s best interest in mind, if the insurance company remunerated them without the customer having any knowledge of the size of remuneration.
A customer would often not use their right to receive information on remuneration, and they would have no opportunity to negotiate on the size of remuneration with the broker. An overly specific obligation to disclose information on remuneration is also problematic for insurance company employees and agents. Providing detailed information on the structure of remunerations would not improve the customer’s ability to understand or compare products, which should be the starting point in regulation. Moreover, releasing detailed information on the network of agencies or its remuneration structure could cause competition problems for insurance companies, and could affect the development of their business models. Consequently, this could narrow down the services available for customers.
C.1 : FFI believes that the nature of IMD provisions makes them inapplicable to the direct sales of insurance companies. Such provisions include e.g. the articles concerning PII, notification and registration of insurance intermediaries. Our views on Article 12 are stated under question A.1.
The provisions on professional requirements and good repute are in their present form also inapplicable to company employees. Insurance companies are responsible for the eligibility and proficiency of their employees and agents as well as for any information they discloseat the point of sale. This responsibility is already subject to strict regulation and monitoring. In FFI’s opinion it is very important to preserve the right of insurance companies to make their own decisions on the recruiting and training of its employees and agents, because itis one of the prerequisites for free competition.
Section 9 of the Insurance Contracts Act imposes insurance companies with extensive responsibility for the information its employees and agents disclose in situations which concern the forming of insurance contracts. This provision ascertains that insurance companies see to the sufficient proficiency of their employees and agents. FFI does not support detailed provisions on professional requirements in the IMD. Such requirements are not included in the MiFID, either.
C.2 : FFI believes that the administrative burden and bureaucracy caused by the directive could be greatly decreased by removing the provision which obligates the registration of agents. At the moment, the registration of agents encumbers both insurance companies and FIN-FSA, and due to staff turnover, register changes are required constantly. We suggest that registration be allowed for those agents who wish to provide cross-border services. Another option which could decrease the administrative burden is making insurance companies maintain their own registers of their agents. For example, the registration requirement of tied agents that is decreed by the MiFID has in Finland been realised by imposing the obligation to maintain a register on investment companies (Section 32.5 of the Investment Firms Act [Laki sijoituspalveluyrityksistä] 922/2007).
C.3 : We support the IMD’s current scope of application.
D.2‒3 : We support the facilitation of the process of cross-border service provision.
E : See response to question C.1. The administrative burden of service providers should not be added to as regards the substantiation of professional requirements.
Section 3.2, questions 1 and 2 : On the basis of the consultation, it is unclear whether the Commission intends to establish different regulation for PRIPs and the other insurance products. The Commission’s outlines are very general in nature, and it is not possible to state any specific views on whether the regulation of PRIPs and non-PRIPs products should diverge or not. As its general position, FFI notes that the same general principles should apply to all insurance products, but that the regulation which applies to PRIPs and other insurance products should take into account the differences in the complexity, risks and sales contexts of the products.
The extension of MiFID regulation to the various insurance products should not be held as the sole model when the conduct of business rules are developed. The Commission should analyse the provisions laid out in insurance directives in this respect and investigate whether there are any well-grounded reasons for changing the regulation that applies to the selling of insurance products.
FEDERATION OF FINNISH FINANCIAL SERVICES
Lea Mäntyniemi
[1] FIN-FSA Statistics on insurance brokers can be found at