Abu Dhabi Global Market opens consultation to update English law regulations
Out-Law Analysis | 05 Oct 2022 | 10:39 am | 6 min. read
The guidance (30-page / 1.31MB PDF) follows a regulation, published by the European Commission in spring 2021, that requires insurance undertakings and intermediaries to integrate sustainability factors into product oversight and governance (POG). It also requires them to integrate these factors into the conduct of business rules and investment advice for insurance-based investment products (IBIPs).
The POG and IBIP regulations and their amendments affect both manufacturers and distributors of products, but the provisions concerning the integration of durability factors in the POG and the suitability process did not give any suggestions on how to comply with these obligations. The new EIOPA guidance is designed to promote better understanding of how the Commission’s 2021 regulation should be implemented.
EIOPA has made clear that its guidance is not binding and does not prevent national competent authorities from taking a stricter approach to promote consumer protection. Here is a closer look at EIOPA’s practical suggestions.
When explaining the term ‘sustainability preferences’ to customers, insurers and insurance intermediaries should distinguish between the three different types of preference that are listed in the glossary of the EIOPA guidelines:
The EIOPA guidance says insurance distributors should explain what the different sustainability aspects mean, while avoiding technical language and the introduction of new terms or definitions. They should also use explanatory notes included by the EU legislator in the margins of the compulsory SFDR templates. They should present information in ‘layers’ – providing brief explanations in the sustainability preference questionnaire submitted to the customer, and more granular information only if requested.
All insurance distributors selling IBIPs should be able to assess a customer’s sustainability preferences but, for those among them which sell IBIPs promoting environmental or social characteristics or having a sustainable investment objective, a deeper knowledge and specific skills are required.
After explaining to the customer what the preferences are and how they can be taken into account when structuring an IBIP, insurance distributors must then collect sustainability preferences information from customers as part of the suitability assessment.
Information on sustainability preferences should be collected as the last element within the collection of information on investment objectives without, however, preventing the customer from spontaneously expressing their sustainability preferences at an earlier stage of the assessment. If the customer has sustainability preferences, the insurer or the insurance intermediary should ask whether they prefer environmentally sustainable investments (a), sustainable investments (b) or PAI (c). If a customer shows several preferences, it is also possible to offer them a combination of all three.
The distributor should then carry out a ‘deeper’ investigation, obtaining sufficiently granular information to allow them to match with the IBIPs’ features. For environmentally sustainable investments (a), distributors should explain that, from January 2023, there will be two key performance indicators (KPIs) used to assess the alignment with the taxonomy regulation. They should then determine which KPI the customer prefers for their underling investments. KPI 1 shows the extent to which the IBIP is aligned with taxonomy based on all of its underlying investments, while KPI 2 shows the extent to which the IBIP is aligned with taxonomy based on all of its underlying investment except government bonds.
For sustainable investments (b), distributors should ask whether the customer wants their sustainability preferences to have a focus on particular ESG criteria, a combination of them, or whether they do not have any preferences.
In the same way, for PAI (c), distributors should investigate whether the customer is more sensitive to the environmental or social criteria of ESG, and, if the latter, try to obtain their preferences on human rights, anti-corruption or anti-bribery matters using simple ‘Yes or No’ questions.
Once the customer’s preferences are clear, the insurance distributor should then move on to a second investigation step and obtain information on the minimum percentage of investments considered “sustainable” under the SFDR (b) and of investments aligned with the taxonomy regulation (a) – even identifying minimum proportion by standardised percentages. The distributor should also work out which PAI (c) should be considered, including quantitative or qualitative criteria.
For multi-option products (MOPs), distributors should know whether the customer wants all the underlying options offered by the contract to consider the selected PAI or only some (at least one).
If a customer does not have any sustainability preferences, they should be considered as “sustainability neutral” and the insurance distributor should recommend IBIPs both with and without sustainability-related features.
If the customer shows sustainability preferences, but does not determine a preference for (a), (b) or (c), EIOPA suggests putting policies and instructions in place for situations where the customer is not willing or able to make a choice. It also advises distributors to record any sustainability preferences expressed by the customer in general terms, and suggests recommending an IBIP that matches as best as possible the customer’s sustainability preferences. Distributors should always record the reasons justifying these recommendations.
EIOPA specifies that insurance distributors must consider information disclosed prior to the conclusion of the contract and via the insurer’s website, bearing in mind the different disclosure obligations in force on 2 August 2022 and on 1 January 2023 – the effective date of the new taxonomy regulation. Insurers and insurance intermediaries can rank and group IBIPs by:
Insurance distributors should assess MOPs – with regards to (a) and (b) – by checking whether:
When assessing MOPs with regards to (c), distributors should simply consider the PAI’s preferences as determined by the customer.
In accordance with new IDD rules, an insurance distributor should not recommend IBIPs when their sustainability features do not match the customer’s preferences. If an insurance distributor does not have IBIPs whose characteristics fit the customer’s sustainability preferences, they must refrain from advising – as they must in the absence of any other suitability criteria. However, there is an important difference between the assessment of the ‘original suitability criteria’ and the assessment of the sustainability preferences. In the event of a mismatch between an IBIP and the original suitability criteria, the insurance distributor must either refrain from offering the insurance contract or switch to the appropriateness test, providing national regulations allow it. Instead, where no IBIPs meets the customer’s sustainability preferences, the customer can decide to adapt them and thus avoid giving up the advice on the IBIP.
It is now easier to understand the purpose of EIOPA's preliminary recommendation to insurance distributors to adopt a neutral and unbiased approach throughout the suitability test, and to refrain from exerting pressure on the customer to adapt their sustainability preferences.
If an insurer or an insurance intermediary does not have an IBIP that matches the customer’s initial sustainability preferences, it should:
If the customer decides to do so, the insurer should present IBIPs that are the closest fit for the new sustainability preferences, and specify if these are available on the market or from the distributor providing advice.
EIOPA's efforts to simplify the implementation of such a complex regulation are welcome, especially in the light of the feedback received by the European authority at the end of its public consultation. This feedback underlined the need for stakeholders to have simpler documents and clearer instructions to ensure that the new suitability assessment provisions are properly implemented.
To limit the workload to be performed by the insurance companies and intermediaries, EIOPA pointed out that insurance distributors are not required to conduct the periodic assessment on the date of application of the new rules for existing customers. However, they should use the next regular update of the existing suitability assessment to identify the customer’s individual sustainability preferences.
Nevertheless, we cannot conceal some of the perplexities arising from the recent recommendations, in particular the possibility for the distributor to take shortcuts during the suitability assessment of the sustainability preferences of their customer.
Only practice and methods that will be adopted by the market sector to face this new professional challenge will confirm to us whether these concerns are well founded. Time will also be needed to assess the overall consistency of the suitability test resulting from EIOPA's recommendations on the integration of customer sustainability preferences.
Abu Dhabi Global Market opens consultation to update English law regulations