Sellers of insurance-based investment products need to prepare for more stringent regulatory requirements

Out-Law Legal Update | 06 Apr 2017 | 5:28 pm | 3 min. read

LEGAL UPDATE: Firms selling insurance-based investment products (IBIPs) will have to provide suitability and appropriateness assessments to more customers under rules proposed by the European Insurance and Occupational Pensions Authority (EIOPA).

Although the FCA has yet to consult on the implementation of provisions for IBIPs in the IDD firms should be aware of the direction new IBIP regulation is taking. Final rules from the FCA are likely to include many of the general requirements outlined by the EIOPA.

There are additional requirements for the sale of IBIPs under the IDD including that suitability assessments must be carried out for advised sales and, even if non-advised, when the customer wishes to provide information about their knowledge or experience, then an appropriateness assessment must be carried out.

EIOPA has recently clarified the type of information to be collected from customers to enable firms to carry out these types of assessments. The information covers the customer's financial situation and investment objectives and includes:

  • source and extent of regular income;
  • assets, including liquid assets;
  • investments and real property;
  • regular financial commitments;
  • length of time customer wishes to hold the investment;
  • preferences regarding risk taking;
  • risk profile; and
  • purposes of the investment.

Prior to conclusion of the contract, the customer should be provided with a 'suitability statement' on a 'durable medium', which usually means one that enables storage and access in the same form at a later date, which must specify the advice given and how it meets the customer's preferences, objectives and other characteristics.

For non-advised sales, and where certain conditions are satisfied including that the IBIP is 'not complex', the product may be sold without a suitability or appropriateness test (execution-only basis). This may be seen as a more streamlined, and less costly, process.  Under the IDD, EU countries do not have to allow execution-only sales of IBIPs and have the option of not derogating from the appropriateness and suitability assessment obligations. If the customer is located in an EU member state that has not derogated then no execution-only sale will be allowed. As the FCA has yet to consult on the IBIP provisions in the UK, we do not yet know what the final position will be here.

There are various additional rules that apply to the distribution of all insurance products under the IDD, including IBIPs, whether advised or a non-advised sales. These rules include that, prior to the conclusion of the insurance contract, the insurance distributor should specify the demands and needs of the customer. The customer should be provided with objective information about the insurance product in a comprehensible form to allow that customer to make an informed decision. This requirement is specific to insurance products and there is not a comparative requirement for IBIPs within the scope of MiFID II.

Greater detail on the suitability and appropriateness assessment provisions were outlined in technical advice from EIOPA published in February this year following a request from the European Commission earlier in March 2016.

The technical advice also provided further detail about the 'organisational and administrative arrangements' that will be required to prevent conflict of interest situations arising in the sale of IBIPs. According to EIOPA, COI policies should be in writing; appropriate to the nature, scale and complexity of the business; and identify the COI circumstances and specify procedures to be followed to manage these; regularly reviewed and updated with frequent written reports to be provided to management.

Criteria which may establish COIs will include where there is a potential financial gain to be made, or financial loss to be avoided, to the detriment of the customer; where there is a financial or other incentive to favour another customer/group of customers over the interests of the customer; and where relevant persons may be involved in the management or development of IBIPs. Disclosure of COIs should be understood as step of last resort to be used only in cases where the organisational and administrative measures are not sufficient to effectively prevent and manage them. EIOPA states that any overreliance on disclosure should be considered a deficiency in the policy.

The technical advice from EIOPA related to proposed Delegated Acts under the IDD for Articles including Article 28 (Conflicts of Interest), 29 (Inducements) and 30 (Assessment of suitability and appropriateness and reporting) all of which relate to IBIPs only. EIOPA also published a consultation paper covering IBIPs that incorporate a structure which makes it difficult for the customer to understand the risks involved. The consultation is open until 28 April. The FCA's work on implementation will be subject to steps taken by the European Commission to adopt Delegated Acts under the IDD.