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MiFID "not the right place" to regulate sales of insurance investment products, says expert

Comprehensive reforms to EU-wide market trading rules recently agreed by lawmakers could extend unnecessarily complex requirements to firms that sell insurance investment products, an expert has said.

The European Parliament, Council and Commission reached agreement on the amended Markets in Financial Instruments Directive (MiFID 2) earlier this month. However, the final text agreed by the 'trialogue' bodies would also amend the Insurance Mediation Directive (IMD), which is designed to improve the regulation of the sale of insurance; as well as allow member states to set their own remuneration processes.

Insurance regulation expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com said that the agreement was unusual considering that the European Commission was already amending the IMD rules as part of a new directive, IMD 2.

"The decision to amend IMD through MiFID 2 will give some concern to insurers who have been exempt from MiFID 1, and have therefore not concerned themselves in the past with applying the complex MiFID requirements, unless super-imposed by the UK regulatory rules themselves" he said. "MiFID is not the right place to regulate sales of insurance investment products - the best place is in the revised IMD, as originally proposed by the Commission. Whilst the IMD2 provisions on the sale of investment insurance products are largely a copy-out of the MiFID provisions, they do not sit well in the rest of the MiFID rules. MiFID has been designed more around investment products and for investment firms such as investment banks, stock brokers and fund managers, not insurance products and insurers."

"The proposal to move the provisions into MiFID 2 has been prompted by the fact that IMD 2 is progressing very slowly. IMD 2 may not be passed before the European Parliament elections later this year. I would like to see the European Parliament resist this move to MiFID 2.  It would be much easier for insurers if IMD 2 is the place to go for all the regulations about selling practices for all insurance products. IMD is already being amended by IMD 2 and insurers do not want to have to change their sales and new business practices twice to accommodate two changes of the rules, if that is the result of this process" he said.

The final text of MiFID 2 as agreed by the trialogue must be voted on by the European Parliament in full before it can be published in the Official Journal and become law. The vote is currently scheduled to happen at the end of next month.

The first MiFID directive was implemented on 1 November 2007 and created a harmonised regulatory regime for investment services across the European Economic Area (EEA). The revised MiFID package was adopted by the European Commission in October 2011, partly in response to the financial crisis. The new framework is designed to take into account developments in the trading environment since the original directive came into force, but also covers a broader range of investments and widens the scope of investment services needing authorisation from national regulators.

The European Commission published the proposed text of IMD 2 on 3 July 2012. The revised framework is designed to create common standards across insurance sales throughout the EU, including consistent information requirements for sellers; and would apply to direct consumer sales as well as firms acting as intermediaries. The proposals would also eventually make it compulsory for all insurance intermediaries to disclose what remuneration they are receiving.

The agreed final text of MiFID 2 has not yet been published. However, in a summary on its website, industry body Insurance Europe noted that be introducing separate conduct of business rules for investment products, sellers of insurance investment products could face "unnecessarily burdensome and expensive" double regulation. It also expressed concern about the proposed introduction of a new definition of insurance investment products, over and above that contained in the Packaged Retail Investment Products (PRIPs) Regulation.

Insurance regulation expert Bruno Geiringer agreed that the definition of insurance investment products (effectively meaning, unit-linked life insurance and single premium bonds) "should be consistent across financial services legislation and should be established under the PRIPs Regulation".

"Additionally, the regulation of insurance investment products should be carefully reconsidered as currently Article 25 of the draft IMD 2 would require an appropriateness test to be applied to execution-only sales of these investment bond products, which could impact the growth of the non-advised market in the UK," he said.

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