Europe: Clearing up confusion

European commission

A mid-January decision to amend the European Union's Insurance Mediation Directive - set to come into force in 2016 - through a revised Markets in Financial Instruments Directive has generated much confusion.

The European Commission first published proposals for a review of Mifid 2 in October 2011, seeking to address concerns over transparency and protection relating to investment products.

In July 2012 it further revealed proposals for IMD2, which seeks to enhance regulation of insurance intermediaries in the EU, with a particular focus on practices for selling insurance products.

However, in mid-January the European Parliament, Council and Commission reached agreement on an amended Mifid 2 which also amends the original IMD and allows member states to set their own remuneration rules. Both developments have resulted in some concern within the insurance market.

Reports have linked the changes to slow progress in agreeing IMD 2, but the final Mifid 2 text agreed by the trialogue on 14 January will need to be formally approved by the Council and the European Parliament plenary to take effect, with the details of the deal still to be fine-tuned during technical meetings.

"Unnecessarily burdensome"
Under the latest proposals, conduct of business on investment products is addressed in Mifid 2, while IMD 2 contains rules for insurance products (as well as a chapter containing enhanced standards that are applicable to insurance products with an investment element).

Insurance Europe, which represents the continent's insurance trade bodies, says IMD2 remains the appropriate place to regulate conduct of business sales for insurance investment products, but warns that the amendments may create extra work for brokers and insurers.

"Amending IMD 1 is an interim solution, as it will be replaced by IMD 2, which is currently being discussed by the EU institutions. This may make the implementation of the rules unnecessarily burdensome and expensive for companies and intermediaries," said Michaela Koller, Insurance Europe's director general.

Bruno Geiringer, an insurance partner at international law firm Pinsent Masons says the decision is "a strange one", and will raise concerns for insurers, who were previously exempt from Mifid 1.

"Insurers have not concerned themselves in the past with applying the complex Mifid requirements," Geiringer says. "It would be much easier for them if IMD 2 was the place to go for all the regulations about selling practices insurance. IMD 1 is already being amended by IMD 2 and insurers do not want to have to change their sales and new business practices twice," he adds.

A hindrance to regulation
Aside from creating problems for companies, the amendments may end up impeding regulation. David Coupe, founder of law firm EC3, says the decision may be self-obstructing and hinder any actual progress on Mifid.

This is because the final Mifid 2 text agreed by the trialogue on 14 January still needs to be formally approved by the Council and the European Parliament plenary.

"You are talking about the whole European Parliament talking on a new piece of legislation and the bigger and more complex it is, the slower it will go through the European parliament," Coupe says. "So you might not see it this year, and then the FCA have got to bring it into line with UK legislation and make sure it is compliant."

British Insurance Brokers Association chief executive Steve White adds: "On a word-by-word basis, the council has only got halfway through the directive and stopped because of time pressures.

"The parliament has got on with it to a greater degree and they are now hoping to have a plenary voting session on this towards the end of February, but whether they can do that or not is another matter."

European election complications
White also notes that the situation may be further complicated by an upcoming European election.

"There are European elections in May, so if Mifid 2 doesn't make the February timetable that will be it, probably, for this parliament. Then it will get pushed back into September at the earliest, and you will have a new parliament who will need to make a decision as to whether to go with where the previous parliament got to, or tear it up and start again," White says.

"It could [get kicked] into the long grass, and how far into the long grass and how quickly it will come out of it is open to debate," he warns.

Coupe estimates that even if the parliamentary plenary vote goes ahead as planned, real action could still be held until March next year, and the London market completes much of its renewals at the end of the year. "So I don't think you will see any instant impact - even if they force commission disclosure - for up to two years," Coupe says.

The commission question
Perhaps predictably, commission and remuneration remain top of the agenda for many individual firms, with potential disclosure requirements still unclear.

White notes that European countries have already begun to diverge in approach, meaning the latest proposals which lack unity of approach, may result in further confusion for the industry.

Several Scandinavian countries, White notes, have already banned commission outright, while France, Germany, Italy and Spain have yet to clarify their own positions. Under the current rules, UK firms are required to disclose information on request.

"In the UK we have a totally separated life, investment and GI market, but on mainland Europe, lots of those are joined up," White explains, noting this adds complexity for any rule making.

"Whilst we can have separate debates in this country about the treatment of disclosure in those separate markets, in some parts of mainland Europe it's more of a joined-up, one-size-fits-all approach.

"There is an ongoing debate as to where that will end up, but it would be wrong of us to prematurely judge," White says, but he adds that he is broadly relaxed on the prospect of UK rules being different to those overseas.

"99.99% of business is done domestically, so if there are differences in other parts of Europe then it is hardly going to have any sort impact," he says. "The far greater issues are around internal level playing fields, making sure that it's the same for all forms of distribution."

Getting a better deal
For Coupe, however, while the legislation will reveal how much a broker is taking in commission, it does not necessarily follow that consumer benefits will be derived. "I'm not sure it will actually be terribly helpful - I've always thought that you get what you pay for," Coupe says.

He argues that in other types of product, the additional benefits of a more expensive product are more obvious - and this could also be the case for insurance.

For example, by flying on a budget airline, a customer is aware they can carry less luggage and are unlikely to receive much hospitality.

"If somebody says their broker is £10 less, that's fine, but one might not have access to all the insurer markets that a more expensive broker has." Coupe says. "So does the customer actually get a better deal?"

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