1. What's changed?
On 18 December 2018, a new transposition law was published in the Belgian State Gazette: the law of 6 December 2018 transposing Directive 2016/97 of the European Parliament and the Council of 20 January 2016 on insurance distribution.
The law will enter into force within 10 days after its publication and implements the Insurance Distribution Directive ("IDD") in Belgium. The IDD is a European Union directive that harmonizes the rules governing insurance and reinsurance distribution and recasts the old Insurance Mediation Directive ("IMD"). The reform aims to make regulatory treatment of the distribution of insurance products more uniform to ensure an adequate level of customer protection across the EU.
A key novelty of the IDD is that it imposes "MiFID-like" rules to the insurance sector. However, prior to the implementation of the IDD, the Belgian insurance industry was already subject to so-called AssurMiFID rules. For undertakings already active on Belgian territory, the new information and conduct of business rules introduced by the IDD should therefore not be revolutionary, but rather a continuation of an earlier tendency to MiFID-ize the insurance industry in Belgium.
The IDD is a minimum harmonization tool and therefore does not preclude Member States from maintaining or introducing more stringent provisions to protect customers ("gold-plating"). The Belgian legislator gold-plated the IDD in a number of areas, such as in relation to the rules on conflicts of interest, which are being extended to all insurance products, whereas the IDD only requires the application of such rules to insurance products with an investment component.
2. What does it mean?
Extended scope of application
The scope of application of the rules under the IDD are extended, now covering not only insurance undertakings and insurance intermediaries, but also other market participants who sell insurance products on an ancillary basis, such as travel agents and car rental companies, unless they meet the conditions for exemption.
Such exemption can be granted if the amount of the premium paid for the insurance product does not exceed EUR 200 calculated on a pro-rata annual basis. The Belgian legislator gold-plated this part of the IDD, as the threshold of the IDD is EUR 600 by default.
Also, the rules of conduct in relation to insurance-based investment products ("IBIPs") are being extended to all savings- and investment-insurance contracts, such as branch-21 insurance contracts, which offer a fixed return without profit sharing and insurance contracts of the third pension pillar. The current status quo under the old AssurMiFID rules is therefore maintained as a result of gold-plating.
Softened rules on inducements
Under the new IDD regime, inducements in relation to IBIPs are allowed on the condition that they:
- do not have a detrimental impact on the quality of the relevant service to the customer; and
- do not impair compliance with the duty to act honestly, fairly and professionally in accordance with the best interests of the customers.
A code of conduct will be prepared by the representative organizations of the insurance sector with (i) a "blacklist" of prohibited inducements that are considered to have a detrimental impact on the quality of the service and (ii) criteria to determine whether inducements comply with the fundamental conduct of business rule to act honestly, fairly and professionally in the best interest of the client. This code of conduct will apply to all types of insurance products (IBIPs and other products).
The additional "positive" requirement that was foreseen under the old AssurMiFID rules, whereby the inducements must also be designed to enhance the quality of the service, is dropped under the new rules, which is an important change for the (Belgian) insurance industry.
Importantly, the European Commission's Delegated Regulation (EU) 2017/2359 of 21 September 2017 contains additional rules on how to assess whether an inducement or inducement scheme may have a detrimental impact on the quality of the relevant service to the customer and must be taken into account by the sector as well. This regulation is directly applicable in Belgium without requiring further implementation into Belgian law.
Product oversight and governance rules
The IDD introduces new rules on product oversight and product governance, which is also an important change for the insurance industry.
These requirements need to be complied with by the manufacturer of the insurance product, be it the insurance undertaking or the insurance intermediary. These rules are new, both from a Belgian and a European perspective.
An important element is that product manufacturers must maintain, operate and review a process for the approval of each insurance product, or significant adaptations of an existing insurance product, before it is marketed or distributed to customers. This product approval process must be proportionate and appropriate to the nature of the insurance product.
The product approval process must also specify an identified target market for each product, ensure that all relevant risks to such market are assessed and that the intended distribution strategy is consistent with such market. Reasonable steps must be taken to ensure that the insurance product is distributed to the identified target market.
Rules on conflicts of interest extended to all insurance products
Broadly speaking, the IDD requires insurance distributors to identify, prevent, manage and disclose conflicts of interest when carrying out insurance distribution activities.
The Belgian legislator decided to extend the rules on conflicts of interest to all insurance products, whereas the IDD only foresees applying such rules to insurance products with an investment component.
Professional knowledge and competence requirements
The IDD requires insurance distributors and employees of insurance undertakings carrying out distribution activities to possess the appropriate knowledge and ability to complete their tasks and perform their duties adequately. Continuing professional training and development requirements will need to be complied with to maintain an adequate level of performance.
IPID for non-life insurance products
Under the IDD, consumers will benefit from a simple, standardized insurance product information document ("IPID"), which aims to provide clearer information on non-life insurance products, so that consumers can make more informed decisions. The IPID can be seen as the counterpart of the KID ("key information document") that needs to be prepared for PRIIPS ("packaged retail investment and insurance products").
Exemptions available for professional clients
The IDD provides Member States with the option to differentiate between professional and non-professional clients.
As a result, certain information obligations may be waived in respect of professional clients, such as disclosure requirements in relation to inducements and disclosure requirements in relation to the suitability and appropriateness test, etc.
No "execution-only" regime for non-complex products
The Belgian legislator decided not to introduce the so-called "execution-only" regime for non-complex IBIPs. Instead, insurance distributors will always have to obtain the necessary information regarding the customer's knowledge and experience when commercializing IBIPs, even when they are not complex.
The current status quo under the AssurMiFID rules will therefore be maintained and is intended to enhance legal certainty and customer protection.
Risks located outside the EU are in scope
In principle, the IDD does not apply to risks and obligations located outside the EU.
The Belgian legislator did not transpose this provision into Belgian law, as the legislator considers that a consumer on the Belgian insurance market should benefit from the same protection for risks that are located outside the EU. The same information requirements and conduct of business rules will thus apply.
Requirement to establish a customer record for all types of insurance products
For IBIPs, the IDD requires insurance distributors to establish a customer record. This record includes the document(s) agreed between the distributor and the customer that sets out the rights and obligations of the parties, and the other terms under which the distributor will provide services to the customer.
The Belgian legislator decided to gold-plate this provision by extending the requirement to establish a customer record to all types of insurance products and not just IBIPs, which largely amounts to a status quo compared to the old AssurMiFID regime.
Document retention period of five years
Although not prescribed by the IDD, insurance distributors also need to keep a register of all their distribution activities to allow the FSMA to exercise its supervisory powers. The standard document retention period is five years.
3. What's next?
Although Belgium was a pioneer by introducing the AssurMiFID rules to the sector early, insurance distributors active on Belgian territory still need to be wary of new changes and are advised to prepare a gap-analysis to ensure full compliance with the new rules, if they haven't already done so.
The IDD introduces some fundamental changes to the playing field and insurance distributors will have to revisit their current business models and practices by making the necessary tweaks and adjustments.
For more information on the changes introduced in Belgium by the IDD, please get in touch with your regular Baker McKenzie contact.
Michael Van Acker Olivier Van den broeck