The IDD directive: better protection for consumer interests Focus on insurance-based investment products
The FSMA This brochure is published by the Financial Services and Markets Authority (FSMA). The FSMA is an autonomous public institution that carries out the tasks in the general interest entrusted to it by the Belgian legislature. The FSMA strives to ensure that the financial system is at the service of society, inspires confidence and places the consumer at the centre of its concerns. It does so in such a way that consumers may be able to count on receiving proper financial services and on transparent and open markets, and that they may be able to purchase products that fit their wishes and needs.
Table of contents What is the IDD directive?
2
Before concluding an insurance contract
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Are you a retail or a professional customer?
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What level of protection do you receive?
9
What is the distributor required to do?
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A. The distributor must always perform a demands-and-needs test B. The distributor will carry out an additional test, the scope of which differs depending on whether or not you are being given advice
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What information should you receive in advance?
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After concluding an insurance contract
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Ongoing obligations for distributors
20
Preventing conflicts of interest
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Following the rules governing remuneration
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Handling complaints and claims
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Three overarching principles to remember
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1
What is the IDD directive?
The IDD is the abbreviation for the European Insurance Distribution Directive. The IDD regulates the distribution services for insurance products. One of its main objectives is to provide a set of rules aimed at strengthening consumer protection. The IDD contains information obligations and conduct of business rules that apply to the distribution of all types of insurance products. It also contains additional requirements that apply solely to insurance-based investment products (IBIPs). The IDD aims to align the rules governing these products with those that apply in the banking sector under the MiFID I and MiFID II directives 1 . This brochure summarizes the main information obligations and conduct of business rules that apply to the distribution, in Belgium, of insurancebased investment products 2 by an insurance company or an insurance intermediary.
1
A separate brochure sets out the rules that apply under MiFID II.
2
A separate brochure sets out the rules that apply to the distribution of other types of insurance products to retail customers.
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Insurance-based investment products The concept of an insurance-based investment product (IBIP) denotes an insurance product which offers an investment component that is exposed to market fluctuations 3 . These are: • savings insurance, namely, class 21, 22 or 26 insurance that comprises a savings element or a combination of such contracts; • investment insurance, namely, class 23 insurance or combinations of class 23 products and combinations of savings insurance and class 23 products.
As a customer, the level of protection you enjoy is higher if the distributor provides you with advice about an insurance-based investment product than if you do not receive any advice.
Three overarching principles The IDD directive requires distributors to abide by three over arching principles when distributing insurance-based investment products: • act honestly, fairly and professionally in a way that best serves your interests; • provide you with information that is accurate, clear and not misleading. This information is meant to enable you to take informed investment decisions; • take account of your individual situation, and in particular of your demands and needs.
3
With the exception of officially recognized occupational pension schemes that fall within the scope of Directive 2016/2341 or of Directive 2009/138/EC (2nd pillar pension).
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Before concluding an insurance contract (p. 8)
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1 The distributor must put you in a category of customers:
The distributor must ask you for certain items of information in order to determine your demands and needs and to assess the appropriateness or suitability of the products in question (= duty of care). The type of assessment to be carried out depends on the type of service:
Retail customer
Professional customer
• distribution relating to sales without advice • distribution with advice
Ongoing obligations for distributors (p. 20)
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After concluding an insurance contract (p. 18)
3
4 The distributor must supply you with certain items of information. Examples:
• Periodic reports and information • Where applicable, periodic suitability assessment
• Information about the distributor • Information about the insurance-based investment products • Information about the costs and charges • …
5 • Preventing conflicts of interest and be transparent • Following the rules governing remuneration • Handling complaints and claims
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Before concluding an insurance contract
1
Are you a retail or a professional customer? Before any distribution of an insurance-based investment product, the distributor must categorize you as a retail customer or as a professional customer. Most individual customers will be placed in the category of retail customers. As a retail customer, you enjoy the highest possible level of protection. The category of professional customers includes banks, public authorities, pension funds, large companies and, in exceptional cases, certain individual customers. If you are a professional customer, your distributor is not required to provide you with certain types of information or may provide you with less detailed information. This brochure only addresses the rules that apply to retail customers. 2
What level of protection do you receive? You can call upon the services of a distributor of insurance-based investment products in two different situations: 1. to buy an insurance product without receiving advice; 2. to receive advice, that is, a personalised recommendation about an insurance-based investment product. A recommendation is personalized if it is tailored to you personally or if it is based on an examination of your own situation. This is not the case, for example, if the recommendation made is intended for the public. Different levels of protection apply to the two different situations.
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WHAT IS THE DISTRIBUTOR REQUIRED TO DO? In every case: the demands-and-needs test The distributor must ask you about your demands and needs and must ensure that the insurance contract proposed is consistent with those demands and needs.
Sale without advice
Sale with advice
Appropriateness test
Suitability test
The distributor must question you on your knowledge and experience in the investment field relevant to the specific type of product offered or requested. In this manner, it must make sure that you understand the risks associated with the transaction and that it is appropriate for you.
The distributor must ask you about: • your knowledge and experience in the investment field concerned; and • your investment objectives and your financial situation. Based on this information, it may recommend a suitable product. The distributor must also ensure that the personalized recommendation explains why the product best meets your demands and needs.
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What is the distributor required to do? A.
The distributor must always perform a demands-and-needs test
Before concluding an insurance contract, the distributor must ask you questions in order to determine your demands and needs according to the complexity of the product and the type of customer. It must also provide objective information on the investment product, based on the insurance product concerned. This process is meant to enable you to make an informed investment decision. The distributor must ensure that the product it is offering you is consistent with your requirements and needs.
B.
The distributor will carry out an additional test, the scope of which differs depending on whether or not you are being given advice
Without advice: appropriateness test If you are calling upon the services of a distributor in order to enter into a contract for an insurance-based investment product without the distributor providing you with advice, a lighter protection mechanism will apply. This is called the ‘appropriateness test’. During the appropriateness test, the distributor must assess your knowledge and experience as regards the type of investment to which the product being proposed or requested belongs: • What types of services, transactions and insurance-based investment products or financial instruments are you familiar with? What was the nature, number, value and frequency of your previous transactions in such products or instruments? Over what period were these transactions carried out? What is your level of education and your current or former occupation?
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Generally speaking, the distributor uses a questionnaire which it gives you before you make an investment. • If the distributor concludes that you have the requisite knowledge and experience to understand the risks involved, it can proceed to carry out the transaction. • If the distributor concludes, on the contrary, that you do not have the requisite knowledge and experience or if you have not provided enough information to enable him or her to form an opinion, it will give you a warning. The warning will indicate that the distributor considers that the product is not appropriate for you or that the information provided is insufficient for him or her to form an opinion. If you insist that the transaction be executed, you must accept the risk it entails. The test is thus intended to protect customers who might not understand or be aware of the consequences or of the risk level of a transaction.
With advice: suitability test If you ask for advice from a distributor or if the latter provides you with advice at his or her own initiative, you are relying on the distributor more than where no advice is provided. You therefore need assurance that the distributor is recommending products that are suitable for you, given your personal situation. That is why the distributor must not only provide you with a personalized recommendation explaining why a particular product may better fit your demands and needs, but it must also carry out a “suitability test”. In order to do so, the distributor will ask you various questions to determine which types of insurance-based investment products are suitable for you and best serve your interests.
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The suitability test must cover the following aspects: • your investment objectives and risk tolerance What is your risk profile and what are your preferences when it comes to taking risks? Would you like total protection of your capital, or are you ready to take elevated risks? What is the purpose of your investments? For how long would you like to keep your investment? • your financial situation and your ability to bear losses What is your regular income, where does it come from and how much is it? Do you own assets, investments or real estate? Do you have any debts or regular financial commitments? To what extent are you able to bear financial losses? • your knowledge and experience in the investment field concerned
If the distributor does not obtain the information necessary to assess the suitability of the product, it cannot make a recommendation. It is therefore crucial for you to reply to the questions you will be asked. They will determine the type of service that the distributor will be authorized to provide you and the resulting level of protection.
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DEMANDS-AND-NEEDS TEST, APPROPRIATENESS TEST AND SUITABILITY TEST
Level of customer protection
With advice
Without advice + knowledge and experience In every case Demands and needs
= appropriateness test
= basic test
Insurance-based investment product
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+ objectives and financial situation = suitability test
3
What information should you receive in advance? All information you receive from the distributor must be accurate, clear and not misleading. This principle applies both to the content and to the presentation of the information. Moreover, where a distributor provides you with advertisements or advertising materials, these must be identifiable as such. The distributor must provide you with the necessary information sufficiently far in advance of the conclusion of the contract, so that you can make an informed decision. It is possible, however, that some information is provided to you afterwards, where the product concerned is being sold to you via a remote mode of communication, such as by telephone. In that case, certain conditions must be met. You must, in particular, receive the following information: Information about your categorization The distributor must inform you if it has categorized you as a retail customer or as a professional customer. It must inform you of your right to request a change of category, where applicable, and tell you the limitations in terms of protection that may result from such a change. Information on the type of advice provided The insurance intermediary must explain to you the nature and scope of the advice it provides, specifying for example if the advice is based on an impartial and personalized analysis or whether they are independent. Moreover, the intermediary will let you know if it will provide you with a periodic assessment of the suitability of the products it has recommended to you.
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Suitability statement If the intermediary provides you with advice, it must provide you with a statement that summarizes the advice given and explains why the advice in question is suited to your situation. The statement must specify, in particular, how the advice meets your objectives, preferences, financial situation, knowledge and experience. The statement must also indicate whether the products recommended are likely to require periodic reassessment. Product information The distributor will provide you with information relevant to the products, taking into account the complexity of the product and what category of customer you are. The distributor will also inform you of the relevant guidelines and warnings concerning the risks inherent in the products or in certain investment strategies. Information about the distributor The distributor must inform you of information such as its contact information, information about its authorization/registration, etc. The distributor must also tell you whether or not it offers advice and must provide you with the requisite information regarding procedures for filing claims, complaints and redress. Information about any conflicts of interest and on transparency Where the distributor is an insurance intermediary, it must provide you with general information about conflicts of interest. The intermediary must also provide you with information about any shares it may hold in companies or about any shares or voting rights that certain companies may hold in its capital. Moreover, it must inform you: (i) (ii)
(iii)
if it bases its advice on an impartial and personalized analysis, if it is subject to a contractual obligation to work exclusively with certain insurance companies, in which case it must give you the names of those companies, or the name and address of the insurance companies with which it can work and works if it is not in any of the situations set out in (i) and (ii).
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Information about the costs and charges This information must include the cost of distributing the product, the cost of the product in question and the way in which the customer can pay these costs, including any payment made by third parties. The information provided must indicate all costs and charges in the form of a total amount, and must show the cumulative effect of the various costs and fees on the return on investment. You have the right to ask the distributor for a detailed breakdown of the costs and fees. Information on remuneration Your insurance intermediary must inform you of the type of remuneration it receives under the terms of the insurance contract. If the distributor is an insurance company, the information should indicate the remuneration received by its staff under the terms of the insurance contract. Where the distributor is an insurance intermediary, it must also specify whether it works on the basis of: (i) (ii) (iii) (iv)
a fee paid by you directly; a commission of any kind included in the insurance premium; any other type of remuneration; or a combination of two or more of the above-mentioned types of remuneration.
Before investing, please ensure you are familiar with the procedures for lodging claims, complaints and redress against the distributor of insurance products. The distributor is required to provide you with this information.
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After concluding an insurance contract
4 Throughout the term of an insurance contract, the distributor must provide you at least once a year with information about the service provided and the transactions conducted, in particular as regards the costs and charges. If the distributor provides you with advice that involves a periodic assessment of suitability, it must send you a report at least once a year that includes an updated statement about the way in which the investment meets your preferences, objectives and other characteristics. The said report may be limited to mentioning the changes made, without reiterating all the details given in the initial suitability statement. It is in your interest to keep all the documents you receive from the distributor.
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Ongoing obligations for distributors
5 The IDD lays down a number of obligations that distributors must respect at all times.
Preventing conflicts of interest Distributors must act in such a way as to serve your best interests. To this end, they take measures that are effective in detecting and preventing potential conflicts of interest that may adversely affect your interests when distributing insurance-based investment products. Distributors must make sure they do not indirectly serve their own interests or those of other customers instead of yours. For example, there is a conflict of interest where the distributor is likely to achieve a financial gain or avoid a loss at your expense. The same is true where the distributor has an incentive - financial or other - to put the interests of another customer or group of customers ahead of yours. If the measures taken by the distributor to prevent or manage conflicts of interest are not sufficient to prevent the risk of damage to your interests, it must inform you of this. In that case, it must provide you with the following information before the insurance contract is concluded: • a precise description of the conflict of interest in question; • an explanation of the general nature and source of the conflict of interest; and • an explanation of the risks that the conflict presents for you and the measures taken to attenuate these risks.
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Following the rules governing remuneration Where a distributor distributes insurance-based investment products, it is possible that it receives benefits from third parties. These benefits may lead the distributor to favour other interests over yours. Different rules govern these situations, with a view to your protection: • The distributor cannot be remunerated, nor can it remunerate or evaluate the performance of its staff in a way that is counter to its obligation to act in your best interests. For example, in the form of sales targets that would encourage it to recommend one particular insurance-based investment product to you whereas it could recommend another that would better meet your needs. • Where the distributor provides insurance distribution services in connection with insurance-based investment products, the distributor may not receive benefits from or pay benefits 4 to third parties unless these: (i) (ii)
do not have a detrimental impact on the quality of service it provides you; and do not impair compliance with its duty to act honestly, fairly and professionally in accordance with your best interests.
Furthermore, organizations that represent the insurance sector have drawn up a code of conduct that further governs the payment and receipt of certain inducements in connection with the distribution of insurancebased investment products. The code sets out: (i)
4
fundamental principles regarding conflicts of interest and regarding the proportionality of the remuneration to the service provided;
Other than those that are necessary or allow for the provision of the service.
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(ii)
(iii)
specific rules regarding certain non-monetary types of remuneration. These include rules on the training offered to insurance intermediaries, a limitation on the length of events organized for intermediaries, as well as the geographical zone in which they are held; and a list of incentives or practices that are prohibited because they are considered to have a detrimental impact on the quality of the service provided to you. For example: trips offered to insurance intermediaries or incentives connected to the sale of certain products where certain conditions are met.
Handling complaints and claims Distributors are required to ensure that any claims you file with them about an insurance contract or an insurance distribution service you have received are examined in an expert and honest way and that you receive a reply in all circumstances.
Procedure to follow if you wish to file a claim or complaint If you wish to file a claim about an insurance distribution service or an insurance product, you can first approach the complainthandling service of your distributor. Under certain circumstances, you can also contact the Insurance Ombudsman, who will play the role of an impartial mediator between your distributor and yourself. Moreover, it is also possible to initiate legal proceedings, notably, if any of the aforementioned claim procedures do not result in a solution to your problem. You can also address questions to the FSMA, bearing in mind that the FSMA is not authorized to intervene in any disputes between you and your distributor.
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Three overarching principles to remember The aim of this brochure is to inform retail customers about the various rules of conduct put in place by Belgian legislation transposing the IDD directive to govern the distribution of insurance-based investment products. These rules are intended to guarantee suitable customer protection. Remember the three fundamental principles that the distributors must adhere to when they provide you with insurance distribution services: 1. act honestly, fairly and professionally, in a way that best serves your interests; 2. provide you with information that is accurate, clear and not misleading; 3. provide you with services that take account of your individual situa tion, and in particular of your demands and needs.
This brochure aims to help customers gain a better understanding of their rights and of the conduct of business rules that insurance companies and insurance intermediaries must comply with when they provide insurance distribution services in respect of insurance-based investment products. It presents a concise and general summary of the main obligations of distributors of the aforementioned insurance products toward retail customers, pursuant to the Belgian legislation transposing the IDD Directive. It is not a comprehensive presentation of the applicable legal framework. This brochure may under no circumstances whatsoever be regarded as a legal interpretation on the part of the FSMA. The FSMA does not provide any advice regarding subscribing to fi nancial products or using specific financial services. The FSMA cannot be held responsible for any deleterious consequences that may result from the purchase of products or the use of fi nancial services that are inappropriate. The FSMA seeks to ensure the quality of the information contained in this brochure but cannot guarantee that it is absolutely precise and up to date at all times. The FSMA is not responsible for any inconsistencies that may arise, notably, due to changes to legislation.
Legal responsibility for this publication: J.-P. Servais, rue du Congrès/Congresstraat 12-14, 1000 Brussels
FSMA Financial Services and Markets Authority Rue du Congrès/Congresstraat 12-14 1000 Brussels Tel. +32 (0)2 220 52 11 www.fsma.be www.wikifi n.be
