Today, on 18 December 2018, the Belgian law of 6 December 2018 implementing Directive (EU) 2016/97 of the European Parliament and the Council of 20 January 2016 on insurance distribution (the "Insurance Distribution Directive" or "IDD") has been published in the Belgian Official Gazette (the "Act"). The Act will enter into force ten days after its publication, i.e. on 28 December 2018. The Act can be consulted here in Dutch and French.
The purpose of the IDD has been to create a level playing field among the distributors of insurance products, to strengthen the confidence of customers and to make regulatory treatment of the distribution of insurance products more uniform in order to ensure an adequate level of customer protection across the European Union. The IDD was initially intended to enter into application from 21 February 2018. However, the European Union agreed to postpone the application date by seven months to 1 October 2018 as it appeared that some insurance distributors, particularly smaller ones, were not fully prepared for its entry into force.
The scope of the MiFID rules of conduct have, since May 2015 been extended to the insurance sector in Belgium (commonly known as the "AssurMiFID regime"). As a result, many of the IDD rules are at present, more or less already applicable to insurers and insurance intermediaries active in Belgium. Therefore, the impact of the IDD on the Belgian market is somewhat more limited when compared to other Member States.
Although the IDD is aimed at minimum harmonization, allowing Member States to maintain or introduce more stringent provisions, the Belgian legislator has decided to implement the IDD as literally as possible. For a number of aspects, however, the Belgian legislator has decided to make use of the options in the IDD in order to take into account the specific characteristics of the current AssurMiFID regime in Belgium.
This client alert is limited to highlighting these specific deviations from the IDD in the Act, and does not discuss the additional IDD requirements such as the enhanced product oversight and governance requirements or the Insurance Product Information Document (IPID). Please contact us should you require more information on any of these topics.
Territorial scope of application
The AssurMiFID regime is applicable when insurance products/services are offered in Belgium, and therefore also to foreign insurance undertakings and intermediaries who have a branch or permanent presence in Belgium, and who are active in Belgium on a free provision of services basis.
The IDD, on the other hand, states that when business is pursued in another Member State under the freedom to provide services, the responsibility for ensuring compliance with the obligations of the IDD with regard to the entire business within the internal market remains in principle with the home Member State. In case of the establishment of a branch or permanent presence in another Member State, the responsibility for enforcement of compliance with the obligations affecting the business as a whole and of the rules on information requirements and conduct of business is distributed between, respectively, the home and host Member State.
However, it can be expected that the Act will continue to apply to foreign service providers active in Belgium on the same basis as the AssurMiFID regime, especially since the Act mainly modifies the provisions of the Insurance Act of 4 April 2014, which - at the moment - still qualifies in its entirety as a provision of 'general good'. The IDD mandates EIOPA to examine in a report, and inform the Commission about, the 'general good' rules as published by the Member States. It can be expected that the current Belgian list will be scrutinized, as was already the case in the past. It remains to be seen whether this list will be updated, in the sense that it will list the 'general good' provisions in a more limited way, in the future.
Ancillary insurance intermediaries
In Belgium, the AssurMiFID regime does not apply to ancillary insurance intermediaries when a number of conditions are met:
- The contract only requires knowledge of the insurance cover
- The contract is not a life insurance agreement
- The contract does not cover any risk of civil liability
- The insurance mediation activity does not constitute the main professional activity
- The "connected contracts" exemption, i.e. the insurance is complementary to the good or service supplied by a provider, where such insurance covers:
- The risk of breakdown, loss of, or damage to, of the goods delivered by that supplier; or
- The risk of damage to, or loss of, baggage and other risks associated with a travel booked with that provider, even if this insurance covers life insurance risks or civil liability risks, but on condition that the cover is additional to the main coverage of the risks associated with the travel; and
- The amount of the annual premium does not exceed 500 EUR and the full term of the contract, including any extensions, shall not exceed five years
The IDD provides for a similar, although more limited, exemption. There is no limitation on duration and the exemption is applicable to all types of insurance. The IDD only refers to the connected contracts exemption and to the fact that the amount of the premium may not exceed 600 EUR.
The Act copies the IDD, but lowers the amount of the premium to 200 EUR. In addition, the King is authorized to adjust this threshold in order to promote consumer protection and to take into account the evolution of consumer prices.
No "execution only"
The IDD establishes that Member States may introduce a simplified system of distribution for insurance intermediaries or insurance undertakings that do not provide customers with advice, a system that resembles the "execution only" service provided in MiFID (and MiFID II). In particular, insurance intermediaries and undertakings may be exempted from the obligation to request information about the customer's knowledge and experience in a number of cases, e.g., where the underlying of a product is a non-complex financial instrument.
The Belgian legislator decided not to provide for such an "execution only" regime in the Act and to copy the European standard "by default". Therefore, under Belgian law, the distributor will always have to check whether the customer has sufficient knowledge and experience to invest in the products concerned. In the absence of sufficient knowledge and experience, the customer will receive a warning from the distributor. The Belgian legislator mainly refers to the complicated interpretation of the criteria set by the EU to determine the non-complex nature of a product, as the reason for not introducing such regime in Belgian law and maintaining the current status quo.
No mandatory advice
The IDD also allows Member States to make the provision of advice mandatory for the sales of any insurance product, or for certain types of insurance products.
The Belgian legislator did not consider this option to be appropriate, insofar as imposing the obligation to provide advice would go against the level playing field with the banking sector. Indeed, MiFID (and MiFID II) do not impose any obligation to provide advice in all circumstances.
Extension of the notion of IBIPs
The so-called IBIPs or insurance-based investment products are defined in the IDD as insurance products which offer a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations. These are mainly the branch 23 insurance products and most branch 21 products, unless it concerns products without profit sharing. Several rules of conduct of the IDD only apply to such IBIPs.
The definition of IBIPs under the IDD is narrower than the definition of savings- and investment insurance products which exists under the AssurMiFID regime. A major difference is that the latter comprises branch 21 products which offer a fixed return (without profit sharing) as well as third pillar pension products, while these are not considered IBIPs under the IDD.
Under the Act, the rules of conduct and information obligations applicable to IBIPs under the IDD are extended to all savings- and investment insurance products, including branch 21 products with a fixed return (without profit sharing) and third pillar pension products. Second pillar pension products (which do not qualify as IBIPs under the IDD) remain, however, exempted from the scope of application of these rules under the Act.
Therefore, this will most likely lead to a status quo for those who have been active on the Belgian insurance market under the AssurMiFID regime.
Conflicts of interest
The current applicable conflicts of interest regime in Belgium is applicable to all insurance products, while the IDD limits the application of these rules to IBIPs.
The Act maintains the current broader AssurMiFID regime, by applying these requirements to all types of insurance products, and not just to IBIPs. The Belgian legislator was of the view that the risk of conflicts of interest is not limited to IBIPs and, moreover, it seems more efficient for insurance distributors to be subject to transversal rules applicable to all types of products, allowing them to develop one and the same policy for all their activities.
The scope of the rules on inducements has been heavily discussed in Parliament during the legislative process.
The AssurMiFID regime foresees a positive "enhancement test", meaning that the inducement must enhance the quality of the service to the client and may not impair the duty to act in the best interest of the client, thereby aligning to the MiFID regime. Furthermore, both the nature and the amount of the inducement had to be clearly disclosed prior to the provision of the service. This regime was applicable to all insurance products, but not to tied agents (the latter being subject to the conflicts of interest rules).
The IDD limits the rules on inducements to IBIPs only, and makes them applicable to all intermediaries, including tied agents. The most important difference with AssurMiFID is that a negative "no detrimental impact test" is imposed, meaning that the inducements may not have a detrimental impact on the quality of the relevant service to the customer, and not impair the duty to act in the best interest of the client. Moreover, only the nature of the inducement must be disclosed and there are some specific rules on costs and charges.
After much debate in Parliament, the Act replaces the positive "enhancement test" by the negative "detrimental impact test", in line with the IDD. This modification should increase the likelihood of an inducement being valid.
The sector organizations (such as Assuralia) are requested (i) to draft a non-exhaustive list of forbidden inducements given their detrimental impact on the quality of the service to the client, and (ii) to define criteria that permit to assess which inducements comply with the fundamental conduct of business rule, within six months after publication of the Act. Importantly, while the Act also limits the application of the inducements rules to IBIPs, the inducement code to be drafted by the insurance sector should apply to both life and non-life insurance products. The King can intervene and draw up an inducement code if the insurance sector has not drafted such a code within twelve months after the entry into force of the Act, or if the proposed code is not ratified by the King.
As is the case in the IDD, and contrary to the AssurMiFID regime, the inducements rules are also made applicable to tied agents, and a principle based disclosure of the nature of the inducement suffices. In general, these modifications render the Belgian inducements regime less stringent than was the case under AssurMiFID.
While the AssurMiFID regime did not foresee a possibility to differentiate between retail or professional clients, the IDD grants the option to Member States to allow for such differentiation.
The Belgian legislator decided to make use of this option, by allowing insurance distributors to make a distinction between professional and retail clients. Certain information (such as regarding the remuneration, yearly reporting to clients, the suitability and appropriateness test, …) will not have to be provided to professional clients. The Act clarifies which information should be given to professional clients regarding their categorization, and states that professional clients have the right to ask to be treated as a non-professional client.
The Act authorizes the King to define the criteria in order to determine when a client should be categorized as a "professional client". The preparatory works state that the King should be inspired by the criteria that exist on a European level in the framework of the IDD and MiFID II, but that he should tailor certain criteria so that these can be applied in the insurance sector.
Under the AssurMiFID regime, insurance undertakings and intermediaries were required to establish a record that includes the documents agreed with the customer that set out the rights and obligations of the parties, and the other terms under which services will be provided to the customer. Such a client file also had to contain proof that the client had opted for another durable medium than paper and a copy of the reports had to be sent to the client.
While the IDD limits these client file obligations to IBIPs only, the Act extends these requirements to all types of insurance products, in line with the previously applicable regime.