[Newsflash n. 36]
On 4 September 2017, IVASS – the Italian Insurance Authority – published a letter to the market (“Letter”) addressing the implementation in Italy of Directive 2016/97/EU on insurance distribution (“IDD”) and EIOPA preparatory guidelines on product oversight and governance (“POG”) arrangements for insurers and distributors (“EIOPA Guidelines”).
The main focus of the Letter is on the product oversight and governance arrangements, as introduced by article 25 of IDD and further specified by the EIOPA Guidelines (published on 13 April 2016) and the Technical Advice on possible delegated acts concerning the Insurance Distribution Directive (“Technical Advice”, sent to the European Commission on 1 February 2017).
These provisions, which are part of the general Solvency II framework on the governance of insurance companies, set out a set of product governance requirements for Insurance Products similar to the one contained in MiFID II with the goal of ensuring that the clients’ interest is adequately taken into consideration throughout the whole duration of a product.
Such requirements are addressed to:
- Manufacturers “de facto” (as defined by the Technical Advice), i.e. (a) insurance companies and (b) intermediaries that have a decision-making role in the design and development of insurance products; and
- Distributors, i.e. (a) insurance companies selling their own products and (b) intermediaries selling products manufactured by third parties.
The Letter aims at encouraging manufacturers and distributors to take action in order to make their internal processes compliant with the IDD (and the relevant Delegated Acts) before its coming into force on 23 February 2018. In particular:
- Manufacturers are required to (i) conduct a gap analysis between the current design and distribution processes and the new requirements; (ii) assess the adequacy of their organisational structure to perform the new mandatory product governance activities; (iii) define new procedures for the definition of the products’ target market; (iv) introduce new processes to properly monitor the products during their duration; (v) determine content and procedures for the ongoing exchange of information with the distributors;
- Distributors need to (i) assess the compliance of the existing information flows with the new requirements; (ii) identify the most efficient channels to manage such information flows between them and the manufacturers.
In performing the activities above, manufactures and distributors are required to refer for guidance to, respectively, Annex 1 and Annex 2 to the Letter, which refer to the relevant EU rules taking into account the principle of proportionality set out by IDD with regard to the complexity and riskiness of products (and, for manufacturers, to their size and structure).
Annex 1 – Manufacturers
POG arrangements should:
- Be focused on the interests, objectives and characteristics of the clients, which must be safeguarded by adequate measures during the design, control, review and distribution phases of the products;
- Provide for appropriate measures in case of products that may cause economic losses to clients; and
- Identify ways to properly manage conflicts of interest, which may arise in the design phase or during the entire life of the product.
Such arrangements should be proportionate to the level of complexity and riskiness of the products as well as to the nature, size and complexity of the activities carried out by the manufacturers.
The manufacturer’s management should approve POG arrangements and define the timing of their periodic review. All the personnel in charge of designing products should have enough knowledge and experience to properly understand the products and assess their target market, on the basis of the criteria set out by the manufacturer. The manufacturer remains the sole responsible for complying with POG arrangements, even when the product design phase is outsourced.
Manufacturers should (a) define the measures to be taken to ensure that their distributors operate in accordance with the POG arrangements and correctly place the products to the relevant target market only, and (b) set out the corrective measures to be taken in case of misconduct.
Before and after placing the product on the market, manufacturers should carry out appropriate tests on it, in order to assess whether the product continues to meet the interests, objectives and characteristics of the identified target market during its entire life.
IVASS specifies that such tests should also be performed on products placed on the market before the entering into force of IDD, particularly in case of market disruption events (e.g. default of the issuer of a financial instrument used as underlying for a life insurance product), which may determine losses for clients.
Finally, manufacturers should keep records of all the measures undertaken to comply with the new POG requirements during the whole life of the relevant products.
Annex 2 – Distributors (Sections A, B and D of the Register of insurance intermediaries)
POG arrangements should:
- Guarantee that the interests, objectives and characteristics of the clients are adequately taken into account;
- Prevent and reduce detriment to clients; and
- Identify ways to properly manage conflicts of interest.
Specifically, POG arrangements should ensure that the distributor obtains appropriate information from the manufacturer on the main characteristics of the insurance product that he intends to offer to its clients, the respective approval process, the identified target market, the relevant risks and costs (including the implicit ones) and the distribution strategy, including any circumstance that could result in a conflict of interest that may cause detriment to the clients.
The distributor’s management body should approve POG arrangements and define the timing of their periodic review. Such arrangements should be proportionate to the complexity of the distributor’s structure.
As soon as he discovers that a product does not match the interests, objectives and characteristics of the initially identified target market, the distributor should inform the manufacturer and provide him with elements that may confirm such a circumstance (e.g. complaints received from clients).
Finally, also distributors are required to keep records, for the whole lifetime of the product, of all the measures undertaken to comply with the new POG requirements.
Legália will monitor future developments on these topics and is available to provide you with any clarification or support in their respect.
Contacts:
Vito Vittore
Senior Partner
Elena Pagnoni
Of counsel
Luigi Bonifacio
Associate
