COMPARATIVE IMPLEMENTATION OF EU DIRECTIVES (III) INSURANCE MEDIATION

Transcription

1 CITY RESEARCH SERIES NUMBER TWELVE COMPARATIVE IMPLEMENTATION OF EU DIRECTIVES (III) INSURANCE MEDIATION CRA International MAY 2007

2 CITY RESEARCH SERIES NUMBER TWELVE COMPARATIVE IMPLEMENTATION OF EU DIRECTIVES (III) INSURANCE MEDIATION Authors: Fiorenzo Bovenzi, Daniel Jacobson, Kyla Malcolm, Mark Tilden, Nonthika Wehmhorner CRA International 1 Undershaft London EC3A 8EE United Kingdom Tel: Fax: MAY 2007

3 Comparative Implementation of EU Directives (III) Insurance Mediation is published by the City of London. The authors of this report are Fiorenzo Bovenzi, Daniel Jacobson, Kyla Malcolm, Mark Tilden and Nonthika Wehmhorner of CRA International. This report is intended as a basis for discussion only. Whilst every effort has been made to ensure the accuracy and completeness of the material in this report, the authors, CRA International, and the City of London, give no warranty in that regard and accept no liability for any loss or damage incurred through the use of, or reliance upon, this report or the information contained herein. May 2007 City of London PO Box 270, Guildhall London EC2P 2EJ

4 Table of Contents Foreword. 1 Executive Summary Introduction Overview of the Insurance Mediation Directive Mandatory registration and professional requirements Information requirements 9 3. Overview of the implementation of the IMD in the EU Case studies Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom Rationale for the choice of representative case studies A comparative analysis of the implementation of the IMD Scope of national rules implementing the IMD and exemptions Retention of acquired rights (Grandfathering) Choice and regulatory style of competent authority Requirements relating to competence and good repute Obligations relating to professional indemnity cover, protection of client money, and solvency requirements Minimum requirements for disclosure of information to customers Arbitration procedures and compensation schemes Cost of regulating insurance mediation after the implementation of the IMD Direct regulatory fees Compliance costs. 31

5 4.9 The impact of the implementation of the IMD on market structure of the insurance mediation sector Role of the industry in the process of the implementation of the IMD and of regulation of general insurance mediation. 32 Annex A: Case study for France. 34 Annex B: Case study for Germany 44 Annex C: Case study for the Netherlands.. 54 Annex D: Case study for the United Kingdom.. 65 Annex E: Comparative Tables. 80 Acknowledgements. 83

6 Foreword Michael Snyder Chairman, Policy and Resources Committee City of London Our series of research reports on the comparative implementation of EU directives is intended to help overcome inconsistencies and differential costs in the implementation of EU Financial Services Action Plan (FSAP) measures because these were designed to achieve a harmonized market place across Europe in the interests of greater competition and improved international competitiveness. These reports seek not simply to identify areas in which implementation has been uneven, but also to analyse the factors which have produced such disparities. While it is sometimes the case that problems have arisen because of flaws or ambiguities in the directives themselves, it is also common to discover that they have been caused or exacerbated at the national state level by such things as differences in legal frameworks, variations in the existing regulatory regimes, the presence or otherwise of earlier legislation, and regulators enthusiasm for super-equivalence i.e. going beyond the scope of the directive. This report, on the comparative implementation of the Insurance Mediation Directive, illustrates the sort of problems that can arise due to national differences. The IMD itself is a minimum harmonisation directive, with the apparently simple objectives of introducing minimum professional requirements for intermediaries, requiring them to be registered with a competent authority in the home Member State, and establishing the minimum amount of information that they must give to consumers before concluding an insurance contract. Implementation has, however, thrown up a host of problems. Only four of the EU-15 countries transposed the IMD into National legislation before the 15 January 2005 deadline, and one, Germany, had still not completed the process at the time of writing. In addition, all four of the countries covered in detail in this report, France, Germany, the Netherlands and the UK, have been guilty, to a greater or lesser extent, of gold-plating the Directive through the imposition of either additional rules or higher than required standards. In their analysis, CRA International suggest that there are two main reasons for these variations: the presence or otherwise of statutory regulation before the IMD was introduced, and whether the Member States concerned have single or sectoral regulators. The most worrying conclusions, however, are that interviewees in all four countries felt that the IMD would increase cost and the regulatory burden which it was feared might drive smaller operators out of the market, and that the cost of implementation itself has varied significantly. The available evidence suggests strongly that the heaviest burden has fallen on the UK.

7 We note, however, that the FSA has in recent months been conducting a review of its Insurance Conduct of Business (ICOB) rules for certain general insurance products. This has so far resulted in the publication of an Interim Review which found limited evidence of consumer detriment (for example, by buying insurance that was either overly expensive or inappropriate to their needs) for standardised products such as home or motor insurance. As a result, the FSA is proposing to remove most of the ICOB requirements that exceed minimum IMD rules. In the context of the attached report this is a positive development which can be said to have been stimulated by the Davidson Review of the implementation of the EU legislation in the UK, to which we contributed. This called last November on the FSA to consult on removing gold-plating in the insurance mediation field by the end of Overall, we hope that the report will aid in the pursuit of the responsibilities the EU Commission and the national regulators have for ensuring more consistent transposition and more effective implementation of EU financial services legislation. This is key to achieving real gains from the FSAP measures and ensuring that the EU s financial services sector fulfils its full potential in contributing to European economic growth and fulfilment of the objectives of the Lisbon Agenda. Michael Snyder London May

8 Executive Summary The City of London asked CRA International to carry out a study into the implementation of the Insurance Mediation Directive (IMD). This Directive introduces minimum professional requirements for all insurance intermediaries across Europe and requires them to be registered with a competent authority in the home Member State. The Directive also establishes the minimum amount of information that intermediaries must give to consumers before concluding an insurance contract. Incomplete implementation across the EU The IMD was published in December 2002 and was supposed to be implemented before 15 January 2005 in all Member States. Only four countries in the EU-15 transposed the IMD into national legislation on time (Austria, Denmark, Ireland and the UK); among the remaining countries which were late in implementing the Directive, Germany was still in the process of implementation at the time of writing. A brief review across the EU-15 finds differences between countries regarding the regulatory landscape in place before implementation and the competent authority used for implementation. In some countries (such as Belgium and Sweden), the IMD appears to have led to an insurance regulator being folded into a new single regulator. Focus on France, Germany, the Netherlands and the UK In this report we provide detailed information about the implementation of the IMD in four different countries: France, Germany, the Netherlands and the UK (which is the only country in our sample that implemented the IMD in a timely manner). This selection combines countries that have a single regulator across the financial services sector (the Netherlands and the UK) with those that have implemented the IMD through a more sector-specific regulator (France and Germany). All Member States except Germany and the UK already had some form of statutory regulation in place before the introduction of the IMD which in many cases also meant the existence of a regulator specifically in charge of the insurance sector. Partly as a result of this regulatory history, the majority of Member States have designated the pre-existing regulator as the competent authority according to the IMD requirements, although a few changes do exist (e.g. in France and the Netherlands). Differences in implementation in these major markets Our report finds that there have been noticeable differences in implementation of the IMD amongst these four countries. While there are specific details associated with each country, there are a number of themes that are possible to identify and we provide details on these below. One of the clear results from the study is that all four countries have imposed some additional rules ( gold-plating ) when implementing the Directive: 3

9 The area of information requirements seems to have been particularly affected with additional requirements relating to the provision of a risksheet, a policy summary, or the disclosure of fees received by the intermediary. The requirements relating to competence have also been susceptible to gold-plating in most countries. In the UK, the Financial Services Authority (FSA) allows considerable flexibility. In the other three countries there are stricter rules such as the possession of certain qualifications, previous experience, and required number of hours of training. The presence of statutory regulation before the IMD seems to have affected the implementation process: Both France and the Netherlands had a statutory regime and some form of register prior to IMD and, according to our interviewees both appear to have achieved a relatively smooth implementation of IMD. By contrast, interviewees indicated that implementation in the UK (where there had been previously been a voluntary regulatory regime) had been more difficult. The German experience is still unclear because implementation has not yet been completed. In addition, the different ways in which gold-plating has occurred also appear to be dependent on the previous regime in place. For example, some countries gold-plated those requirements where the IMD set lower standards compared to those that were already in place in the country (e.g. minimum limits of professional indemnity cover in France). Different national regulatory dimensions Whether or not countries have sectoral or single regulators in financial services also appears to have had an impact (although with only four case studies this conclusion should be seen as tentative): In the UK and Netherlands, where a single regulator is in charge of the whole financial services sector, the IMD requirements have been applied to direct selling of insurance products beyond the IMD scope as well as to intermediaries. It seems likely that in both cases the regulator wants to supervise the distribution of insurance products in a consistent manner regardless of the channel used to carry out the activity. In contrast, France and Germany, which have applied the IMD through sectorspecific regulators, follow the text of the IMD and do not include direct selling within the scope of the rules. Although the split between direct sales and sales through other intermediaries varies between countries, the application of IMD requirements to direct sales has a significant impact in the UK and the Netherlands. 4

10 In the UK, one of the implications of insurance intermediaries being regulated by the FSA is that other rules contained in the FSA Handbook have also been applied which interviewees have perceived as leading to greater burdens than in other countries. In contrast, French and Dutch interviewees were much less critical of the rules adopted in their countries. The German experience is still not clear as implementation has not been completed. The style of regulation of the UK and the Netherlands appears to be similar in terms of a proactive approach involving inspections, supervision and on site visits. The French approach appears to be less proactive, although this is still to be determined as the regulatory bodies that have been formed as a result of IMD are still relatively new. The German regime is not yet in place. Grandfathering differences The Netherlands, France and Germany all allowed existing insurance intermediaries to retain their rights and continue their activity without having to re-qualify for their national register ( grandfathering ). This is not surprising for France and the Netherlands where some form of register was already in place pre-imd. In contrast, it is perhaps surprising that Germany where there was no register at all permitted grandfathering for certain kinds of intermediaries. In the UK, grandfathering was not permitted; even for those intermediaries who were already complying with the voluntary regime through the General Insurance Standards Council (GISC) (approximately 6,000 intermediaries or one third of the market). Wide variation in the cost of implementation Available evidence suggests a wide variation in the cost of the implementation of the IMD and compliance with the new rules. It appears that implementation costs were significantly higher in the UK than elsewhere based on the cost benefit analysis performed by the FSA. The Dutch also performed a cost benefit analysis which appears to show that their implementation was less costly than the UK. France and Germany have not performed any cost benefit analysis. Interviewees in all four countries felt that IMD would increase cost and regulatory burden, and that this would cause small players to leave the market. There were mixed views as to whether this was beneficial or not. Respondents from France, Germany and the Netherlands cited the benefits of the IMD as a counterweight to the loss of smaller players from the market. Consultation process Lastly, different countries appear to have used different processes of consultation before finalising their IMD implementation. The extensive degree of constructive engagement with industry bodies may help explain the relative ease of implementation in the Netherlands and France. In this respect, we note that the FSA will soon consult the industry in order to simplify the current rules for the sale of insurance products following the Davidson Review. 5

11 In summary, it is clear that implementation of IMD varied widely in the countries we studied. This manifests itself in the detail of each nation s final regulation, but also in the manner and ease or difficulty of the implementation process. Not surprisingly, these differences are partly related to the nature of the pre-existing regulatory regime in the countries we studied. For example, where a register already existed together with a statutory body of rules not dissimilar to IMD (such as in France), IMD implementation appears to have gone relatively smoothly and without excessive cost. It also seems clear that single regulators (as in the UK and the Netherlands) had an impact on the final form of IMD in their countries, for instance in terms of extending the regime to other distribution channels for which they were responsible, but which were not included in IMD. Finally, it is clear that all countries we studied in detail engaged in some form of gold-plating. 6

12 1 Introduction The City of London asked CRA International to carry out a study into the implementation of Directive 2002/92/EC on insurance mediation (hereafter referred to as the Insurance Mediation Directive, the IMD, or the Directive) in Europe. The IMD introduces minimum professional requirements for all insurance intermediaries across Europe and requires them to be registered with a competent authority in the home Member State. The Directive also establishes the minimum amount of information that intermediaries must give to consumers before concluding an insurance contract. Once they meet these requirements in their home country, insurance intermediaries can freely provide their services in the other Member States. Published in December 2002, the Directive had to be implemented before 15 January 2005 in all Member States. Its implementation, however, has suffered from delays in several countries; in addition, there are concerns that its transposition into national legislation has not been uniform across Europe. According to many commentators, these facts hinder the creation of a single market for insurance mediation and may entail greater costs for those intermediaries located in countries where the IMD has been implemented earlier or where national rules go beyond the Directive. This report provides a comparative analysis of how the IMD has been implemented in Europe, whether the way that IMD has been implemented reflects the different regulatory structures observed in different markets, and major policy implications. The structure of this report is as follows: Chapter 2 provides an overview of the main provisions contained in the IMD; Chapter 3 is an up-to-date survey of the implementation of the IMD across the EU-15. It provides information on whether, and when, the Directive has been transposed into national legislation, which type of regulatory regime was in place before the IMD (e.g. statutory or voluntary regulation), and which type of authority was designated as the competent authority responsible for implementing the IMD (i.e. whether the authority was specialised in the insurance sector or multi-sectoral). Using this information we also explain the rationale behind our choice of France, Germany, the Netherlands, and the UK as representative examples of how the IMD has been implemented across Europe; Chapter 4 presents a comparative analysis of the implementation of the Directive in France, Germany, the Netherlands, and the UK. The analysis in this chapter draws on the detailed case studies for these countries, which are found in the annexes. 7

13 2 Overview of the Insurance Mediation Directive The IMD aims at enabling insurance intermediaries (e.g. brokers, agents, and bancassurance operators) to operate across the entire EU (under the regime of both freedom of establishment and freedom to provide services), while enhancing customer protection at the same time. The Directive only applies to persons who provide insurance mediation services to third parties in exchange for remuneration. 1 Moreover, it does not apply to persons who provide advice on insurance cover on an incidental basis in the course of other professional activities (e.g. tax experts or accountants; see article 2.3) or as an ancillary activity under certain strict conditions. 2 The main provisions of the IMD refer to: mandatory registration and professional requirements of insurance intermediaries (chapter II of the Directive); and, information requirements for insurance intermediaries (chapter III). 2.1 Mandatory registration and professional requirements Under the rules set out in chapter II, insurance and reinsurance intermediaries of all Member States are required to be registered with a specifically designated competent authority in their respective jurisdictions. Registration of intermediaries is subject to the fulfilment of strict professional requirements and enables them to operate across the entire EU, after previous notification to the home competent authority of the decision to carry our insurance mediation abroad. The professional requirements considered by the Directive relate to the competence, good repute, professional indemnity cover and financial capacity of insurance intermediaries. 1 According to article 2.3 of the Directive, insurance mediation includes the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim. It does not include direct selling, i.e. when these activities are carried out by an insurance company or its employees. 2 According to article 1.2 of the IMD, the Directive does not apply to persons providing mediation services for insurance contracts if all the following conditions are met: (a) the insurance contract only requires knowledge of the insurance cover that is provided; (b) the insurance contract is not a life-insurance contract; (c) the insurance contract does not cover any liability risks; (d) the principal professional activity of the person is other than insurance mediation; (e) the insurance is complementary to other products or services (e.g. it covers the risk of breakdown, loss or damage to goods, or it is travel insurance); (f) the amount of the annual premium does not exceed 500 and the total duration of the insurance contract, including any renewals, does not exceed 5 years. Also, the Directive does not apply to tied insurance intermediaries who act under the full responsibility of an insurance company and do not collect premiums from customers (article 2.7). 8

14 According to article 4.1 of the IMD, insurance and reinsurance intermediaries must possess appropriate knowledge and ability, as determined by the home Member State of the intermediary. These requirements can vary with the activity of insurance or reinsurance mediation and the products distributed. Moreover, intermediaries must be of good repute (article 4.2), i.e. they must at least have a clean police record (in relation to serious criminal offences linked to crimes against property or other crimes related to financial activities) and have not been previously declared bankrupt (unless they have been rehabilitated). Intermediaries are also required to hold professional indemnity insurance covering the entire EU for at least 1,000,000 for each claim and 1,500,000 in aggregate for all claims in a single year (article 4.3). Article 4.4 of the IMD requires Member States to adopt measures relating to client s money including any of the following: Provisions established by law or contract whereby monies paid by the customer to the intermediary are treated as having been paid to the insurer, whereas monies paid by the insurer to the intermediary are not treated as having been paid to the customer until the customer actually receives them; A requirement for insurance intermediaries to have financial capacity amounting to 4% of the sum of annual premiums received, subject to a minimum of 15,000; A requirement that customers' monies are transferred via strictly segregated client accounts and that these accounts shall not be used to reimburse other creditors in the event of bankruptcy; and A requirement that a guarantee fund be set up. According to article 4.6 of the IMD, Member States are allowed to adopt stricter or further requirements than those described above for intermediaries registered within their jurisdiction. Article 5 of the IMD introduced the possibility of the retention of acquired rights ( grandfathering ). In other words, Member States had the ability to decide that people who had been carrying out insurance mediation before 1 September 2000, were included in a register, and had a level of training and experience similar to that required by the Directive might be automatically entered in the newly established register (once the conditions relating to professional indemnity cover and financial capacity were met). As established in articles 10 and 11 of the Directive, Member States must also ensure that procedures are in place for registering clients complaints about intermediaries and for the out-of-court settlement of disputes between clients and intermediaries. 2.2 Information requirements Article 12.1 of the IMD (in chapter III) describes the minimum amount of information that insurance intermediaries must provide to customers before the conclusion of any insurance contract. An intermediary must specify: 9

15 name and address; the register in which he is included; whether he holds more than 10% of the voting rights or the capital in a given insurance company; whether an insurance company holds more than 10% of the voting rights or capital in the intermediary; and the procedures which allow customers to register complaints and the out-of-court dispute resolution procedures. Furthermore, an intermediary must also inform the client whether: he gives advice based on the obligation to provide [ ] a fair analysis, or he is under a contractual obligation to conduct insurance mediation business exclusively with one or more insurance undertakings, [ ] or he is not under a contractual obligation to conduct insurance mediation business exclusively with one or more insurance undertakings and does not give advice based on the obligation [ ] to provide a fair analysis. According to article 12.2 of the Directive, if an intermediary provides advice on the basis of a fair analysis, he is then required to conduct a fair and sufficiently wide-ranging analysis of products available in the market, so that his proposed choice of insurance products is adequate to meet the customer s needs. Moreover, as per article 12.3, before the conclusion of a contract an intermediary must specify, on the basis of information provided by the customer, the demands and the needs of that customer as well as the underlying reasons for any advice given to the customer on a given insurance product. In respect of these information requirements, the Directive gives Member States the option of adopting stricter provisions if they so wish (article 12.5); these stricter provisions would apply to all intermediaries operating in the concerned Member State, even though not registered with the local competent authority. Lastly, article 13.1 states that this information must be provided on paper or other durable medium available and accessible to the customer, and in a clear and accurate manner, comprehensible to him. The information, however, may be provided orally if the customer requests it, or where immediate cover is necessary (article 13.2). The deadline for Member States to comply with the IMD was set as 15 January 2005, although very few countries (Austria, Denmark, Ireland, and the UK) managed to implement it on time. In most European countries the Directive was only implemented in late 2005 or during At the time of writing it has not yet been fully implemented in Germany. 10

16 3 Overview of the implementation of the IMD in the EU-15 In this chapter we provide a review of the current state of the implementation of the IMD in the EU-15 countries. In particular, for each country we report when the IMD was implemented, the designated regulatory authority for insurance mediation and what regulatory regime was in place prior to the implementation of the Directive. 3 We also use this information to inform our choice of case studies of regimes of insurance mediation in Europe as described in section Case studies Austria The IMD was implemented in Austria on 29 November 2004 with the law modifying the previous framework defined by the Trade and Commercial Regulations Act, the Broker statute, the Insurance Contract Act, and the Banking Act (Novelle der Gewerberordnung BGBI. I. Nr. 131/2004). This law entered into force on 15 January 2005, as required by the Directive. According to this law insurance intermediaries must be registered by the district authorities (Bezirksverwaltungsbehörde), which are in turn supervised by the Federal Ministry of Economy and Labour. The Federal Ministry is also the competent authority for the central register of insurance intermediaries, as it centralises the collection of data entered by the district authorities. The Financial Markets Authority (FMA) is the regulatory authority for insurance intermediaries who are employed by credit institutions. 4 Under the previous regime, brokers and agents were required to be registered in a central register of all businesses instead of a specific register for insurance intermediaries and the existing requirements regarding professional qualifications and registration were comparable to those in the IMD. As a result, all insurance intermediaries which were previously registered were considered to fulfil the requirements set out by the IMD on reputation and professional qualification. The requirements of the IMD, however, are stricter with reference to past bankruptcies and good repute. 5 3 For the drafting of this section we used Implementation of the IMD by EU Member States 9 th Update, a report published by BIPAR (the European Federation of Insurance Intermediaries) in December We thank BIPAR for kindly making available this report to us. 4 Federal Ministry of Economy and Labor: 5 Document by the BMWA (Austrian Federal Ministry of Economy and Labour) on the implementation of the amended business code, (Umsetzungsbestimmungen): E0106C02EC47/0/UmsetzungsbestimmungenVersicherungsvermittlung.pdf. 11

17 3.1.2 Belgium Belgium implemented the IMD on 15 March 2006, when the new law modifying the previous framework established in 1995 entered into force. 6 The authority in charge of supervising insurance intermediaries in Belgium is the CBFA (Commission Bancaire, Financiere et des Assurances). On 1 January 2004 the Insurance Supervisory Authority was incorporated into the CBFA which is now the single supervisory authority for the Belgian financial sector. Prior to the implementation of the IMD into the Belgian legislation, insurance intermediaries (including brokers, agents, and sub-agents) were subject to statutory regulation, as described by the law of 27 March The impact of the IMD was therefore expected to be small as it has been noted that the IMD was prepared during the Presidency of Belgium and was therefore largely inspired by the existing Belgian legislation Denmark Denmark implemented the IMD into national legislation in August 2005 with the Insurance Mediation Act 767 of 5 August Under the previous regime only brokers were regulated; in contrast, the new Act covers all intermediaries (i.e. agents and brokers). The competent authority for regulating insurance mediation in Denmark is the Danish Financial Services Authority (Finanstilsynet) Finland In Finland the new Act on Insurance Mediation (Act No. 570/2005, Laki vakuutusedustuksesta) implementing the IMD into national legislation entered into force on 1 September All insurance intermediaries are now regulated, whereas only brokers were regulated under the previous regime. The regulator is the Insurance Supervisory Authority (ISA Vakuutusvalvontavirasto), which is part of the Ministry of Social Affairs and Health France France transposed the IMD into national legislation in December 2005 with law no of 15 December 2005, which modified Book V of the Insurance Code. The corresponding decrees and ministerial orders which work out in detail the general provisions of the law were then published during Statutory regulation of insurance mediation was already in place in France prior to the implementation of the IMD. In particular, insurance mediation 6 BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p C/M/S, IMD Guide Selling Insurance Across Europe January 2006, page 22: 8 BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p

18 was regulated by the Insurance Code (Code des Assurances, in French), first published in The French regulatory authority for the insurance sector is now ACAM (Autorité de contrôle des assurances et des mutuelles). Registration of intermediaries, however, is now entrusted to a separate agency (ORIAS), whereas this task was previously carried out by ALCA (Association de la Liste des Courtiers d'assurances) Germany Germany has only very recently implemented the IMD into national legislation: the law was published in the Federal Gazette on 22 December 2006 and will come into force on 22 May The implementation of the IMD will represent a major change in Germany, as insurance intermediaries (including brokers, agents, and sub-agents) are currently subject neither to authorisation nor to any other registration requirements. After long discussions, the local Chambers of Industry and Commerce which are in turn supervised by the Federal Lander have been designated as competent authority and responsible for setting up the register of intermediaries Greece In Greece the IMD was implemented on 14 September 2006 when the new law amending the Insurance Mediation Act of 1985 was published in the Official Journal. 15 The supervisory authority is the newly-formed Commission for the Supervision of the Insurance Market, which is part of the Greek Ministry of Development. It is expected that the Ministry of Development, which was responsible for regulating insurance intermediaries in Greece before the IMD, will continue to supervise both intermediaries and insurance companies until the new Commission is fully operational Ireland Ireland implemented the IMD in accordance with the timescale in the Directive on 14 January 2005 through Statutory Instrument no. 13 of Before the implementation of the IMD, the Insurance Act of 2000 provided the general regulatory framework for the insurance sector and also introduced a system of statutory authorisation and supervision of insurance and reinsurance 11 C/M/S, IMD Guide Selling Insurance Across Europe January 2006, page 30: 12 ALCA, however, only represented brokers. 13 BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p

19 intermediaries. 17 Moreover, investment and insurance intermediaries were regulated by the Financial Regulator under the Investment Intermediaries Act of The Irish Financial Services Regulatory Authority (IFSRA) is responsible through its Insurance Section for regulating, supervising and enforcement. Both intermediaries and insurers are regulated by the IFSRA Italy In September 2005 the Italian government published the new Insurance Code (Legislative decree 209/2005), which implemented the IMD into the Italian legislation. The new Code entered into force on 1 January 2006, although ISVAP the Italian supervisor for the insurance sector was given 24 months from such date to adopt specific regulations. In October 2006 ISVAP approved the regulation concerning the activity of insurance mediation (regulation 5 of 16 October 2006). This regulation introduces a single register of insurance intermediaries (including: agents, brokers, canvassers, banks, and employees/freelance affiliates to agents, brokers or banks), which became operational on 1 January Insurance mediation had already been subject to statutory regulation in Italy since 1984 (with Law 792/1984) when a compulsory public register of insurance intermediaries was created. The original register, however, included only 2 categories, instead of the 5 listed above in the new register. ISVAP is the specific supervisor for the insurance sector and is independent of the Italian financial services authority CONSOB. The new Code also stipulated that all competencies concerning insurance intermediaries are transferred from the Ministry of Trade and Industry to ISVAP Luxembourg Luxembourg adopted the IMD with the law of 13 July 2005, which modified the existing legal framework defined in December The law was complemented by the regulation of 24 November 2005 on the licensing and pursuit of the business of insurance and re-insurance intermediaries, which came into force on the 6 December The law governs all intermediaries, including agents, brokers and sub-brokers, who are all defined in the law. The competent authority for insurance mediation in Luxembourg is the Commissariat aux Assurances, the specialised supervisor for the insurance sector. 17 Irish Financial Services Regulatory Authority, Insurance Statistical Review 2004, p. 115: 18 Irish Financial Services Regulatory Authority: /in_int_intr.asp&nv=/industry/in_nav.asp. 19 BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p

20 Netherlands The IMD was initially brought into Dutch law by the Financial Services Act (Wet financiële dienstverlening Wfd) of 12 May 2005 which entered into force on 1 January The Wfd has subsequently been integrated in the Act on Financial Supervision (Wet op het financieel toezicht Wft) of 26 September 2006, which came into force on 1 January The competent authority in charge of implementation of the IMD is now the Authority Financial Markets (AFM), which is also in charge of general financial services in the Netherlands. Insurance mediation as well as advice (in a professional capacity and resulting in a recommendation of a specific product) fell under the scope of the Financial Services Act implementing the IMD and then of the Act on Financial Supervision. Intermediaries were already subject to compulsory registration with the regulator before the IMD. Previous registration requirements included proof of experience and knowledge by providing certificates to show completion of courses as well as having no prior criminal records or bankruptcy Portugal Portugal implemented the IMD into national legislation with Decree Law no. 144 of 31 July 2006, which entered into force on 28 January This replaced the old regime which was established in 1991 (Decree Law no. 388). The authority regulating insurance mediation in Portugal is the ISP (Instituto de Seguros de Portugal, in Portuguese), the specialised regulator for the insurance sector. Whilst the supervisory body will be in charge of the registration, insurers will be competent to verify if tied intermediaries comply with professional requirements before registering Spain Spain implemented the IMD on 17 July 2006 with the approval and publication of Law no. 26 of 2006 on mediation of private insurance and reinsurance (Ley de mediación de seguros y reaseguros privados, in Spanish). Prior to the implementation of the IMD, the regulatory framework on insurance mediation in Spain was contained in Law no. 9 of The new Law is built around the following three principles: Introduction of new intermediaries (like insurance agents linked to multiple insurance companies and reinsurance brokers); Equality of treatment of all intermediaries, including equivalent professional requirements; and, 20 BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p C/M/S, IMD Guide Selling Insurance Across Europe January 2006, page 52: 22 BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p BIPAR, Implementation of the IMD by EU Member States 9 th Update, December 2006, p

21 Enhancement of transparency requirements in order to protect consumers. The Spanish competent authority as per article 7 of the IMD is the General Directorate of Insurances and Pension Funds (Dirección General de Seguros y Fondos de Pensiones, or DGS, in Spanish). This is a division of the Ministry of Economy and Finance and separate from the general Spanish financial services authority CNMV. Under the previous regime, only brokers were regulated and subject to registration, whereas insurance agents were trained by (and registered with) their insurance company only. Insurance companies managed their own registry of agents and assumed the administrative responsibility for its agents. 24 As a result, insurance companies were not required to be registered or authorised to carry out insurance mediation activities through directly selling to customers. The new regime requires all intermediaries including tied and multi-linked agents to be registered with the supervisor, in accordance with the principle of equality of treatment. The DGS has also published answers to a list of practical questions raised by industry representatives Sweden Sweden implemented the IMD on 1 July 2005 with the parliamentary approval of the Insurance Mediation Act and Insurance Mediation Ordinance and the publication of the corresponding regulations. Insurance intermediaries in Sweden have been under the obligation of being authorised by (and registered with) the supervisory authority and keeping professional requirements since Moreover, direct selling of insurance products has always been regulated in Sweden. Finansinspektionen, the single financial supervisory authority in Sweden, is the competent authority responsible for the supervision of the insurance mediation business (including authorisations and legal issues), whereas Bolagsverket, the Companies Registration office, is responsible for the registration of insurance intermediaries C/M/S, IMD Guide Selling Insurance Across Europe January 2006, page 62: final_links_0306.pdf. 25 DGS, Contestaciones a las preguntas de las entidades aseguradoras sobre la nueva normative de mediación de seguros y reaseguros privados, July 2006: DAMEDIACI%C3%93N% pdf. 26 Finansinspektionen, Activity of EEA-Intermediaries in Sweden, 24 th January 2006: 16

22 United Kingdom In the UK the IMD was implemented on 14 January In December 2001, HM Treasury chose the FSA as the competent authority responsible for the implementation of the IMD. The transposition of the IMD into UK legislation represented a major change in the regulation of general insurance mediation, as the industry was not subject to statutory regulation before the IMD. In the pre-imd regime GISC (the General Insurance Standards Council) an independent organisation voluntarily created by the industry set standards and good practices for its more than 6,000 members (estimated to be about a third of the market). 3.2 Rationale for the choice of representative case studies The overview presented in section 3.1 provides an assessment of when IMD was implemented; whether statutory or voluntary (or no) regulation of general insurance mediation was in place before the IMD; and, whether the current supervisory authority is specialised in the insurance market or is in charge of the whole financial services sector. Table 1 provides a summary of the implementation of the IMD across the EU

23 Table 1: Summary of the implementation of the IMD across the EU-15 Country Date of Implementation Competent Authority Previous regime Austria 29/11/2004 Federal Miistry of Economy and Labour Brokers and agents were required to be registered in a central register of all businesses Belgium 15/03/2006 CBFA Insurance intermediaries were subject to statutory regulation Denmark 05/08/2005 Financial Services Authority Finland 01/09/2005 Insurance Supervisory Authority Only brokers were regulated Only brokers were regulated France 15/12/2005 ACAM Statutory regulation of insurance mediation was already in place Germany 22/05/2007 (expected) Chamber of Industry and Commerce No previous regulation Greece 14/09/2006 Commission for the Supervision of the Insurance Market Ireland 14/01/2005 Irish Financial Services Regulatory Authority Regulated by Ministry of Development A system of statutory authorisation and supervision of insurance and reinsurance intermediaries Italy 01/01/2006 ISVAP Compulsory public register of insurance intermediaries Luxembourg 24/11/2005 Commissariat aux Assurances Insurance intermediaries were subject to statutory regulation Netherlands 01/01/2006 AFM Compulsory registration with the regulator Portugal 28/01/2007 ISP Insurance intermediaries were subject to statutory regulation Spain 17/07/2006 General Directorate of Insurances and Pension Funds Only brokers were regulated Sweden 01/07/2005 Finansinspektionen Regulation for all intermediaries since 1989 UK 14/01/2005 FSA Voluntary regulation with GISC Source: CRA analysis 18

24 Almost all countries included in this section have transposed the IMD into national legislation after the deadline of 15 January 2005, although four countries did meet the deadline (Austria, Denmark, Ireland, and the UK). At present only one of the old 15 Member States has yet to implement the IMD, as the law implementing the IMD in Germany will only come into force during the first half of 2007 (see section 31.6). The survey of the EU-15 identified two important characteristics of the regulatory regime that differed between Member States, namely: whether statutory or voluntary (or no) regulation of general insurance mediation was in place before the IMD; and, whether the current supervisory authority is specialised in the insurance market or is in charge of the whole financial services sector. We use these two dimensions to define a matrix (see Figure 1) and to inform our choice of representative case studies. In all countries except Germany and the UK there was some form of statutory regulation for general insurance mediation in place before the IMD; in some cases (e.g. Belgium) this statutory regulation was also very similar to that contained in the IMD. As for the regulatory authority, the supervision of insurance mediation is carried out by sector specific regulators in most countries. In some countries where, by way of contrast, a single regulator is in charge, the former insurance regulator was folded into the new super regulator (e.g. Belgium and Sweden). The UK and Germany, however, had no sector specific regulator prior to IMD. We used this matrix to choose a subset of four Member States to focus our analysis. The objective is to understand whether the structure of the competent authority (i.e. sector specific versus single regulator ) and existence (or not) of statutory regulation for insurance intermediaries has affected the implementation of IMD in various countries. The UK and Germany are similar in that they were the only countries where there was no statutory regulation of general insurance mediation before IMD. The two countries, however, have adopted a different approach to choice of the competent authority, and are therefore located in different sections of the matrix. In the UK, the independent body voluntarily set up by the industry (GISC) was dissolved and the FSA was given responsibility for regulating the sector. In Germany after long discussions it was finally decided to designate the local Chambers of Commerce as competent authorities, without involving the financial regulator Bafin. Among the countries where statutory regulation was already in place before the IMD, our selected countries are the Netherlands and France. In the Netherlands, the single Dutch financial authority AFM follows a similar approach to regulation as the FSA in the UK, for instance, through the use of public consultations and requirements to carry out cost-benefit analysis. 19

25 Among the countries with a specialised regulator (as opposed to a single overarching regulator) we have chosen France because it is one of the largest insurance markets in Europe, together with Germany. Figure 1: Summary of regulatory regimes for insurance mediation in Europe Sectoral regulator Single regulator Statutory regulation of general insurance in place prior to IMD - Austria - Finland (only brokers) - France - Greece - Italy - Luxembourg - Portugal - Spain (only brokers) - Belgium - Denmark (only brokers) - Ireland - Netherlands - Sweden Voluntary (or no) regulation of general insurance in place prior to IMD - Germany - United Kingdom Source: CRA analysis. Note: Germany has designated the local Chambers of Commerce (IHKn) as competent authority, which is in turn supervised by the Ministry of Economy. The comparative analysis of the implementation of the IMD in these countries (the UK, France, Germany and the Netherlands) is presented in the next chapter, which is followed by detailed case studies for each country. 20

26 4 A comparative analysis of the implementation of the IMD In this chapter we examine the implementation of the IMD in France, Germany, the Netherlands, and the UK. Our analysis shows that there are a number of differences across countries, some of which are explained by the type of regulation in place in a certain country before the IMD or the approach chosen to implement it. These differences also translate into different costs that intermediaries are required to pay in each country. We examine ten different dimensions of IMD implementation in the four countries to enable detailed comparison of the implementation result. These ten dimensions are: Scope of national rules implementing the IMD and exemptions; Retention of acquired rights by existing intermediaries (grandfathering); Choice (single or sector-specific regulator) and regulatory style of competent authority; Requirements relating to competence and good repute; Obligations relating to professional indemnity cover, protection of clients money, and solvency requirements; Minimum requirements for disclosure of information to customers; Arbitration procedures and compensation schemes; Cost of regulating insurance mediation after the implementation of the IMD; The impact of the implementation of the IMD on national market structure of the insurance mediation sector; and The role of the industry in the process of preparing for, and implementing IMD, and in regulation of general insurance mediation. 4.1 Scope of national rules implementing the IMD and exemptions As described in Chapter 2, the IMD does not apply to direct sale of insurance products by insurance companies; it also provides a list of exemptions, e.g. relating to motor warranties and travel insurance cover. The scope of IMD and the list of exemptions are, however, different in the four countries selected. For example, insurance companies who directly sell their products must comply with the IMD rules in the UK and the Netherlands (where the activity of selling insurance products is regulated, irrespective of the sales channel), but direct selling is outside the scope of IMD in France and Germany. 21

27 As to exemptions, the national rules in France, Germany and the Netherlands follow the list in Article 1 of the IMD, with some minor differences. 27 The UK, however, goes beyond the minimum requirements established by the Directive) since all forms of motor warranties fall within the scope of the FSA rules implementing the IMD, including those with premiums below Retention of acquired rights (grandfathering) Article 5 of the IMD explicitly allows Member States to include in the newly established register persons who were: carrying out insurance mediation before 1 September 2000; included on a register; and who had a level of training and experience similar to that required by the Directive. This is an example of grandfathering, i.e. intermediaries with a certain amount of experience before the introduction of the IMD could retain their place in the register. Three of the selected countries used a permitted form of grandfathering when implementing IMD. In France, for example, brokers who were previously included in the register maintained by ALCA were automatically included in the new register created by ORIAS, after paying the annual registration fee. 28 Furthermore, intermediaries who had been actively selling insurances for two years before January 2007 were automatically included in the ORIAS register without having to undertake further training or submit any diploma. Surprisingly, in Germany, where there was no statutory regulation in place before the IMD, grandfathering was nonetheless implemented and intermediaries who had been actively employed since August 2000 are currently not required to pass an examination if they register before A similar regime was established in the Netherlands, whereby intermediaries already active and with a certain amount of experience or a diploma, were automatically granted a licence by the AFM if they applied within three months since the publication of the Financial Services Act of Grandfathering was not used in the UK despite the voluntary regulation previously in place through GISC, which covered approximately one-third of the total number of intermediaries active in the market. 4.3 Choice and regulatory style of competent authority There are clearly significant differences between the types of institution chosen as competent authority in the four countries. The style of regulation 27 In the Netherlands, exemptions are granted to intermediaries mediating in hail damage insurance, horse and livestock insurance or glass insurance, with the exception of greenhouse glass insurance and to travel agencies or organisations which mediate in travel insurance policies, if at least one employee in the branch has a relevant diploma. Also, the German law explicitly exempts intermediaries selling insurances which are part of a collective agreement of a building society aimed at insuring repayment of debt in relation to building loan agreements and intermediaries selling residual debt insurance for a consumer credit as part of selling another good under the condition that the annual premium does not exceed Intermediaries had three months since the publication of the French law implementing the IMD to comply with its provisions and retain their rights. 22

28 also differs between countries. We examined the consultation process employed (as described by our interviewees), and the manner in which the industry was monitored, i.e. extent to which supervision was used proactively or reactively. In both the UK and Netherlands the existing agencies responsible for regulating the whole financial services sector the FSA and AFM, respectively were designated as the competent authorities for regulating the insurance mediation sector. All market sources confirmed that the choice of the FSA and AFM as competent authority was seen as a foregone conclusion in the two countries. In addition, in both countries the choice of the FSA and AFM represented a significant change with respect to the previous regime. Indeed, the FSA replaced the voluntary regime implemented by GISC, whereas the AFM replaced the statutory regime supervised by the SFD (which was mainly in charge of registering intermediaries and did not carry out ongoing supervision of the sector). Interviews lead us to conclude that the FSA and AFM appear to adopt a similar regulatory style. Neither authority limits its activities to simple registration of intermediaries, but authorises or grants licences to them only after checking their professional qualifications (e.g. competence and good repute). Moreover, the FSA and AFM are quite proactive in supervising authorised/licensed intermediaries on a regular basis, e.g. through a regular program of visits and mandatory reporting. Lastly, intermediaries are now subject to an established regime of sanctions, in case of violation of the rules. 29 Both authorities established public consultations with the industry and participated in the drafting of the rules for insurance intermediaries. Interview input suggests that this process was possibly longer and more elaborate in the Netherlands, where several working committees were created to define the new rules. There was, however, a major difference in the approach to transition. In the Netherlands, increasing the number of regulated intermediaries very quickly was seen as potentially problematic, and the regulator supported the initiative of creating the Stfd, which assists intermediaries in their annual reporting obligations. In the UK, by way of contrast, it was decided to dissolve GISC when the FSA was assigned complete responsibility for regulating insurance intermediaries. In France the implementation of the IMD did not represent a break with the past, as insurance intermediaries (brokers, in particular) were already 29 Both authorities seem to have been focusing more on the authorization and supervision process in the first years after the implementation of the IMD and only recently seem to have started a more intense activity of enforcement of the rules. 23

29 complying with statutory regulation. As for style of regulation, several industry sources interviewed by CRA reported that the French competent authority ACAM is likely to be less proactive than the FSA or the AFM, especially with reference to ongoing supervision. It is noteworthy, however, that ACAM was only created in 2005 and therefore it is possibly too early to form a precise judgement. 30 Also, ACAM is not responsible for creating and maintaining the new register of intermediaries, which is the responsibility of the new body ORIAS, although it is expected that ACAM and ORIAS will exchange information on a regular basis. After a long debate the German law implementing the IMD determined that the 83 Chambers of Commerce (IHKn) operating in Germany would have the responsibility of both authorising and registering intermediaries, under the supervision of the Ministry of Economy. This process is ongoing at present, so it seems premature to formulate an opinion about the style of regulation adopted by the IHKns. 4.4 Requirements relating to competence and good repute Article 4.1 of the Directive requires that insurance and reinsurance intermediaries possess appropriate knowledge and ability, as determined by the home Member State of the intermediary, although these requirements can vary with the activity of insurance or reinsurance mediation and the products distributed. Moreover, according to article 4.2, intermediaries must be of good repute, i.e. they must at least have a clean police record in relation to crimes against property and other crimes of a financial nature and must not have been declared bankrupt, unless they have been rehabilitated. 31 These requirements are general in their formulation and have been implemented in practice in different ways. In the UK (see section 4.4), the FSA requires insurance intermediaries to pass the fit and proper person test, which covers: honesty, integrity, and reputation; competence, and capability; and financial soundness. Intermediaries in the UK thus have a degree of flexibility in this regard compared to other countries, as there are no prescriptive rules, e.g. possessing a certain diploma or passing a specific examination. By contrast, the rules are much more prescriptive in other countries. For example, in the Netherlands intermediaries also have to demonstrate they are fit and proper in order to obtain the licence. To do this, they must 30 The ACAM has, however, the possibility of carrying out inspections and issuing sanctions. 31 Member States have also the faculty of not applying these requirements to all persons working within an insurance mediation business, being sufficient that a reasonable proportion within the management and all persons directly involved in mediation meet the conditions. 24

30 submit a certificate of good behaviour and have not been declared bankrupt in the past. The Dutch legislation also requires that in most cases intermediaries hold a specific diploma. Moreover, the new Act on Financial Supervision of 2006 introduces the requirement of permanent education, e.g. intermediaries must attend specific courses and seminars (and pass exams in some cases) on a regular basis, as deemed necessary by the AFM in consultation with the industry. The requirements relating to good repute are similar in France and were for the most part already in place before the IMD, e.g. in article L322-2 of Book V of the Insurance Code (condition d honorabilité). 32 The competency requirements, however, vary according to the category of intermediary. Brokers, for example, and managers of brokerage companies (courtiers and dirigeants, respectively) must have completed an internship of 150 hours, have professional experience of two years in a managerial capacity with insurance agents, brokers or undertakings, 4 years running insurance contracts with insurance agents, or a specific diploma. Agents are in a different category and, must only have completed an internship of 150 hours, whereas intermediaries selling insurance as an ancillary product (the third category) must show completion of adequate training (although the law does not define what is meant by adequate). The requirements for competence introduced by the German law are very similar to the text of the IMD; with regard to competence, brokers and multitied agents have to pass an examination with the local Chambers of Commerce. Details of this exam are described in the decree implementing the law of 18 December 2006, although they are not significantly different from the apprenticeship examination for insurance intermediaries entailing around 222 hours of training. 33 Overall, the requirements introduced by articles 4.1 and 4.2 of the IMD have been implemented with a certain degree of flexibility in the UK, whereas the corresponding provisions are more detailed in the other countries (i.e. list of crimes that block access to the profession or detailed course and experience requirements). 32 The current French Insurance Code states that persons condemned of certain crimes (including murder, theft, fraud or breach of trust, money laundering, and corruption) or declared bankrupt cannot exercise the profession of an agent or a general broker. The law transposing the IMD has introduced further types of crimes and infractions leading to the incapacity to exercise the profession and is somewhat stricter with respect to the past and the original text of the IMD. 33 A large number of intermediaries, however, do not need to take the exam, e.g. those already in possession of an equivalent qualification or who have successfully applied for exemption. Moreover, tied agents do not need to take the exam if the insurance company on whose behalf they are active assumes full liability for them. Intermediaries with several years of experience in the profession do not need to take the exam either. 25

31 4.5 Obligations relating to professional indemnity cover, protection of client money, and solvency requirements The IMD introduces the obligation for insurance intermediaries to hold professional indemnity insurance of at least 1 million for each claim and 1.5 million in aggregate for all claims per year (article 4.3) which is a new requirement for most Member States. Furthermore, article 4.4 of the IMD requires Member States to adopt measures in order to protect client money. The obligation of holding professional indemnity cover has been transposed almost identically as per the IMD in both Germany and the Netherlands. In the UK, the minimum limits are 1 million for a single claim and, 1.5 million or 10% of annual income (up to 30 million) in aggregate. 34 In France, minimum covers are equal to 1.5 million per claim and 2 million in aggregate, which are the same as those established for brokers before the implementation of the IMD. As to financial guarantees and protection of clients money, in the UK intermediaries can transfer the risk for premiums and claims to an insurance company or use segregated accounts. Furthermore, insurance intermediaries must hold a minimum amount of capital ( 10,000 or 5% of the annual income if higher) and meet specific solvency requirements. In addition, the FSA rules on the management of client money by insurance intermediaries are stricter than those stipulated in the IMD. In the Netherlands the IMD requirement that monies paid by the customer to the intermediary are treated as having been paid to the insurer, whereas monies paid by the insurer to the intermediary are not treated as having been paid to the customer until the customer actually receives them was already in place in the Dutch civil code before the IMD. Similar rules apply in Germany and France, e.g. in France insurance intermediaries must have a minimum financial capacity of 15, Minimum requirements for disclosure of information to customers Article 12 of the Directive describes the minimum amount of information that insurance intermediaries must provide to clients prior to the conclusion of a contract. These requirements have generally been followed in the countries we are considering, but significantly expanded upon in several aspects, i.e. intermediaries must now provide more information than that prescribed by the IMD. In the UK, for example, in addition to the minimum amount of information required by the Directive (e.g. statements of demands and needs), insurance intermediaries must also provide customers with the following extrainformation: 34 These limits are lower than those established by GISC for its members (see section D.2). Several industry sources agreed that it is convenient to have higher minimum limits than those established by the FSA and voluntarily adopt higher standards. 26

32 A policy summary, including disclosure of any fees; A policy document; Information about the claims handling process; Information about cancellation rights, where relevant; and For any applicable compensation scheme mentioned in the policy summary, the extent and level of cover and how further information can be obtained, if not already included in the policy summary. In the Netherlands, information requirements specified by the national legislation closely follow the original text of the IMD (see Annex C.4.4). The intermediary, however, is also required to disclose how he is remunerated, i.e. through a fee or commission, which is not included in the original text of the Directive. Furthermore, there are more detailed rules on transparency in place for complex products, e.g. life-insurance policies, or mortgages in combination with life insurance. For this kind of product the intermediary must keep a written record of his clients personal characteristics (e.g. financial position, knowledge of and experience in financial products, demands and needs, and willingness to take risks) and of his own advice (e.g. characteristics of the financial products he recommended and underlying reasons for recommendation) for one year. The intermediary must also provide customers with a risk sheet, i.e. a standardised description of risk in the product purchased. The rules concerning disclosure of fees in the case of complex products will become stricter in the near future in the Netherlands. From October 2009 onwards, the intermediary must inform the client about the average amount of the commission paid for the product under consideration and, upon the client s specific request, must also disclose the exact amount of the commission he receives for his mediation in the transaction. The modified French Insurance Code also replicates the original text of the IMD almost exactly in many aspects (see section A.3.4). But here, too, there are additional requirements. For example, the intermediary must disclose the name of the insurance company or the group of insurance companies which accounted for more than 33% of his revenues in the preceding year. Moreover, the intermediary must explain in writing the reason he is proposing a specific product in the case of complex insurance products (grandes risques). Special rules also apply to disclosure of remuneration. In particular, brokers must inform clients at their request about the remuneration they receive if the contract covers professional risks (risques professionnels) and the annual premium exceeds 20,

33 The information requirements in the recent German legislation also broadly follow the requirements of the IMD, but, again, with some exceptions. 35 A major difference is that in Germany intermediaries need to document their advice in writing, unless the client prefers to receive this in oral form or the insurance company assumes liability for the intermediary. The German law also states that the intermediary must inform the customer that not requesting written documentation could be detrimental to any damage claims the customer may want to make against the intermediary. In this respect some market participants noted that these extra requirements represent an additional bureaucratic burden for German intermediaries with respect to their counterparts in other Member States. Overall, extra requirements in comparison to the text of the IMD have been introduced in all countries under consideration, perhaps more so in the UK and the Netherlands than in France and Germany. The extra requirements often relate to disclosure of fees and commissions (the IMD is silent in this respect) and often apply to more complex or risky products. It is difficult to assess the usefulness of this extra information, since some of these rules are very recent or yet to be implemented. Industry sources in the Netherlands reported that consumers can now make a better informed choice and in principle the new rules represent an improvement with respect to the past. The view in the UK, however, is generally different; the Davidson Review, for example, comments that much of the extra, non-directive required information is unnecessary and is not read by the consumer and results in consumers shopping around less than they otherwise would. It is expensive for firms to produce and adds to the amount of records that they are required to keep Arbitration procedures and compensation schemes According to article 10 of the Directive, Member States must ensure that procedures exist whereby clients and consumer associations can file complaints about insurance intermediaries. In addition, article 11 also requires the introduction of appropriate procedures for the out-of-court settlement of disputes between clients and intermediaries, using existing bodies. It is notable that in several countries there were no complaint procedures or dispute resolution schemes before the IMD and that the requirements of the Directive have been interpreted in different ways. In the UK, for example, insurance intermediaries as in all other sectors regulated by the FSA are now under the jurisdiction of the Financial Ombudsman Service (FOS) and contribute to the Financial Services Compensation Scheme (FSCS) (see Annex D.4.5). In this respect, some market participants interviewed by CRA noted that these procedures may be too complex and expensive for small 35 For example, prior to the conclusion of a contract the intermediary must provide his name and the name of the insurance company selling the product, the latter being not required by the IMD. 36 See Davidson Review, paragraph

34 intermediaries, which was also noted by Lord Davidson in his review of EU regulation. 37 The Dutch legislation also introduced rules for compensation schemes with the enactment of the Financial Supervision Act. A single Ombudsman for the financial sector (KIFID) was created on 1 January 2007 that started operations during March/April Since these are very recent legal provisions and newly created institutions, market participants in the Netherlands were unable to assess their impact and effectiveness. In France consumers address their complaints to the regulator (ACAM) as there is no industry-wide procedure for handling consumer complaints. Large insurance companies, however, tend to have their own in-house ombudsmen and the CSCA a trade association of brokers reported that it was considering setting up its own dispute resolution scheme. In addition, all intermediaries who collect money on behalf of customers, even on an occasional basis, are required to have a financial guarantee. In Germany, the existing Ombudsman set up by the industry to deal with complaints regarding insurance companies is foreseen to be also responsible for handling complaints against intermediaries in the future, but there is no arbitration court as yet. As to financial guarantees and consumer compensation, market participants noted that this is not relevant for 99% of the active intermediaries since they do not collect premiums from the consumers. The remaining intermediaries are required to pay 4% of the total amount of annual premiums received into a separate account or be in possession of a unlimited bank guarantee. 4.8 Cost of regulating insurance mediation after the implementation of the IMD In this section we discuss the available evidence on the cost of the new regime established by the IMD in each country. In this respect, it is useful to distinguish between direct costs (e.g. regulatory fees) and compliance costs (e.g. due to the necessity of creating a compliance officer or unit, additional record-keeping requirements, etc.) when evaluating the cost of the new rules. There is evidence also confirmed by several market participants interviewed by CRA that the new regime established by the IMD is more costly than in the past, as a result of higher fees and higher compliance costs. It is also noteworthy that detailed cost-benefit analyses of the proposed legislation or cost estimates are not available for all countries in our study, so comparisons among regimes in this section must be treated with caution. Also, we are only attempting a partial analysis of the costs of the new rules i.e. we do not take into account the possible benefits deriving from a more defined legal framework. 37 The Davidson Review notes that for small firms the fees to the Ombudsman are a significant expense and [ ] it is seen as an over-burdensome complaints scheme for this industry. See also section D

35 4.8.1 Direct Regulatory Fees In the UK, insurance intermediaries pay annual fees to the FSA and also contribute towards the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS). Fees to the FSA and contributions to the FSCS depend on the annual turnover of intermediaries. In 2006 the fees to the FSA ranged from approximately 587 for the smallest intermediaries to 42,697 for the largest ones (i.e. between 400 and 29,100), whereas contributions to the FSCS varied between 9 and 728 (i.e. between 6 and 496). Fees to the FOS were set at a fixed amount 75 (i.e. 50) per year, but intermediaries also have to pay a certain amount for every complaint they receive (see section D.5). In the Netherlands the annual regulatory fees for 2006 were set at 420 for self-employed intermediaries and increased up to a maximum of 14,780 for intermediaries with over 200 employees. Intermediaries filling their selfassessment with the help of the Stfd (see section C.4), however, were granted a rebate, e.g. with the self-employed intermediary paying just Fees in France and Germany are much lower. In France, for example, registration with ORIAS will cost up to 50 in 2007, with the fee not depending on annual turnover of the intermediary. In Germany annual fees are expected to be set at around per year. Table 2 summarises the direct fees that intermediaries are required to pay each year under the new rules. Overall, intermediaries in the UK pay the highest fees, followed by those operating in the Netherlands. In contrast, fees in France and Germany are considerably lower. Table 2: Summary of Direct Regulatory Fees in each country UK France Germany Netherlands Annual Fees to Competent Authority ,697 (dependant on turnover) ,780 (dependant on no. of employees) Financial Services Compensation Scheme N/A N/A N/A Ombudsman 75 + a fixed amount per complaint received N/A N/A N/A Source: CRA analysis 38 Note that these fees have increased in 2007 as the result of the AFM having better estimates of the actual workload and time needed to process an application than in Also, there is a one-off fee for registration with the AFM which costs 240 plus 300 per member of the executive board of the intermediary for integrity checks. 30

36 4.8.2 Compliance Costs Compliance costs are likely to be higher as a result of the IMD, according to many market participants interviewed by CRA in all four countries, although it is widely acknowledged that these costs are intrinsically difficult to quantify exactly. In the UK, for example, the FSA has carried out several cost-benefit analyses of its proposed legislation for general insurance mediation. As an example, in evaluating the cost of the new rules for the selling and administration of general insurance contracts, the FSA estimated that market players would have to spend approximately 300 million one-off plus 240 million a year in compliance costs. 39 Furthermore, the cost of the additional requirements imposed by the IMD to insurance intermediaries would amount to approximately 85 million as one-off costs plus a sum in the range of 106 million 310 million on an ongoing basis. 40 Comparable estimates for the cost of compliance in the UK are provided by the ABI, which recently reported that general insurance regulation (including both the IMD and the DMD Distance Marketing Directive) would lead to indirect costs for compliance of about 400 million. 41 Moreover, the financial impact of the new regulatory regime is perceived to be proportionally heavier for smaller companies. For example, the British Insurance Brokers Association (BIBA) calculated that intermediaries with an annual income of less than 100,000 would pay 5.20% of their income on regulation, whilst those with an income over 100 million would only pay 1.13%. In the Netherlands, administrative costs resulting from the introduction of the Financial Services Act are also sizeable. The Dutch government (see section C.5) estimated that intermediaries would have to spend additional 20.8 million a year for compliance, which amounts to over 2,311 per intermediary. There is no quantitative evidence about the administrative costs of the new rules available for France and Germany. Industry sources, however, consulted by CRA reported that it would cost 1.6 million to set up the new database maintained by ORIAS in France, whereas in Germany the charges for the qualifying exams are expected to be around 350 and the professional indemnity insurance is likely to cost around 1,500 per year. Overall, the regulatory framework, as regards both fees and compliance costs, appears to be more expensive in the UK than elsewhere (e.g. in the 39 The original amounts are 197 million and 166 million, respectively. Annex 2 of Part I of the Consultation Paper CP 187, Insurance Selling and Administration & Other Miscellaneous Amendments, published by the FSA in June 2003: 40 The original amounts are 57 million and million, respectively. Annex 1 of the Consultation Paper CP 174, Prudential and Other Requirements for Mortgage Firms and Insurance Intermediaries, published by the FSA in March 2003: 41 ABI The Regulation of General Insurance Sales: One Year On, March 2006, p. 7: 31

37 Netherlands which have the closest regulatory regime to the UK), although we acknowledge that there are no detailed studies for France and Germany. 4.9 The impact of the implementation of the IMD on market structure of the insurance mediation sector IMD rules have been in place in the four countries for a relatively short time period (and not at all in Germany). This makes it difficult (or premature) to evaluate the impact of the Directive on market structure in national insurance mediation sectors. Nevertheless, several industry sources, especially in the Netherlands and UK, have told us that the IMD may have contributed (among other factors) to a consolidation in the sector, i.e. through sales and mergers and exit of smaller intermediaries from the market, because it has become too costly or expensive to comply with the new rules. According to these industry sources, however, it is nearly impossible to quantify this impact given the lack of reliable data. In addition, it cannot be excluded that the exit of smaller and older operators, most with inactive portfolios, is due to reasons not related to IMD. We also note that in principle a consolidation process through the creation of larger firms and increased concentration may be a natural ongoing process in the industry Role of the industry in the process of the implementation of the IMD and of regulation of general insurance mediation Article 3.1 of the Directive allows for insurance and reinsurance undertakings and other bodies to collaborate with the competent authorities in registering insurance and reinsurance intermediaries and in the application of the requirements of Article 4 [i.e. professional requirements] to such intermediaries. This collaboration may have several advantages, including smooth implementation of the new rules with the support of market participants. Also, it could ensure that the industry s comments are heard. Some of the countries in our study have adopted this option, although to different degrees. In France, for example, ACAM is the designated competent authority, although it is not responsible for creating and maintaining the public register of intermediaries introduced by the IMD. Instead, ORIAS a newly created body which will benefit from the participation of professional organisations of insurance intermediaries, banks and insurance companies is responsible for the register (see section A.3). In contrast, in Germany the option of setting up an industry body in charge of authorising and registering intermediaries was extensively discussed, but finally rejected in favour of the local Chambers of Commerce (IHKns). Opinion is still divided as to the merits of this. According to the trade association of insurance intermediaries, however, an industry-based solution would have been cheaper than the one actually decided. In the Netherlands, the Stfd a private organisation created during the process of bringing the IMD into Dutch legislation helps its members (around 9,000 intermediaries in 2006) to perform the annual self-assessment, for which they receive a rebate of the regulatory fee payable to the AFM. In addition, 32

38 the Stfd provides feedback to its members and highlights areas where improvement is needed. Lastly, it represents the industry during consultations with the AFM and may help with the acceptance of new regulation within the industry. In the UK, industry bodies play no role with respect to the authorisation and supervision of intermediaries, which falls entirely within the FSA s responsibility. The view of some interviewees is that this may have resulted in duplication of costs, since GISC accumulated considerable experience and knowledge of the sector from its creation in 2000 until it was dissolved in In a different role, GISC might possibly have been able to assist the FSA in maintaining the register (as ORIAS does in France) or help intermediaries comply with detailed regulations (as the Stfd does in the Netherlands). It should, however, be noted that some employees in GISC joined the FSA when GISC was dissolved. 33

39 Annex A: Case study for France A.1 Introduction The transposition of the IMD into the French legislation started with a bill drafted in 2004, which was approved by the Comité consultatif de la réglementation et de la legislation financière on 28 January After several amendments, the IMD was implemented with the Loi du 15/12/2005 portant diverses dispositions d'adaptation au droit communautaire dans le domaine de l'assurance (Law of 15 December 2005 concerning various provisions of adaptation to the Community legislation in the field of the insurance). The law primarily amended section 5 of the French Insurance Code (Livre V du Codes des Assurances), which regulates insurance intermediaries, and entered into force on 16 December The Décret du 30 août 2006 relatif à l'intermédiation en assurance et modifiant le code des assurances (partie réglementaire) (Decree of 30 August 2006 relating to the intermediation in insurance and modifying the insurance code) works out the provisions of the law in greater detail. It entered into force on 1 September 2006 and describes the scope of the law implementing the IMD, derogations for certain categories of intermediaries, procedures relating to registration, and definition of professional qualifications. It also defines the statute and tasks of the institute which is in charge of maintaining the register of intermediaries. In addition to the decree, several orders (arrêtes) have been published on 3 and 18 November 2006 describing the information which intermediaries need to be listed in the register, the amount of registration fees and the minimum cover of the mandatory professional insurance. 44 A.2 Regulation of insurance mediation in France before the IMD A summary of the regulation of insurance mediation before the IMD in France is presented in Table 3. A register of brokers (courtiers d assurances) existed in France since 1999 and was maintained by ALCA (Association de la Liste des Courtiers d Assurances), although registration in this list costing 122 was 42 Implementation of the Insurance Mediation Directive, published October 2005, p. 1: pdf 43 ec.europa.eu/internal_market/finances/actionplan/transposition/france /f_d15_fr_en.htm. The law, decree and arrêtés transposing the IMD can be found at: 44 The Fédération française des sociétés d'assurances (FFSA) published a document (Intermédiation en Assurance: un nouveau Cadre d exercice issue de la Directive Européenne du 9 décembre 2002) which gathers all laws, decrees and arrêtes about the implementation of insurance intermediation law into a single document. 34

40 not mandatory. 45 The absence of mandatory registration meant that only few intermediaries registered, rendering effective supervision difficult. Table 3: Summary of key regulatory variables in France before the IMD Key regulatory variable Type of regulation: statutory or voluntary? Name and type and of the regulator, if any Existence of a register of insurance intermediaries? Minimum professional requirements (e.g. clean police records, no past declarations of bankrupt, possession of a diploma)? Obligation of professional indemnity cover? What was the minimum cover? Minimum disclosure requirements towards customers? Existence of protection scheme of client s money? Existence of a compensation scheme? Existence of an established arbitration procedure? Amount of (one-off) fee to be paid by the intermediary to obtain authorisation, if any Amount of (annual/ongoing) fee to be paid by the intermediary to retain registration, if any Position pre-imd Statutory ACAM (Autorité de contrôle des assurances et des mutuelles). ACAM is only responsible for insurance companies. ALCA (Association de la Liste des Courtiers d Assurances) was responsible for maintaining a list of brokers. Only a few brokers registered with ALCA as registration was voluntary YES registration was compulsory YES Livre V of the Code des Assurances YES 1,500,000 per claim and per year NO mainly defined by jurisprudence YES financial guarantee mandatory for brokers NO NO 122 for registration at ALCA Negligible Source: CRA 45 Report no presented to the French National Assembly in March 2005 by MP Philippe Auberger, member of the Commission in charge of transposing the IMD, p. 31: According to ACAM (Annual report 2005, p. 88), about 8,500 brokers were registered with ALCA in 2005, compared to 6,124 in 2004, 4,420 in 2003, and 3,660 in

41 Statutory legislation relating to competence and good repute, professional indemnity cover with minimum covers of 1.5 million per claim and 2 million in aggregate and financial capacity were already in place in the French legislation. In particular, brokers were required to provide advice and information to clients verbally before the conclusion of a contract. Professional requirements such as adequate training already existed before the IMD for all intermediaries. Hence, requirements for current authorisation and registration rules are not considered to be especially burdensome. The large degree of similarity between the regulation pre-imd and post-imd implies that the implementation of the IMD did not lead to great changes for intermediaries, especially if the intermediaries were already complying with the pre-imd regime. This has been confirmed in interviews with industry representatives. Indeed, a report presented to the French National Assembly in March 2005 by the Commission in charge of transposing the IMD noted that the bill under discussion at the time would not lead to a complete revamping or upheaval of French regulation. 46 Accordingly, the French trade association of insurance companies FFSA (Fédération française des sociétés d'assurances) considered that the existing regulations already fulfilled the basic requirements of the Directive and any attempt to go beyond this would penalise French intermediaries compared to their European counterparts. 47 A.3 Implementation of the IMD in France The implementation of the IMD into French legislation did not represent a significant change to the existing regime. Although the implementation of the IMD introduced the obligation to be registered, market participants did not consider that the requirements necessary for registration were burdensome. The main reason was that intermediaries already had to comply with similar requirements in the past. For example, market participants noted that the implementation of the concept of appropriate knowledge is relatively light and companies often go beyond what is required. Similarly, brokers were required to have professional liability insurance before the implementation of the IMD. Other intermediaries such as agents, mandataires (agents which have a mandate to sell insurances on behalf of an insurance company) and insurance representatives were not required to have professional liability insurance. This has not changed with the implementation of the IMD. The rules implementing the IMD, however, require advice to be given in writing and this is considered to be a major change for brokers because they were only obliged to give this advice verbally in the past. 46 Report no presented to the French National Assembly in March 2005 by MP Philippe Auberger, member of the Commission in charge of transposing the IMD, p. 5: 47 The 2005 Annual Report of the FFSA, p. 54: 36

42 Given the relatively small changes in the rules governing insurance intermediation in France, it is not surprising that industry participants noted that the IMD will not have a significant impact on the distribution of insurance products in France. While interviewees agreed that the requirements regarding information will lead to greater costs of selling insurance (either because each intermediary requires more time or must work harder, in turn requiring a greater commission), the increase in costs was not considered large enough to force many intermediaries to exit the market. Nevertheless, one intermediary also noted that it is difficult to estimate the number of intermediaries which have exited the market as the lack of compulsory registration in the past meant that it was impossible to count the number of intermediaries. Intermediaries selling insurance as an ancillary activity (e.g. intermediaries who sell insurances to a small circle of friends or their relatives) were thought to be the most likely to exit the market. In addition, it was noted that one impact of increased requirements may be to encourage specialisation and concentration in the market for insurance intermediation. Nevertheless, some intermediaries also noted the benefits provided by the IMD. Intermediaries accept that the registration provides a service to insurance companies because it allows them to verify the professionalism of prospective employees. Moreover, before the implementation of the IMD, brokers were required to note on all documents handed to customers whether they were in possession of professional liability insurance. In the current regime, the broker merely needs to state his registration number. While interviewees were sceptical whether the IMD will lead to better informed consumers, most agreed that the rules implementing the IMD will render it more difficult for intermediaries to sell insurance solely for their own benefit and without considering the needs of the consumer. The Distance Marketing Directive, (DMD, Directive 2002/65/EC) was implemented in France at the same time as the IMD. Market participants noted that they were implemented through separate processes which did not affect each other in a significant way, especially as the IMD regulates information to be provided by intermediaries, whereas the DMD regulates information provided by insurance companies. A.3.1 Choice and style of the competent authority The French regulatory authority for the insurance sector is the ACAM (Autorité de contrôle des assurances et des mutuelles). The ACAM, which was named CCAMIP (Commission de contrôle des assurances, des mutuelles et des institutions de prévoyance) until December 2005, is the result of the merger in August 2003 of two other agencies, the CCA (Commission de contrôle des assurances) and the CCMIP (Commission de contrôle des mutuelles et des institutions de prévoyance). 48 The Commission bancaire was responsible for the regulation of banks. 48 Law of 1 August 2003 and law of 15 December

43 The ACAM s mission is to supervise the French insurance sector, namely that industry players (insurers, intermediaries) comply with the rules in place and that they are able to meet their obligations towards clients. It was noted during an interview that a different approach to regulation exists in France compared to the UK: there is no permanent supervision of insurance organisations. Nevertheless, ACAM is allowed to visit intermediary offices as well as to sanction intermediaries. Sanctions include imprisonment and fines up to 37,000. According to industry sources, however, ACAM has not carried out regular checks yet. This may also be partly because ACAM only existed for a year as well as difficulties in checking whether intermediaries comply with all the regulations. Hence, interview participants indicated that ACAM is more likely to control access to the profession rather than engage in ongoing regulation. Under the rules implementing the IMD in France, however, ACAM is not responsible for creating and maintaining a public register of intermediaries. According to consultations with market participants, it was initially proposed that ACAM should be responsible for the register, although the industry argued that the existing register under ALCA should be continued. Appointing ACAM to manage the register was thought to entail the risk that the 50 registration fee would be used for other purposes, as the fee would be rolled into the general budget of ACAM. At the end of the consultation period, there was a consensus to create a new organisation, Organisme pour le Registre des Intermédiaires d Assurances (ORIAS) to be in charge of the set-up, management and update of the (partly existing) register. 49 A Commission within the ORIAS, which is composed of representatives of professional organisations of insurance intermediaries and companies concerned, takes the decisions regarding registration, updating and refusal of registration. At present the Commission includes representatives from the following organisations: The Fédération française des sociétés d'assurance (FFSA, the trade association of insurance companies); The Chambre syndicale des courtiers d'assurances (CSCA, the trade association of insurance brokers); The Fédération nationale des syndicats d'agents généraux d'assurances (AGEA, the trade association of tied agents) ; The Groupement des entreprises mutuelles d'assurances (GEMA, an association of mutual insurance companies); The Fédération bancaire française (FBF, the French Banking Association); and, The Fédération nationale de la mutualité française (FNMF, the national federation of mutual companies) for ORIAS website. 50 Arrêté du 18 novembre 2006: 38

44 The law implementing the IMD foresees that there will be an exchange of information between the newly created organisation, ORIAS, and ACAM. Furthermore, all insurance companies who make use of the services of insurance intermediaries are required to check that they are properly included in the ORIAS register. A.3.2 Scope of the rules implementing the IMD and exemptions While the new law did not lead to an upheaval of French regulation, it extended the scope of the existing French Insurance Code. Article L of the amended Insurance Code notes that intermediation involves all activities which consist of introducing, proposing or assisting in the conclusion of insurance or reinsurance contracts. The IMD rules, however, do not apply to intermediaries involved in the management of insurance contracts or to direct sellers (employees of insurance companies). This is defined in article L511-1 of the amended French Insurance Code. Hence, employees of insurance companies do not need to be registered; they must only fulfil requirements regarding professionalism. In general, an intermediary is defined as a person carrying out any of these activities for remuneration: soliciting a person to enter into an insurance contract; or collecting applications for such contracts; or setting out orally or in writing the conditions for coverage under a contract; or all persons carrying out analytical or advisory work and who introduce, propose or assist in the conclusion of an insurance transaction. 51 It was noted by a market participant that French banks fall under the definition of insurance companies. In order to allow employees selling insurance on their behalf to register as brokers instead of employees, banks have created so-called societés de courtiers (brokerage companies) which employ the (bank s) brokers. If the intermediaries were to remain employees of the banks, they would be prohibited from selling insurances as independent brokers under the rules implementing the IMD. Derogations from the application of the IMD in France basically follow those listed in article 1.2 a) to f) of the IMD, e.g. intermediaries selling travel insurance policies with premiums below 500 are excluded from the IMD. According to the FFSA (Fédération française des sociétés d'assurances, the national association of insurance companies), derogations under French law which only apply to the risk of breakdown, loss of or damage to goods, and travel insurance are more restrictive than in the previous legislation. For example, all intermediaries selling insurance contracts linked to a loan now fall within the scope of the IMD. 52 Interviews with the industry confirmed that intermediaries which carry out insurance intermediation as an ancillary 51 Article L of amended Livre V, available at: 52 See Fédération française des sociétés d'assurances (FFSA), Intermediation en Assurance: un nouveau Cadre d exercise issue de la Directive Européenne du 9 decembre 2002, p

45 activity are now required to register. For example, persons selling motor insurance must be registered, unless the derogation of article 1.2 IMD applies. A.3.3 Professional requirements Requirements with regard to good repute Insurance intermediaries must satisfy strict conditions with regard to good repute and competence. Some of these requirements (condition d honorabilité) were already listed in article L322-2 of Book V of the Insurance Code before the IMD and therefore do not represent a major change. 53 The current Insurance Code states that persons condemned of certain crimes (including murder, theft, fraud or breach of trust, money laundering, and corruption) or declared bankrupt cannot exercise the profession of an agent or a general broker. It is noteworthy that the law transposing the IMD has introduced further types of crimes and infractions leading to the incapacity to exercise the profession and is somewhat stricter with respect to the past and the original text of the IMD. 54 Consultation with the industry confirmed that requirements regarding professionalism are not considered to be overly burdensome. Competence With regard to competence, the French law implementing the IMD distinguishes between three different categories of intermediaries, with increasing requirements for each category: Brokers (courtiers) and managers of brokerage companies (dirigeants) must have completed an internship of 150 hours, professional experience of two years in a managerial capacity with insurance agents, brokers or undertakings, 4 years running insurance contracts with insurance agents, or a specific diploma; Agents, including those employed by brokers must have completed an internship of 150 hours; and Intermediaries selling insurances as an ancillary product and who are not in possession of professional indemnity insurance must show completion of adequate training. The law does not define what is meant by adequate. Further, although employees of intermediaries are not required to be registered, the IMD introduced new requirements with regard to training The updated Book V of the Insurance Code pursuant to the law implementing the IMD directive of December 2005 can be found at The previously existing Book V can be found in the Annex of the report presented to the French National Assembly in March 2005 by the Commission in charge of the transposing the IMD: 54 Fédération française des sociétés d'assurances (FFSA), Intermediation en Assurance: un nouveau cadre d exercise issue de la Directive Européenne du 9 decembre 2002, p Report no presented to the French National Assembly in March 2005 by MP Philippe Auberger, member of the Commission in charge of transposing the IMD, p. 34: 40

46 Indemnity insurance and minimum financial capacity Article L512-6 of the current French Insurance Code requires all intermediaries (not exclusively brokers as in the past), to be in possession of professional indemnity insurance. The minimum cover is set out in the arrêté of 3 November 2006 at 1.5 million per claim and at 2 million in aggregate for each intermediary per year. The minimum cover is equal to the limits existing prior to the implementation of the IMD and is higher than specified in the IMD. Indeed the French Government tried to convince the European Commission during discussions within the European Council to increase the minimum coverage, but without success. 56 The franchise par sinister (the excess to be paid by the insured for each claim) cannot exceed 20% of each claim a condition which is not mentioned in the original text of the IMD. 57 The IMD also requires insurance intermediaries to have a minimum financial capacity of 15,000. This is laid down in article A of the Arrêtés du 3 novembre Grandfathering As mentioned above, under the new rules of December 2005 all insurance intermediaries are now required to be included in a public register maintained by ORIAS. It is established, however, that brokers previously included in the register maintained by ALCA are automatically included in the new register (article 19 of law ). Also, intermediaries who were actively selling insurances at least two years before January 2007 have been automatically included in the register without the obligation of obtaining a diploma. A.3.4 Information requirements In many aspects the French Insurance Code replicates the original text of the IMD almost exactly. For example, according to articles L520-1 and R520-1 of the Insurance Code before the conclusion of any contract insurance intermediaries are required to disclose their name and address and their unique number of registration at ORIAS. In addition, an intermediary must specify: Whether he/she has a holding which represents more than 10% of the voting rights or the capital in a given insurance undertaking; The companies which have a direct or indirect participation of over 10% of the voting rights or capital of the insurance company for which he/she is working; 56 Report no presented to the French National Assembly in March 2005 by MP Philippe Auberger, member of the Commission in charge of transposing the IMD, p. 17: 57 Article L of Livre V. 41

47 The name of the insurance company or the group of insurance companies which accounted for more than 33% of his revenue in the preceding year. (This is above the requirements of the IMD.) 58 The internal complaints procedure and the relevant dispute resolution body, as well as the address of ACAM. Depending on his/her status, an insurance intermediary may also be required to state prior to the conclusion of an insurance contract the following information: If the intermediary has a contractual obligation to conduct business exclusively for one or more insurance undertakings, he/she must name the undertaking if the consumer demands this; or, If the intermediary does not have a contractual obligation exclusively to act as a broker for one or more providers and bases his advice on an objective analysis of the market, he/she must analyse a large enough number of contracts on the market; or, If the intermediary is not acting exclusively for one or more insurance undertakings and does not provide a fair analysis of the market, the intermediary must name the insurance undertakings he is working for at the request of the consumer. The intermediary must also ask for the demands and needs of the client and describe the reason he is proposing a specific product in writing. This requirement is not considered overly burdensome because it exists only for more complex insurances (grandes risques). Furthermore, in the past intermediaries were subject to certain obligations regarding advice, and advice based on insufficient knowledge could cause claims to be made against their professional indemnity cover. Obligations regarding the provision of information, however, were mainly defined through jurisprudence. 59 Concerning information regarding the remuneration of intermediaries, the law transposing the IMD contains requirements for the provision of information which go beyond those required by the IMD. For example, brokers must communicate to the potential insurance taker who asks about their remuneration if the contract covers professional risks (risques professionnels) and if the annual premium exceeds 20,000. A.3.5 Arbitration procedures and compensation schemes Currently, there is no industry-wide procedure for handling consumer complaints. Consumers can address complaint regarding particular intermediaries to ACAM. If the consumer is not satisfied with the outcome he can address his complaint to the traditional judicial powers. Although large 58 Fédération française des sociétés d'assurances (FFSA), Intermediation en Assurance : un nouveau Cadre d exercise issue de la Directive Europeenne du 9 decembre 2002, p Fédération française des sociétés d'assurances (FFSA), Intermediation en Assurance: un nouveau Cadre d exercise issue de la Directive Europeenne du 9 decembre 2002, p

48 insurance companies have their own in-house ombudsmen, the CSCA (i.e. the association of brokers) is considering the creation of its own mediator, but these plans have so far not been realised. According to industry participants, the first cases have shown that intermediaries ignore the applicable rules of the Insurance Code. 60 In the past, intermediaries who were responsible for customer funds were required to subscribe to a financial guarantee. With the implementation of the IMD, all intermediaries who collect money on behalf of customers, even if only on an occasional basis, are required to subscribe to a financial guarantee. Intermediaries who do not collect money on the behalf of customers are required to declare this when they register with ORIAS. A.4 The cost of regulating insurance mediation in France after the implementation of the IMD According to the new law, registration with ORIAS will cost up to 50 per year for 2007 as set in the arrêtes of 3 November Registration has to be renewed each year. No studies setting out the costs of implementation have been published to date according to our knowledge. One market participant indicated that it would cost around 1.6 million to set up ORIAS s database. 60 ACAM, Annual report of 2005, p Arrêté du 3 novembre 2006: 43

49 Annex B: Case study for Germany B.1 Introduction The German government published the first draft of the bill implementing the IMD in December It was only on 22 December 2006, however, after three readings of the bill in the German parliament, that the final law implementing the Directive (Gesetz zur Neuregelung des Versicherungsvermittlerecht BGBI Teil 1 Nr. 63) was approved. 62 The new law will enter into force from 22 May The corresponding decree implementing the IMD in detail (e.g. regulating the content of the exam to be taken by intermediaries, the information to be recorded in the register and the information which the intermediary must give to the clients) is still in draft form at present. 64 As a result, this case study should be read in light of the fact that the law implementing the IMD has only recently been agreed and there is currently no actual evidence regarding the impact and effect of the IMD. Indeed, the registration, examination and granting of permission by IHKn is only expected to take place in June B.2 Regulation of insurance mediation in Germany before the IMD Table 4 below summarizes the regulatory regime for insurance mediation in Germany before the IMD. In the past insurance intermediaries did not have to fulfil any special requirement before they could start selling insurance in Germany, as they were considered to be tradesmen and as such their only obligation was to notify the relevant local Trade Supervisory Office (Gewerbeaufsichtsamt) before commencing business. 65 Hence, unlike other European countries, there were neither specific statutory criteria for the admission to the profession in Germany nor a register of insurance intermediaries. 66 This lack of legal barriers to access to the profession also explains the large number of insurance intermediaries active in Germany (approximately 500,000) Copy of the law: 63 Chamber of Commerce, New rules for insurance intermediaries (Merkblatt: Neue Regeln für Versicherungsvermittler), of 8 January 2007: 64 Verordnung über die Versicherungsvermittlung und- beratung. Entwurf vom 18. Dezember Draft decree implementing the law transposing the IMD: vermittlerverordnung.pdf. 65 The registration with the local Trade Supervisory Office was prescribed by section 14 of the Industrial Code (Gewerbeordnung). 66 The underlying reasoning behind this lax regime was to ensure universal coverage of the German population with insurance policies. See Peter Reiff, Versicherungsvermittlerrecht im Umbruch, (Insurance intermediation law in upheaval), a study commissioned by the Hamburg Institute for the Promotion of Insurances, June 2006, p. 4: 67 See Peter Reiff, Versicherungsvermittlerrecht im Umbruch (Insurance intermediation law in upheaval), June 2006, p

50 Table 4: Summary of key regulatory variables in Germany before the IMD Key regulatory variable Type of regulation: statutory or voluntary? Name and type and of the regulator, if any Existence of a register of insurance intermediaries? Minimum professional requirements (e.g. clean police records, no past declarations of bankrupt, possession of a diploma)? Obligation of professional indemnity cover? If so, what was the minimum cover? Minimum disclosure requirements towards customers? Existence of protection scheme of client s money? Existence of a compensation scheme? Existence of an established arbitration procedure? Amount of (one-off) fee to be paid by the intermediary to obtain authorisation, if any Amount of (annual/ongoing) fee to be paid by the intermediary to retain registration, if any Position pre-imd NONE There was no register. Insurance intermediaries were only required to notify the relevant local Trade Supervisory Office before starting their business NO NO NO One case filed before the Federal Court (Bundesgerichtshof) clarified the liability of brokers but no obligation NO NO NO Only by the industry since 5 years, not statutory NO NO Source: CRA While the pre-imd regime was relatively lax with regard to entry to the profession, the regulation of the contractual obligations of insurance intermediaries towards clients was more stringent. The regime distinguished between insurance brokers and insurance agents. Insurance agents did not have contractual obligations with clients; hence, clients could only present claims against insurance companies. In contrast, insurance brokers had a contractual relationship with customers involving many obligations and a strict personal liability regime, although we understand that these obligations were not set by statutory legislation. For example, obligations under the practice of current German law (i.e. according to common law, as opposed 45

51 to written law) regulating the provision of information by brokers were considered to be stricter than those under Article 12 of IMD. 68 As a result of the lack of regulation of access to the profession, the obligations established by the IMD for intermediaries to have a clean police record and no bankruptcy are new in Germany. Similarly, obligations regarding the information to be provided (e.g. on the status of the intermediary as well as needs and demands of the customer) are also new in Germany. B.3 Transition towards the implementation of the IMD in Germany The lengthy process leading to the approval of the law implementing the IMD in Germany approximately 2 years is partly explained by the fact that there was no specific regulation of general insurance intermediaries in Germany before the IMD; see section B.2. A further reason was the difficulties encountered in the choice of the authority to be in charge of the register. The delays in the choice of the competent authority created problems for German intermediaries who had been selling insurance products in the UK some time before the IMD. When the IMD was implemented in the UK, they were required to be registered in Germany, although such a register did not exist yet. The problem was solved through a bilateral agreement between the UK and Germany. B.4 Implementation of the IMD in Germany At present it is too early to evaluate the impact of the implementation of the IMD in Germany, since the new law will only come into force in May The impact of the IMD, however, is likely to be significant, given the practical absence of regulation in Germany prior to the IMD. According to views from the industry, the requirements are in line with the tasks carried out by intermediaries, although industry participants did not consider that the IMD will lead to the provision of better information in the majority of cases. Another innovation resulting from the IMD is the introduction of an ongoing supervision regime in Germany. According to market participants, only intermediaries selling insurance parttime or as an ancillary service (although this may be the majority of intermediaries in Germany) may consider exiting the market due to the higher costs resulting from the IMD. On the other hand, if the insurance companies assume full liability for them, these intermediaries have will not need to be authorised and hence will not have to prove their professional competence. In contrast, if companies are not prepared to assume full liability, these intermediaries will be required to have professional indemnity insurance. At that point, if the premium paid exceeds his earnings, the intermediary may decide to exit the market. Lastly, market participants noted that the implementation of the DMD did not influence the implementation of the IMD distance sales in Germany have been regulated since See Peter Reiff, Versicherungsvermittlerrecht im Umbruch (Insurance intermediation law in upheaval), June 2006, p

52 B.4.1 Choice and style of the competent authority A lively debate surrounded the choice of the competent authority for registration and authorisation of insurance intermediaries in Germany. In 2004, the Ministry of Economy and Labour (BMWA, since 2006 Ministry of Work and Technology or BMWi) originally considered designating the 7,000 local trade offices (örtliche Gewerbeämter) as competent authorities responsible for the registration of intermediaries. 69 This proposal also included the creation of a private company responsible for setting up a central information register and collecting information from the 7,000 local trade offices. The German federal states (Länder), however, protested against the BMWA proposal, referring to the additional costs it would imply for them. 70 The German trade association of insurance intermediaries (Bundesverband Deutscher Versicherungsverkaufsleute) joined their protests, complaining about the high costs involved with the exchange of data between such a large number of local offices and the central information register. The law as finally published in December 2006 retains a decentralised solution, as the bodies responsible for both authorising and registering intermediaries are now the 83 IHKns operating in Germany. Compared to the previous solution involving more than 7,000 local trade offices and a separate entity responsible for authorisation, the final scheme is likely to be more costeffective, since the local chambers can carry out the authorisation and registration processes simultaneously without a massive transfer of data between organisations. The Federal State in which the business of the intermediary is located determines the IHKn at which he should register. According to consultations with the industry, the IHKns have financial authority and can set the registration fees as they wish. In supporting this decentralised solution, the Ministry of Economy argued that the federal financial supervisor, BaFin, would not have the capacity to deal with the large number of intermediaries active in Germany. 71 Moreover, a centralised solution under a single regulator was not seen as feasible since many insurance intermediaries often must also comply with another industry law specific to their profession See Peter Reiff, Versicherungsvermittlerrecht im Umbruch (Insurance intermediation law in upheaval), June 2006, p See Peter Reiff, Versicherungsvermittlerrecht im Umbruch (Insurance intermediation law in upheaval), June 2006, p As explained in the text above, Germany is rather peculiar in the European landscape as the number of active insurance intermediaries is reportedly very large (around 410,000). See BMWi, Gesetz zur Neuregelung des Versicherungsvermittlerrechts, Comments by the Ministry of Economy on the draft law implementing the IMD, 24 March 2006: maerz_20 06_6364d3f0.pdf. Note that the number counts the networks of independent intermediaries as a single intermediary. A total number of around 500,000 is hence not unlikely. 72 Ministry of Economy and Technology, Entwurf: Gesetz zur Neuregelung des Versicherungsvermittlerrechts (Draft law reforming the insurance intermediation law), 24 March 2006, p. 5: 47

53 However, the final decision to involve the Chambers of Commerce did not gain unanimous consensus. For example, Professor Reiff of University of Trier protested against the choice of involving the IHKn, as he stated that, unlike BaFin, the IHKns do not have any previous experience in authorising and registering intermediaries. Instead, he favoured the creation of a body set up by the industry (this solution was called the Verbändelösung, or trade association solution) with responsibility for the register, which would be then overseen by BaFin. 73 The German trade association of insurance intermediaries also supported the creation of a body set up by the industry as the best solution. The association considered that the authorisation and registration costs would amount to only around 200 if an industry body were chosen compared to the 400 up to 1,500 estimated by the German government. The association, however, expressed concerns that differences in the interpretation of the law between the 83 Chambers of Commerce would lead to intermediaries shopping around for the most lenient Chamber of Commerce. 74 Interviews carried out by CRA suggested this would not be a significant problem because intermediaries are unlikely to change the location of their business. The extent of shopping around may also depend on the difference in fees between the IHKns in each of the Federal States and these fees will only be published around May The Ministry of Economy did not consider the industry body as a feasible solution, because the insurance intermediaries involved are too heterogeneous (e.g. car dealers, large banks, and brokers). In view of this diversity, according to the Ministry, supervision by a public body would be needed to ensure the necessary neutrality of this industry body, implying that the industry solution would not reduce public sector costs anyway. 75 Hence, the government designated the local Chambers of Commerce as competent authority for registering and authorising intermediaries. B.4.2 Scope of the rules implementing the IMD and exemptions The exemption of insurance intermediaries in the German law follows the provisions in article 1 paragraph 2 of the Directive. The scope of the German regime is narrower than the UK regime, as a person selling motor warranties when the price is less than 500 per year is regulated in the UK system but not 73 See Peter Reiff, Versicherungsvermittlerrecht im Umbruch (Insurance intermediation law in upheaval), June 2006, p Bundestag, Schriftliche Stellungnahmen der Sachverständigen zur Öffentlichen Anhörung: Versicherungsvermittlerrecht am 18. Oktober Written views of the experts on the law regarding intermediaries, 18 October Ministry of Economics and Technololgy, Entwurf: Gesetz zur Neuregelung des Versicherungsvermittlerrechts, Draft law reforming the insurance intermediation laws, 24 March See pdf, p.5. Also German Consumer Association, Stellungnahme zum Regierungsentwurf zur Versicherungsvermittlerrichtlinie, Comments by the German consumer association on the law implementing the IMS, October 2006: 48

54 in the German system (if the additional criteria are also fulfilled). Persons involved in claims handling or administration of insurance contracts are not subject to the rules applicable to insurance intermediaries. In addition to the exemptions in the IMD, the German law explicitly exempts the following intermediaries from authorisation and registration: Intermediaries selling insurance as part of a collective agreement of a building society aimed at insuring repayment of debt in relation to building loan agreements; and Intermediaries selling residual debt insurance for a consumer credit as part of selling another good under the condition that the annual premium does not exceed Moreover, tied agents (Einfirmenvertreter) are automatically exempted from authorisation if they are competent and the insurance company who employs them assumes full liability for their actions. A statement from the company employing them is considered to be sufficient proof of competence. This exemption has consequences regarding the requirements of professionalism as described below. Tied agents, however, still need to be registered with the IHKn, if only in order to be allowed to provide their services in other Member States. Market participants noted that even tied advisers who do not intend to carry out their activities in another Member State are advised to register and apply for authorisation because the risk that they will be expelled from the register as soon as their contract with the insurance company (assuming full liability for them) expires is too great. The following intermediaries selling insurance ancillary to their main profession can also apply for exemption from authorisation (although they need to be registered) if: They sell insurances on behalf of intermediaries which have been authorised or are selling insurances on behalf of one or several insurance companies (tied advisers); They are in possession of a professional indemnity insurance; and, They have adequate qualification and are not bankrupt. In this regard, it is sufficient if the insurance company on whose behalf the intermediary is working certifies that the intermediary has adequate competence. As a result, requirements for accreditation (e.g. qualifications) are lower for intermediaries selling insurance as ancillary products to their main sales activity as well as for tied advisers. This is in line with article 2.7 of the IMD, although some insurance intermediaries have expressed complaints 76 Chamber of Commerce, Merkblatt: Neue Regeln für Versicherungsvermittler (New rules for insurance intermediaries), 8 January 2007, p. 3: ueregeln.pdf. 49

55 in this respect. 77 Furthermore, all (tied or non-tied) intermediaries who have been selling and advising on the sale of insurances without interruption before 1 January 2000 and which have registered themselves before 1 January 2009 do not need to prove their competence. 78 B.4.3 Professional requirements All intermediaries except tied agents need to be authorised and registered. They are authorised and registered if they fulfil certain conditions regarding good repute and professional liability insurance, in line with the requirements of the IMD. For example, intermediaries must have a minimum guarantee for professional indemnity insurance of 1 million per claim and 1.5 million per year for all claims. 79 Moreover, brokers and multiple agents have to pass an examination with the IHKn. Tied agents do not have to pass the exam. The details of the exam are set out in the draft decree implementing the law of 18 December The examination, however, does not differ significantly from the established apprenticeship examination for insurance intermediaries since 1991 entailing around 222 hours of training (although this does go beyond IMD requirements). 80 Intermediaries already in possession of an equivalent qualification do not need to pass the exam. 81 Moreover, intermediaries who do not require authorisation and registration as well as intermediaries who have successfully applied for exemption do not need to sit the exam. Tied agents also do not need to take the exam if the insurance company on whose behalf they are active assumes full liability for them. Instead, it is up to the insurance company to verify whether they are competent. The verification method 77 See Peter Reiff, Versicherungsvermittlerrecht im Umbruch (Insurance intermediation law in upheaval), June 2006, p Trade Association of Insurance Intermediaries, Stellungnahme zum Entwurf der Verordnungen über die VersVerm VO, Opinion of the BVK on the draft decree implementing the IMD, 9 January 2007, Stellungnahme%20VersVermV-09%2001%2007.pdf 79 Chamber of Commerce, Merkblatt: Neue Regeln für Versicherungsvermittler, New rules for insurance intermediaries, 8 January 2007, p. 2: ueregeln.pdf. 80 Schriftliche Stellungnahmen der Sachverständigen zur Öffentlichen Anhörung: Versicherungsvermittlerrecht am 18. Oktober Written views of the experts on the law regarding intermediaries, 18. October 2006: 81 The list of equivalent qualifications is listed in the following document: Chamber of Commerce, Merkblatt: Neue Regeln für Versicherungsvermittler, New rules for insurance intermediaries, 8 January 2007: ueregeln.pdf, p.4. 50

56 which insurance companies must apply is not prescribed by law. 82 Finally, insurance intermediaries who have been active in their profession for a long time do not need to pass the exam. 83 As a result of the numerous exemptions, there will only be a marginal change regarding the professional requirements for the majority of intermediaries. For example, as around 90% of intermediaries are tied advisers, only a small number of intermediaries in Germany require authorisation. The lower qualification requirements for tied advisers in the proposed law was heavily criticised by the trade association of intermediaries. In October 2006, the Committee of the Ministry of Economy and Technology involved in the drafting of the law invited experts to comment on the proposed law. The trade association of insurance intermediaries persuaded the committee to recommend to the lower house of parliament that it should interpret the requirement of appropriate qualifications that tied intermediaries also need to pass the IHKn examination when selling the entire product range. 84 This implies that BaFin has to control whether tied intermediaries acting on behalf of insurance companies have the appropriate requirement i.e. whether they have passed the IHKn examination. The requirements regarding personal indemnity insurance follow the limits set out in the IMD. The German rules go beyond the IMD in specifying that the company providing the personal indemnity insurance must be authorised to do business in Germany and the insurance must cover damage in the EU and the EEA. 85 B.4.4 Information requirements The information requirements in Germany broadly follow the requirements of the IMD. 86 Intermediaries must provide the following information before the conclusion of the insurance contract: 82 Chamber of Commerce, Merkblatt : Neue Regeln für Versicherungsvermittler, New rules for insurance intermediaries, 8 January 2007: ueregeln.pdf, p Stellungnahme zum Entwurf der Verordnungen über die VersVerm VO, Opinion of the BVK on the draft decree implementing the IMD, 9 January 2007: 09%2001%2007.pdf 84 Schriftliche Stellungnahmen der Sachverständigen zur Öffentlichen Anhörung: Versicherungsvermittlerrecht am 18. Oktober Written views of the experts on the law regarding intermediaries, 18. October 2006: 85 Implementation of the Insurance Intermediation Directive in the EU Member States, BIPAR 9 th Update, December Verordnung über die Versicherungsvermittlung und- beratung. Entwurf vom 18. Dezember The draft decree implementing the law transposing the IMD: vermittlerverordnung.pdf, p

57 The identity of the intermediary and the name of the insurance company (the requirement to name the company is not stated in the IMD); Address of the company; Whether the intermediary is a broker, a tied adviser (if he/she is a tied adviser he/she must indicate whether he/she is authorised by the IHKn, whether he/she is a tied adviser selling insurance on behalf of insurance companies or whether he/she is selling insurance complementary to the sale of another product) or a whether he/she is an authorised adviser; Details of the register which contains the intermediaries registration; Whether the intermediary has a holding which represents more than 10% of the voting rights or the capital in a given insurance undertaking; The companies which have a direct or indirect participation of over 10% of the voting rights or capital of the insurance company for which the intermediary is working; and The address for the out-of-court complaint and redress procedures. Article 12.3 of the IMD regarding the specification of the demands and needs of customer has been implemented nearly literally into German legislation. Intermediaries need to document in writing the basis for recommending a certain product, unless the customer explicitly refuses this, in which case the intermediary has to inform the customer that a refusal to receive written documentation of the advice given may negatively affect his claim for damages. 87 B.4.5 Arbitration procedures and compensation schemes Intermediaries must inform their customers about the complaint procedure in place. According to paragraph 42 of the law implementing the IMD, this can be an arbitration court set up by the industry (given the approval of several German Ministries). The court will not affect the right to redress in a national court. According to our interviewees, it is currently foreseen that an Ombudsman set up by the industry to deal with complaints regarding insurance companies will in future also be responsible for handling complaints against intermediaries. The arbitration court is obliged to answer all complaints regarding intermediaries. The procedural fees have to be paid by the intermediary unless the complaint is abusive. If no arbitration court is set up under private law, the German Ministries can appoint a federal body to take on this role. 88 The law implementing the IMD hence allows the existing Ombudsmen of the 87 Verordnung über die Versicherungsvermittlung und- beratung. Entwurf vom 18. Dezember The draft decree implementing the law transposing the IMD is available under vermittlerverordnung.pdf, p Gesetz zur Neuregelung des Versicherungsvermittlerecht BGBI Teil 1 Nr. 63 (law implementing the IMD): versicherungsvermittlerrechts-stand-dezember- 2006,property=pdf,bereich=bmwi,sprache=de,rwb=true.pdf. 52

58 insurance industry to handle complaints and arbitration, implying that no new bodies need to be set up. 89 According to consultation with the industry, financial guarantees and consumer compensation in Germany is not important as 99% of intermediaries do not collect the premiums from the consumers (this is carried out by the insurance companies themselves). The remaining intermediaries are required to pay 4% of the total amount of annual premiums received into a separate account or be in possession of a unlimited bank guarantee (as per the IMD). B.5 The cost of regulating insurance mediation in Germany after the implementation of the IMD The German Ministry of Economy explicitly stated that both the expected costs of higher requirements regarding advice as well as the documentation costs will be significant, but that it will be difficult to specifically quantify this. 90 It expects the professional indemnity insurance to cost around 1,500 per year (if a group insurance is not possible), the authorisation and registration charges to be around per year, and the charges for the qualifying exams to be around According to the draft decree implementing the law of 18 December 2006, there will be no annual review of whether the requirements regarding documentation of the information provided to the insured have been fulfilled in order to avoid bureaucracy and further costs Ministry of Economics and Technololgy, Entwurf: Gesetz zur Neuregelung des Versicherungsvermittlerrechts, Draft law reforming the insurance intermediation laws, 24 March p Comments by the Ministry and Economics on the draft law implementing the IMD Gesetz zur Neuregelung des Versicherungsvermittlerrechts, 24 March 2006, p. 7: maerz_20 06_6364d3f0.pdf. 91 Verordnung über die Versicherungsvermittlung und- beratung. Entwurf vom 18. Dezember 2006, p. 16. The draft decree implementing the law transposing the IMD: vermittlerverordnung.pdf 92 Verordnung über die Versicherungsvermittlung und- beratung. Entwurf vom 18. Dezember 2006, p The draft decree implementing the law transposing the IMD: vermittlerverordnung.pdf 53

59 Annex C: Case study for the Netherlands C.1 Introduction The IMD was initially implemented into the Dutch legislation by the Financial Services Act (Wet financiële dienstverlening Wfd) of 12 May 2005 which entered into force on 1 January The Act contained rules for providing, mediating and advising on financial products for consumers and (in the case of insurance) for businesses. The scope of the financial products covered by the Act was not limited to insurance contracts, but included also mortgages, bank and savings accounts, consumer loans and investment products. 93 The general provisions of the Act were then worked out in greater detail in the Financial Services Decree (Besluit financiële dienstverlening) and the Exemption Regulations pursuant to the Financial Services Act (Vrijstellingsregeling Wfd), both published in December The Wfd has subsequently been integrated in the Act on Financial Supervision (Wet op het financieel toezicht Wft) of 28 September 2006, which came into force on 1 January The Wft replaces eight existing supervision acts and, as stated in the Dutch regulator s website, brings together practically all the rules and conditions that apply to the financial markets and their supervision. 95 The new Act simplifies and reduces the administrative burden of financial services providers, and facilitates the co-operation between the Dutch central bank (DNB) and the financial regulator, the AFM. C.2 Regulation of insurance mediation in the Netherlands before the IMD Table 5 presents the main regulatory characteristics for insurance mediation in the Netherlands before the IMD. Insurance mediation in the Netherlands has been regulated since 1954, particularly with reference to professional requirements. For example, under the Act on the Insurance Intermediary Business (Wet assurantiebemiddelingsbedrijf Wabb), which remained in place until the Financial Services Act of 2005 was approved, all insurance intermediaries in the Netherlands had to be registered with the SER (the Dutch Social and Economic Council). Intermediaries had to provide proof of having undertaken specific courses aimed at certifying their experience; they had to have clean criminal records with respect to the major criminal offences; and they could not have been declared bankrupt in the past In addition to the Financial Services Act, insurance intermediaries are also required to comply with the Act on Identification of Services (Wet identificatie bij dienstverlening Wid) and the Act on the Disclosure of Unusual Transactions (Wet melding ongebruikelijke transacties Wmot). 94 The Financial Services Decree also implements the European directive 2002/65/EC on distance marketing of financial services into the Dutch legislation. 95 See the Dutch regulator s website: 96 C/M/S, IMD Guide Selling Insurance Across Europe January 2006, page

60 Table 5: Summary of key regulatory variables in the Netherlands before the IMD Key regulatory variable Type of regulation: statutory or voluntary? Name and type and of the regulator, if any Existence of a register of insurance intermediaries? Minimum professional requirements (e.g. clean police records, no past declarations of bankrupt, possession of a diploma)? Obligation of professional indemnity cover? If so, what was the minimum cover? Minimum disclosure requirements towards customers? Existence of protection scheme of client s money? Existence of a compensation scheme? Existence of an established arbitration procedure? Amount of (one-off) fee to be paid by the intermediary to obtain authorisation, if any Amount of (annual/ongoing) fee to be paid by the intermediary to retain registration, if any Position pre-imd Statutory SER the SER, however, had limited supervisory powers (compared to the AFM now) and was mainly responsible for registration YES registration was compulsory YES since the publication of the Act on the Insurance Intermediary Business in 1954 NO under statutory rules, but YES under GIDI rules97 NO under statutory rules, but YES under GIDI rule NO but according to the Dutch civil code, a payment from the client to the intermediary is considered as a payment to the insurer NO YES consumers could use the SKV (Stichting Klachteninstituut Verzekering), which dealt with consumer complaints NO Around per year Source: CRA 97 GIDI is a voluntary code of conduct promoted by the Dutch insurance mediation industry before the implementation of the IMD. Compliance with the GIDI rules was mandatory for members of NBVA and NVA, the two major trade associations of insurance intermediaries in the Netherlands. 55

61 In interviews with CRA, however, several industry sources reported that the regulatory activity of the SER was very limited and not comparable to what the AFM currently does (see below). The SER was mainly responsible for maintaining the register of intermediaries (now discontinued) and only intervened when specific issues arose, i.e. it did not carry out ongoing supervision. The limited fee that intermediaries used to pay the SER around per year was considered as a registration fee rather than a regulatory fee. Furthermore, there were no specific rules about issues such as minimum disclosure requirements toward customers, professional indemnity cover etc. in the statutory regime in place in the Netherlands before the IMD. Nevertheless, since 2002 the Dutch insurance mediation industry had promoted a private code of conduct, known as GIDI (Gedragscode Informatieverstrekking Dienstverlening Intermediair Intermediary Services Code of Conduct). This code contained stringent rules about the provision of information to customers and the possession of indemnity cover by an intermediary, which are comparable to those subsequently introduced by the Financial Services Act of Compliance with the GIDI rules was mandatory for intermediaries affiliated to the two major Dutch trade associations NBVA and NVA and voluntary for other intermediaries. According to industry sources, the great majority of insurance intermediaries in the Netherlands around 8,000 9,000 intermediaries (out of an estimated total of 12,000 intermediaries), representing approximately 70% of the market in terms of premiums were complying with the GIDI code before the implementation of the IMD. Only small intermediaries and those with an inactive portfolio were reportedly not adhering to the GIDI code. C.3 The transition towards the implementation of the IMD in the Netherlands In 2001, the Dutch Ministry of Finance promoted an initial public consultation about the scope of the future Financial Services Act involving not only insurance intermediaries, but also mortgage advisers, banks, and insurers. A wide consultation process then followed between 2002 and The financial regulator AFM and market players (including the NBVA and NVA representing insurance intermediaries) also participated in this debate, in addition to the Ministry of Finance. Several joint working groups were formed, with each of them in charge of discussing and defining the rules of a specific area, e.g. supervision, permanent education requirements, disclosure obligations, etc. In this respect, all the market participants and organisations consulted by CRA commented that this was a very fruitful process, which contributed to define effective and clear rules in a collaborative way. The initiative of creating the Stfd (see section C.4.3) was also taken during this process. 98 Copy of the GIDI code: 56

62 C.4 Implementation of the IMD in the Netherlands The implementation of the IMD into the Dutch legislation represented a major change with respect to the past. Although many intermediaries were already complying with the GIDI rules at the time, the Financial Services Act of 2005 introduced mandatory rules for all providers of financial products. These ranged from the obligation of having professional indemnity cover to detailed information requirements towards clients and the obligation of being a member of a complaint institute (see sections C.4.2 and C.4.5). For complex products it is now mandatory for an intermediary to keep written records of his activity, e.g. the demands and needs of the client, product recommendations, etc. An industry source also noted that minimum standards of education are now better defined with respect to the past and there is a new requirement for ongoing education of insurance intermediaries. 99 Another major change is the licensing process of the AFM and its ongoing supervision regime. The market players interviewed by CRA commented that obtaining a licence from the AFM is a more complex and completely different process from the previous registration with the SER because entry requirements are stricter and more formal than in the past. Also, the AFM has a proactive attitude in supervision, e.g. it carries out regular controls and audits of the intermediaries activity (see section C.4.1). All market players consulted by CRA agreed that it is difficult at this stage to assess the impact of the implementation of the IMD on the structure of the Dutch market for insurance mediation. Several sources reported that some small or older intermediaries about 30-35% of the market, and mainly those who were not adhering to the GIDI code did not apply for or were not likely to obtain a licence from the AFM, because they find it difficult to comply with the new rules or voluntarily decide to exit from the market. The AFM also reported that there is an increased activity of concentration and sales of portfolios among insurance intermediaries. There was general agreement, however, that these processes of exit and concentration may increase efficiency and therefore benefit consumers in the long-run. Similarly, several sources consulted by CRA agreed that the new rules implementing the IMD (e.g. on advice and information provision; see section C.4.4) represent an improvement and enhance consumers protection with respect to the past, especially in the case of complex products, which reportedly was a long-standing issue in the Netherlands. Lastly, although the Distance Marketing Directive, (DMD, Directive 2002/65/EC) was implemented at the same time as the IMD into the Dutch legislation, several market participants noted that the DMD and IMD were 99 Minimum professional requirements (e.g. possession of a diploma) were in place for insurance intermediaries in the Netherlands even before the Financial Services Act of 2005, but not for mortgage advisors, for example. 57

63 implemented through separate processes which did not affect each other in a significant way. C.5 Choice and style of the competent authority The Financial Services Act of 2005 designated the AFM as the competent authority for regulating insurance mediation a choice confirmed by the Act on Financial Supervision of The AFM supervises business conduct in the financial markets in the Netherlands and was established as the legal successor to the Securities Board of the Netherlands (Stichting Toezicht Effectenverkeer, or STE) in 2002, when a major reform of supervision of financial markets took place in the Netherlands. The AFM is also in charge of the register of all providers of financial services, which includes banks and insurers as well as intermediaries. 100 Market participants interviewed by CRA reported that the AFM has a quite proactive attitude, unlike the SER in the past. It publishes a plan of its supervisory activity each year, describing which sectors and products it is going to focus on. For example, mortgages and life-insurance products will be a focus of the AFM s activity during In the insurance mediation business the AFM reportedly spent 2006 the first year of the new regime mostly granting licences. As a result, it is now expected that during 2007 and coming years the AFM will carry out more controls and devote more time to the enforcement of rules. For example, according to the industry representatives the AFM plans to carry out about 400 audits annually, e.g. using the number of complaints reported by each intermediary in the annual self-assessment as a signal or specifically investigating intermediaries included in the watch-list prepared by the Stfd. Moreover, although no sanctions have been decided so far for violations of the rules introduced in 2005 and 2006, a trade association noted that the AFM has very recently withdrawn the licence to approximately 600 intermediaries who had applied for it during the transitory regime and benefited from retention of acquired rights. C.6 Scope of the rules implementing the IMD and exemptions As per article 1 of the IMD, the rules contained in the Dutch Financial Services Act of 2005 do not apply to intermediaries when all of the following conditions are met: Their main professional activity is different from insurance intermediation; The insurance contract is not a life-insurance agreement and does not cover liability risks; The insurance is complementary to the provision of goods or services, like the risk of breakdown, loss or damage to goods, and travel insurance; and, The annual premium is below Register of financial services providers: 58

64 Insurance intermediaries are also exempted if their activity is exclusively limited to claims brokerage or the collection of premiums. Furthermore, exemptions are granted to intermediaries if they mediate in hail damage insurance, horse and livestock insurance or glass insurance, with the exception of greenhouse glass insurance and to travel agencies or organisations which mediate in travel insurance policies, if at least one employee in the branch has a relevant diploma. 101 On the other hand, direct selling of insurance products by banks and insurance companies also falls under the scope of the rules implementing the IMD in the Netherlands. 102 C.6.1 Professional requirements As mentioned earlier, the new regime initially established by the Financial Services Act of 2005 (and subsequently integrated into the Act on Financial Supervision of 2006) introduces higher professional requirements for insurance intermediaries than in the past, since they now need to be licensed by the AFM, unless exempted. 103 Licensed intermediaries are then included in a public register. In particular, intermediaries must be fit and proper in order to obtain the licence. To this aim, they are required to submit a certificate of good behaviour and must have not been declared bankrupt in the past, which is sufficient proof of integrity according to section 6 of the Decree of In addition, intermediaries must hold a valid diploma which certifies the possession of the relevant professional skills, as specified in the Decree. 104 The Act on Financial Supervision of 2006 also introduces the requirement of ongoing education, i.e. intermediaries must attend courses and seminars (and pass exams in some cases) on a regular basis, as deemed necessary by the AFM in consultation with the industry. The new regime also introduced the obligation of having professional indemnity cover, in accordance with article 4 of the IMD. In particular, insurance intermediaries are required to have minimum cover of 1m per claim and 1.5m in aggregate on account of errors, omissions or negligence committed in the exercising of their profession. Alternatively, insurance intermediaries may submit an unconditional guarantee provided by a credit 101 See, for example, sections 5 and 12 of the Exemption Regulations pursuant to the Financial Services Act, published by the Dutch Ministry of Finance: ( 102 See BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9 th update, December 2006, p The Financial Services Act of 2005 also established a transitory regime whereby intermediaries already operating in the market and in possession of a diploma could obtain a licence from the AFM if they applied for it within a certain time from the enactment of the Act. 104 The integrity of the intermediary is checked by the AFM itself (for which a specific fee is payable; see section C.5), whereas the intermediary is responsible for employees to have a certificate of good behaviour and possess adequate knowledge (e.g. through a diploma). Intermediaries are required to have a specific diploma for every financial product they distribute. The duration of each diploma depends on the complexity of each product, ranging e.g. from 40 hours for consumer loans to 100 hours for mortgages and 120 hours for non-life insurance products, according to an industry source. 59

65 institution covering their obligations for the same amount (section 24 of the Decree). Dutch customers benefited from a financial guarantee even before the implementation of the IMD. Indeed, according to the Dutch civil code monies paid by the customer to the intermediary are treated as having been paid to the insurer, whereas monies paid by the insurer to the intermediary are not treated as having been paid to the customer until the customer actually receives them. 105 Lastly, intermediaries have to fill an annual self-assessment (either directly or through the Stfd) which is used by the AFM for regulatory purposes. The selfassessment contains around 80 questions about the current business practices adopted by each intermediary, the number of employees and their level of education, the amount of training they received in the previous year, the number of complaints received and the complaint procedures in place. 106 The AFM uses the self-assessment to determine the risk-profile of each intermediary and decide whether to undertake an audit or not, to carry out further controls, etc. Several industry participants commented that the selfassessment, even if it specific to the Dutch regulatory regime and a quite complex exercise to carry out, is useful because the AFM can focus on targeted audits (e.g. on high-risk intermediaries only) and adopt better shaped and lighter regulations for the industry as a whole. The role of the Stfd in the Dutch insurance mediation market The Stfd (Stichting Financiële Dienstverlening Foundation for Financial Services) is a private organisation created during the process of implementation of the IMD on the initiative of the Ministry of Finance, the AFM and several market participants, including NBVA and NVA (the two major trade associations of insurance intermediaries), banks, insurers, and mortgage advisors. Its main role is to assist its members (approximately 9,000 intermediaries) in fulfilling the annual self-assessment they are required to submit to the AFM. 107 The Stfd also provides feedback to intermediaries highlighting shortcomings and areas for improvement. 108 If an intermediary does not follow the Stfd s advice, he is put on a special watch list which the AFM can use to decide upon targeted audits and investigations. Moreover, the StFD maintains a 105 See BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9 th update, December 2006, p According to sources consulted by CRA, it takes about 1-2 days for an intermediary to complete a self-assessment. The self-assessment form is available, in Dutch at: The Stfd is not involved with the process of granting a licence or checking the truthfulness of the information in the self-assessment, which are exclusive responsibility of the AFM. 108 A self-assessment independently compiled and submitted to the AFM (i.e. without the Stfd s assistance) would receive no feedback in turn. The feedback the intermediary receives from the Stfd is considered one of the main advantages of the process, according to several industry sources. 60

66 database of self-assessments which provides information on compliance, behaviour and facts about the industry. This database can be used by the StFD and on request by the AFM to monitor the industry and its risk-profile over time. There is also a monetary benefit for intermediaries to be advised by the Stfd in the completion of the self-assessment. Indeed, the AFM acknowledges the role of the Stfd in making supervision of insurance intermediaries easier and grants a rebate off the annual regulatory fee to intermediaries registered with the Stfd (see section C.5). Market participants reported that, even after paying the registration fee for the Stfd, it is cheaper to receive assistance from the Stfd and pay the discounted fee than to complete the self-assessment independently and pay the full regulatory fee. 109 Another role performed by the Stfd is to represent insurance intermediaries when talking to the AFM. As a result, in addition to having regular exchanges of data, the AFM and Stfd also engage in discussions about industry practices, proposed regulations. In this way the Stfd also ensures that new regulations receive a wide industry acceptance. C.6.2 Information requirements The information requirements specified by the rules implementing the IMD into the Dutch legislation are generally very similar to the original text of the IMD. In particular, prior to the conclusion of an insurance contract an intermediary must provide customers with at least the following information: Its name and address; The nature of the insurance contract; Its internal complaints procedure and the relevant dispute resolution body; and, Its registration with the supervisory authority. Moreover, an intermediary must inform consumers of: Whether it advises on the basis of the obligation to provide an objective analysis; 110 Whether it has a contractual obligation exclusively to act as a broker for one or more providers; or That it has no contractual obligation exclusively to act as a broker for one or more providers and does not advise on the basis of the obligation to provide an objective analysis Submitting the self-assessment to the AFM independently would also involve not receiving any feedback e.g. about required improvements. 110 If the advice is given on the basis of an objective analysis, the intermediary must carry out an analysis of an adequate number of comparable insurance contracts available on the market, so that he is able to recommend the contract that best suits the consumer s needs. 61

67 The intermediary must also disclose how he is remunerated, i.e. through a fee or commission, which is not included in the original text of the Directive. Special and more detailed provisions on transparency, however, apply to complex products, e.g. life-insurance policies, or mortgages in combination with a life insurance. Starting from October 2009 the intermediary must inform the client about the average amount of the commission paid for the product under consideration. Furthermore, upon the client s specific request, the intermediary must also disclose the exact amount of the commission he receives for his mediation in the transaction (with the breakdown of what he receives at the beginning of and during the contract). 112 Moreover, for complex products the intermediary must keep a written record of his clients personal characteristics (e.g. financial position, knowledge of and experience in financial products, demands and needs, and willingness to take risks) and of his own advice (e.g. characteristics of the financial products he recommended and underlying reasons for recommendation) during one year. In the case of complex products the intermediary must provide customers a standardised description of how risky the product they are considering to buy is. These requirements go beyond those of the IMD. C.6.3 Arbitration procedures and compensation schemes Under the rules implementing the IMD in the Dutch legislation, intermediaries must inform their customers about the complaint procedure in place and must join an organisation recognised by the government for settling disputes between intermediaries and customers. A single and centralised institute to deal with complaints in the financial services sector has been created on 1 January 2007 and is in operation since 31 March The new organisation known as KIFID (Klachteninstituut Financiele Dienstverlening Institute for Complaints relating to Financial Services) replaces the multiple organisations existing in the sector until 2006, including the Dutch Ombudsman SKV. 113 The new Act on Financial Supervision of 2006 has also introduced rules for compensation schemes which apply to insurance mediation as well as to distribution of mortgages, consumer loans, etc. These rules represent new requirements for the Netherlands, as they were not part of the Financial Services Act of The insurance intermediary must also specify whether it owns a direct or indirect holding of 10% or more of a particular financial services provider s voting rights or capital, and whether a particular provider or a particular parent company of a provider owns a direct or indirect holding of more than 10% of the intermediary s voting rights or capital. 112 BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9 th update, December 2006, p Intermediaries had to pay a certain amount to make use of the services of the SKV, e.g. 127 in the case of intermediaries with less than 5 employees and 220 beyond this threshold. 62

68 C.7 The cost of regulating insurance mediation in the Netherlands after the implementation of the IMD The registration with the AFM costs 240 plus 300 per member of the executive board of the intermediary for integrity research. Annual regulatory fees for 2006 were set at 420 for self-employed intermediaries and increased up to a maximum of 14,780, if the intermediary has more than 200 employees. 114 The basic annual fee for intermediaries registered with the Stfd was only 270, as several market participants confirmed to CRA. For 2007 the annual fee set by the AFM amounts to 1,250 for intermediaries with up to 5 employees if they are not registered with the Stfd. 115 The same fee for intermediaries registered with the Stfd is around 700. This increase is explained in that the AFM has now better estimates of the actual workload and time needed to process an application with respect to 2006, which was the first year of the new regime. These fees are considered to be in line with those paid in other sectors, e.g. accountants. Though they are much higher than under the SER regime, market participants consulted by CRA generally did not complain about their level and acknowledged they serve to pay the costs of a better and more comprehensive regulatory regime. Table 6: Additional costs following the new rules regarding advice in the Financial Services Act IT investment, implementation and compliance cost ( million) Costs of extra advice (hours) Cost of one hour of advice ( ) Cost of extra advice per advice given ( ) Number of "advice" sessions given (million) Cost of extra time needed to fulfil requirements regarding advice ( million) Total administrative costs ( million) A B C D=B*C E F=E*D G=A+F Intermediaries Banks Insurance companies Total Source: Besluit financiele Dienstverlening, Nota van Toelichting (Decree Financial Services Act, Explanatory Notes), pp Note that the costs above refer to the rules regarding advice in the Financial Services Act, which are generally broader than the rules regarding advice contained in the IMD (i.e. they also apply to distribution of mortgages, savings and bank accounts, consumer loans, etc.). Also, the costs reflect the only the advice given for so-called impactvolle products these are products which are considered as complex and have a significant financial impact on consumers. All costs are stated on an annual basis. 114 See BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9 th update, December 2006, p. 72. This compares to when the register was maintained by the SER. 115 A check by the AFM of the integrity of a partner or policy-maker in a mediation agency or brokerage firm costs additional

69 In addition to direct supervisory costs in concept of fees, financial service providers also face other costs relating to the implementation of the new rules regarding advice, e.g. IT investment and compliance costs. The Dutch Government estimated these costs before the implementation of the Financial Services Act in two steps. Firstly, relevant market parties intermediaries, banks and insurance companies were asked to submit their cost estimates. Secondly, a consulting firm was asked to verify and crosscheck these estimates. Table 6 shows the costs so determined. One-off costs due to investments in IT, setting time aside to explain regulatory requirements to intermediaries and ensuring that they comply are especially significant for banks and insurance companies. In the case of intermediaries, the cost of extra time spent on advising customers has the largest financial impact. The Dutch government notes that these cost estimates must be treated with caution. For example, the calculations show a large difference between the cost estimates for each of the different types of providers which should not exist given that intermediaries, banks and insurance companies all compete in the same market. Nevertheless, on the assumption that there are around 9,000 intermediaries (not including bank or insurance employees), the table shows that each Dutch intermediary incurs an administrative cost of 2,311 per year, in addition to the annual registration costs of 700 or 1,250 (depending on whether the intermediary registers via the Stfd or the AFM). 64

70 Annex D: Case study for the United Kingdom D.1 Introduction In the UK the IMD was implemented in a timely manner on 14 January This followed legislation in June 2003 to change the Regulated Activities Order (RAO) of 2001 which specifies the activities and products subject to regulation by the Financial Services Authority (FSA) with statutory instrument 2003/1476 (the Insurance Mediation Order ). This order applies to the activities of dealing as an agent in contracts of insurance, arranging deals in contracts of insurance, assisting in the performance and administration of a contract of insurance and advising on the merits of buying or selling a contract of insurance. Further changes to the RAO were introduced in 2004 (statutory instrument 2004/1610) and the FSA modified its handbook during 2003 and 2004, after consulting the industry. In March 2007 the FSA published a review of consumer experiences and outcomes in general insurance markets (see Box at the end of this annex). 116 Based on the results of this research, the FSA is now considering whether to remove some of the Insurance Conduct of Business Rules (ICOB; see section D.4) and introduce lighter regulation for certain insurance products. The proposed changes will be presented in a Consultation Paper in June 2007 and (if agreed) are then likely to be implemented in December D.2 Regulation of insurance mediation in the UK before the IMD The implementation of the IMD into the UK legislation in 2005 implied a major change in the regulation of general insurance mediation. Although the FSA was already regulating mediation of life-insurance products before the IMD, general insurance mediation was only subject to voluntary regulation, with the industry being self-regulated by GISC (the General Insurance Standards Council). 117 A summary of the main characteristics of the regulatory regime in the UK before the IMD is presented in Table ICOB Review Interim Report: Consumer Experiences and Outcomes in General Insurance Markets, published by the Financial Services Authority in March 2007: Until April 2001 general insurance intermediaries who had chosen to adopt the title of insurance broker were regulated and registered with the Insurance Brokers Registration Council (IBRC), under the Insurance Brokers (Registration) Act (IBRA) of The Treasury decided the dissolution of the IBRC because the IBRC captured only those who chose to trade as insurance brokers, but not the many other general insurance intermediaries. In addition, many respondents to a public consultation on the future of the IBRC in early 1998 said that voluntary regulation offered the best prospects for improving standards of conduct among general insurance intermediaries. As a result, GISC took over many of the tasks previously performed by the IBRC. See the press notice of the Treasury of 30 April 200: 65

71 Table 7: Summary of key regulatory variables in the UK before the IMD Key regulatory variable Type of regulation: statutory or voluntary? Name and type and of the regulator, if any Existence of a register of insurance intermediaries? Minimum professional requirements (e.g. clean police records, no past declarations of bankrupt, possession of a diploma)? Obligation of professional indemnity cover? If so, what was the minimum cover? Minimum disclosure requirements towards customers? Existence of protection scheme of client s money? Existence of a compensation scheme? Existence of an established arbitration procedure? Amount of (one-off) fee to be paid by the intermediary to obtain authorisation, if any Amount of (annual/ongoing) fee to be paid by the intermediary to retain registration, if any Position pre-imd Voluntary 118 GISC (General Insurance Standards Council), an independent and nonstatutory organization created in July 2000 by the industry NO although GISC maintained a list of its members No specific criteria laid down in the GISC Rulebook although there was an application procedure YES (for GISC members only): minimum cover equal to the greater of 1 million or 3 times the annual amount of fees and commissions, administration charges, etc. YES (for GISC members only) YES (for GISC members only), through segregation rules NO YES (for GISC members only), through an approved dispute resolution scheme NO For year 2000, 0.1% of intermediaries annual revenue, subject to a minimum of 200 and a maximum of 100,000 Source: CRA 118 The information reported in the table refers to the GISC Rulebook. Membership of GISC which was open to banks and insurers as well as intermediaries was voluntary. 66

72 GISC an independent and non-statutory organisation created in July 2000 was responsible for regulating the sales, advisory and service standards of its members. Membership which was voluntary was open to insurers, intermediaries (including brokers) and other parties involved in general insurance such as claims handlers. There was an application procedure for becoming a member of GISC, but no specific criteria relating to good repute and clean criminal record were laid down. In October 2002, GISC had approximately 6,500 members. 119 Members of GISC had to comply with the GISC Rulebook and agreed to observe high standards of integrity and to act with due skill, care and diligence in the course of their activities. They had also to have and maintain adequate internal controls and procedures to ensure compliance with the Rulebook and organise their internal affairs in a prudent manner, taking into account the size, nature and complexity of their business (including the maintenance of proper records and systems). GISC was also in charge of monitoring the conduct of its members and initiating investigations, if necessary; it also had specific enforcement powers, including the possibility of issuing intervention orders. Furthermore, the GISC Rulebook required members of GISC to maintain adequate financial resources to meet their commitments. They also had to be sure that their employees received adequate training and proper supervision and possessed the necessary knowledge and skills relevant to their activities. Members of GISC were also required to maintain one or more separate Insurance Bank Accounts (IBAs) to keep insurance premiums and claims. In addition to segregation rules, intermediaries had to take out and maintain professional indemnity cover, with the minimum level of indemnity being equal to the greater of 1 million or 3 times the annual Net Retained Brokerage (which included fees and commissions, administration charges etc), applicable to any single claim and in the aggregate. Solvency requirements were also in place for some intermediaries. The GISC Rulebook, a document of approximately 40 pages, also included the Private Customer and the Commercial Codes, which set minimum standards of good practice for sales to private customers and businesses, respectively. According to the Private Customer and Commercial Codes before the conclusion of a contract GISC members were required to explain: the type of service they offered to customers; whether they acted for an insurer or acted independently for customers as an intermediary, or acted as an agent of another intermediary; and the available choice of products and services. Moreover, GISC members had to identify customers needs by 119 According to the FSA, this number would represent approximately one third of the total number of general insurance primary intermediaries, implying a population of approximately 20,000 firms. FSA Consultation Paper CP 174, p. 7 of Annex 1: 67

73 getting relevant information from them (if practical) and offer suitable products and services according to the customers needs and requirements. GISC members were also asked to provide information about the products and services offered (e.g. identity of the insurer, details of cover and benefits, and period of cover) and their costs (including insurance premiums, other fees and charges, intermediary s commission etc). 120 Once insurance arrangements were in place, GISC members had to provide customers with a written confirmation of cover, proof of payment, and full policy documentation. GISC members were also required to ensure that any money, documents, and other property or information they handled or held on behalf of their customers were secure. Furthermore, claims had to be handled fairly and promptly and customers had to be provided with information on claims procedures (e.g. details of how to make a claim and customers responsibilities in relation to making claims). Similarly, complaints had to be handled fairly and promptly and customers had to be informed in writing about existing complaints procedures. If customers were unhappy with how a member of GISC had dealt with a complaint, they could also contact a recognised and independent dispute resolution scheme, approved by GISC. Members of GISC had to record the number of complaints received each year and a breakdown of the subject matter of the complaints; these records had to be kept for at least 2 years. D.3 The transition towards the implementation of the IMD in the UK HM Treasury held a public consultation during the period October 2002 to January 2003 on how to implement the IMD into the UK legislation. 121 In theory, GISC could have been transformed into a statutory regulator and designated as the competent authority. However, this did not occur and instead HM Treasury decided to include general insurance mediation within the range of activities regulated by the FSA. D.4 Implementation of the IMD in the UK The implementation of the IMD into the UK legislation in 2005 implied the move from a voluntary regulatory regime with GISC setting professional standards for its members to statutory regulation under the FSA. Among other things, this resulted in the obligation for insurance intermediaries to comply with the extensive FSA Handbook, which replaced the GISC Rulebook. 122 More specifically, under the new regime insurance intermediaries had to comply with several sections of the FSA Handbook, including: 120 Customers could decide not to receive all the information under the GISC Private Customer Code. 121 See HM Treasury, Regulating Insurance Mediation Consultation Document, 21 October Documentation relating to the consultation process: FSA Handbook including tailored handbooks for specific categories of firms or sectors: 68

74 AUTH, which sets out procedures and rules for the authorisation of intermediaries; 123 SUP, which describes supervisory requirements with which insurance intermediaries must comply; ICOB, containing detailed prudential and conduct of business rules including among others those relating to: information and advising requirements, statement of demands and needs, and claims handling requirements; SYSC, on the systems and controls that firms must have in place; APER and FIT, on the requirements that authorised intermediaries need to comply with (e.g. reputation, honesty, and integrity requirements, as per article 4 of the IMD); PRU, which lays down requirements for professional indemnity insurance (as per article 4 of the IMD); TC, describing training and competency requirements of intermediaries and their employees (article 4 of the IMD); COMP, which contains the rules governing eligibility under, and levies for, the Financial Services Compensation Scheme; and, CASS, on the requirements regarding the holding and protection of client s money. 124 The new rules were generally more stringent and detailed than the GISC Rulebook in many respects, e.g. for requirements relating to authorisation, disclosure of information to clients, and resolution of disputes (but not for professional indemnity cover; see section D.4.3). In addition, the FSA s regulatory framework is wider and more rigorous than that of GISC since it has stricter enforcement requirements. The FSA first authorises insurance intermediaries and then supervises them on a regular basis, enforcing rules and issuing sanctions in case of violations. As reported in the recent Davidson Review, several commentators believe that the approach adopted by the British regulators for general insurance mediation may not be entirely appropriate. 125 For example, it is noted that insurance mediation comprises a large number of firms, many of which are small, and the risks involved in this activity are small compared to those of other sectors regulated by the FSA. As a result, many intermediaries reportedly find it difficult, time-consuming or simply too expensive to comply with the rules of the FSA Handbook, especially in comparison with the previous regime based on voluntary regulation. 123 The AUTH section of the FSA Handbook has been deleted with effect from 31 December 2006, with some of its rules being included in other sections. 124 C/M/S, IMD Guide Selling Insurance Across Europe January 2006, page Published in November 2006, the Davidson Review considers several issues related to the implementation of EU directives into the British legislation, including gold-plating. Some directives are examined in more detail, among which is the IMD. Davidson Review: 69

75 The British Insurance Brokers Association (BIBA) the major trade association of insurance intermediaries in the UK is among those supporting this view. In its response to the Davidson Review BIBA commented that the FSA Handbook has brought about a substantially more onerous regulatory regime in the UK than elsewhere in the EU, which has put British intermediaries at a significant competitive disadvantage versus their European counterparts. 126 In addition, in January 2003 the Association of British Insurers (ABI) reportedly warned that small intermediary firms would rather exit the market than face the high costs likely to arise from the new regulation of general insurance. 127 More recently, in April 2005 Sir Howard Davies, former chairman of the FSA, wrote that the insurance mediation directive is the worst example of a measure that has imposed huge costs on UK insurance brokers for highly uncertain benefits. 128 There is general agreement, however, among the market participants consulted by CRA that the impact of the new FSA rules may be different depending on the size of the business under consideration. Small businesses may suffer more from new regulations and devote comparatively more financial resources to compliance (see also section D.5). In contrast, according to an industry source, larger intermediaries for example, Lloyd s brokers, who used to comply with Lloyd s strict regulations and accreditation criteria from 1977 until GISC was created may have been less affected by the extra burden imposed by the rules implementing the IMD into the UK legislation. Moreover, the same source added that in larger firms, compliance departments are more structured than in the past and this can be seen as a positive development, even though costs from implementation may have been significant. Furthermore, according to these sources, the new regulatory regime may have contributed among other factors to the exit of small intermediaries from the market and to mergers of portfolios. Indeed some have noted that a reduction in small intermediaries could, in principle, lead to greater efficiency in the sector (see also comments from Dutch operators in the case study for the Netherlands). Further, the FSA stated that we do not expect that the exit of these firms will have a significant effect on competition nor on the quantity, quality and variety of transactions for most consumers and firms. 129 Lastly, some intermediaries may have now decided to limit the scope of their activity to introduction, so that they can apply for an exemption from the new rules. Given the absence of a formal register of intermediaries before the IMD was implemented it is difficult to gauge the 126 See BIBA s response to the Davidson Review, p Open Europe (in association with Keith Boyfield Associates), Selling the City short? A review of the EU s Financial Services Action Plan, November 2006, p. 66: Financial Times, 20 April 2005, p The FSA Consultation Paper CP 174, p. 30 of Annex 1, of March 2003: 70

76 impact of the implementation of the IMD on the market structure of the insurance mediation business in the UK. D.4.1 Choice and style of the competent authority As mentioned in section D.1, in December 2001 HM Treasury decided to extend the FSA s original remit and to give it responsibility for the implementation of the IMD in the UK legislation. 130 Several industry sources commented that the designation of the FSA as competent authority for regulating general insurance mediation was never under discussion. For example, BIBA noted that the dominant position of the FSA within the UK s regulatory landscape meant that the HM Treasury had little alternative. 131 The FSA is considered to be a proactive regulator. In particular, market participants reported that the FSA undertakes the following types of supervisory activity: Regular visits, e.g. the FSA visits the largest 5% of mediation businesses every year; Occasional and more numerous visits (e.g. 200 firms), when the FSA is investigating how regulated firms deal with a specific theme; Mandatory reporting, e.g. the Retail Mediation Activities Return (RMAR), which collects financial and other type of information, to be submitted electronically by intermediaries every six months (or every three months for larger intermediaries); 132 and Visits to specific businesses, if the need arises. Under the previous regime GISC also had a specialised monitoring team which would visit every member at least once a year. It could also visit a member any time a problem or issue was reported; however, GISC did not require mandatory reporting nor publish any thematic work. Immediately following the implementation of the IMD, the FSA was understood to be checking the perimeter i.e. focusing on the authorisation process and ensuring that anyone conducting insurance mediation services was regulated to do so. More recently, the FSA has become more active in enforcing the various detailed rules relating to insurance mediation and issuing sanctions. 130 HM Treasury, Regulating Insurance Mediation Consultation Document, 21 October Documentation related to the consultation process: See BIBA s response to the Davidson Review, p. 2. In this respect BIBA also commented that the FSA is not the appropriate body to perform this role and we believe that this decision has led to insurance brokers and intermediaries being shoe-horned into a pre-existing regulatory regime that was never designed for this purpose. The FSA was established to regulate very different markets from that of insurance mediation, principally those relating to higher risk financial services and products. 132 The content of the RMAR is briefly explained at: 71

77 D.4.2 Scope of the rules implementing the IMD and exemptions The UK rules on insurance mediation are wider in scope than the original text of the IMD. For example, while the IMD provided for the possibility of not regulating motor warranties in the form of insurance contracts when they cost less than 500 per year, HM Treasury decided to regulate all such motor warranties, regardless of the price. 133 Furthermore, the FSA rules cover insurance mediation as well as the direct selling of general insurance by insurers, whereas the IMD only applies to the former. HM Treasury consulted the industry on both extensions of scope and received wide support for those; the extension of regulation to direct selling was also subject to a cost-benefit analysis by the FSA. In connection with direct selling, the Davidson Review reports that the insurance industry in large part no longer supports this extension of scope because they think that the regime is expensive and difficult to comply with and is not really designed to deal with direct sales by insurers. 134 The Davidson Review also reports that HM Treasury was initially uncertain about whether the IMD covered all activities listed in the Regulated Activities Order (e.g. freight forwarders arranging insurance cover for their customers and property developers arranging insurance to cover their sub-contractors), given the lack of a definition of contract of insurance in the directive. At the time the European Commission confirmed the wide scope of the IMD to the Treasury, but it is not now clear that the Commission will take this approach in its current review of implementation of the IMD by all Member States. 135 As to exemptions, in 2002 HM Treasury decided to extend the appointed representatives regime to mediation activities in relation to general insurance. Appointed representatives of persons authorised by the FSA can carry on regulated activities and are exempt from being authorised if the authorised person (the principal ) accepts responsibility for the conduct of those regulated activities. D.4.3 Professional requirements Under the new rules published by the FSA, all insurance intermediaries must be authorised by the FSA, unless exempted, and are subsequently included in a public register In contrast, HM Treasury decided not to introduce statutory regulation of travel insurance sold as part of a package, as allowed by the IMD. HM Treasury is currently conducting a review into the sale of travel insurance purchased alongside a holiday or other related travel (see Extended warranties on domestic electrical appliances and other goods were also excluded from statutory regulation in 2005, pending the conclusion of the investigation that the Competition Commission was carrying out into such market at the time. 134 See Davidson Review, paragraph See Davidson Review, paragraph The FSA register is publicly available at: 72

78 These rules include meeting certain threshold conditions (e.g. legal status and adequate resources) and passing a fit and proper test, among other factors. In particular, under the FIT section of the FSA handbook, a fit and proper person must possess: honesty, integrity, and reputation; competence, and capability; and, financial soundness. 137 The FSA also requires authorised intermediaries to follow both general and more detailed rules on training, attaining competence, recruitment, supervision, and record keeping. These requirements are all stricter than those established in the IMD. In the UK, grandfathering was not permitted; even for those intermediaries who were already complying with the voluntary regime through GISC (approximately 6,000 intermediaries or one third of the market). In contrast, in some other countries existing intermediaries have retained their acquired rights and have been automatically inscribed in the new register introduced by the IMD. Under ICOB 7.4 of the FSA handbook, the FSA also requires insurance intermediaries to act with due care, skill, and diligence and to avoid conflicts of interest, when they handle claims on behalf of customers. In contrast, the IMD does not contain provisions in this matter. In this case, however, Lord Davidson comments that the FSA rules are not burdensome and it can be helpful for firms to have certainty about how to deal with conflicts of interest that arise in the course of their business. 138 There are other instances where the FSA rules go beyond the original text of the IMD. The first instance relates to minimum limits of professional indemnity insurance. The FSA established the following limits for insurance intermediaries (section PRU of the handbook): for a single claim, 1 million; and, in aggregate, 1.5 million or, if higher, 10% of annual income up to 30 million. Firstly, in contrast, the IMD does not mention the upper aggregate limit of 10% of annual income up to 30 million (see article 4.3 of the Directive). These limits are lower than those established by the GISC Rulebook (i.e. the greater of 1 million or 3 times the annual Net Retained Brokerage) in the past. Several market participants interviewed by CRA, however, reported that many large intermediaries were voluntarily adopting higher limits. Secondly, the IMD requires that insurance companies use the mediation services of registered intermediaries only (article 3.6). Instead, rule PRU 9.4 of 137 It is noteworthy that these are general provisions; there are no prescriptive rules, e.g. possessing a certain diploma or passing a specific examination, in the UK regime. 138 See Davidson Review, paragraph

79 the FSA handbook makes an insurer responsible for checking that all persons in the chain of providing mediation services (i.e. primary and secondary intermediaries) are authorised to do so. As the Davidson Review notes (paragraph 2.23), this results in a duplication of checks, since intermediaries may be checked for authorisation by the insurer and by the intermediary on whose behalf they are acting. Third, in respect of financial guarantees, an intermediary can transfer the risk for premiums and claims he holds to an insurance company by contract or use segregated accounts, where insurance monies are protected if the intermediary is liquidated. Moreover, insurance intermediaries must hold a minimum amount of capital (i.e. 10,000 or 5% of the annual income, if higher) and meet specific solvency requirements. 139 The FSA rules on the management of client s money by insurance intermediaries (CASS 5 rules) are stricter than the IMD. In particular, Lord Davidson notes that the CASS rules could be substantially reduced and made easier to comply with if the approach taken was more principles based and relied more on the fiduciary duties [of the intermediaries]. D.4.4 Information requirements BIPAR the pan-european trade association of insurance intermediaries reports that the FSA rules about disclosure of information to clients closely follow the Directive, e.g. with respect to suitability of advice and statements of demands and needs. 140 There is, however, some extra information that the FSA requires intermediaries to provide to clients. In particular, under rule of the Insurance Conduct of Business (ICOB) of the FSA handbook insurance intermediaries must also provide customers with: a policy summary, including disclosure of any fees; a policy document; information about the claims handling process; information, where relevant, about cancellation rights; and for any applicable compensation scheme mentioned in the policy summary, the extent and level of cover and how further information can be obtained, if not already included in the policy summary. 141 In relation to these additional requirements, the Davidson Review comments that much of the extra, non-directive required information is unnecessary and is not read by the consumer and results in consumers shopping around less than they otherwise would. It is expensive for firms to produce and adds 139 BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9 th update, December 2006, p BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9 th update, December 2006, p The details of this additional information are laid out in section ICOB 5.5 of the FSA handbook (which is available at: Information requirements as per article 12 of the IMD are contained in the ICOB sections 4.2. and 4.4 (statement of demands and needs ) of the FSA handbook. 74

80 to the amounts of records that they are required to keep. 142 This view is also shared by some of the market participants interviewed by CRA, and previous work by CRA International found that additional information had led to longer sales processes and less shopping around. 143 D.4.5 Arbitration procedures and compensation schemes The implementation of the IMD also led to insurance intermediaries being subject to the compulsory jurisdiction of the Financial Ombudsman Service (FOS), for which they pay a specific fee (see section D.5). Compared to the requirement for GISC members to join an approved dispute resolution scheme, the Davidson Review notes that for small firms the fees to the Ombudsman are a significant expense and [ ] it is seen as an overburdensome complaints scheme for this industry. Furthermore, the Financial Services Compensation Scheme (FSCS) now applies to general insurance intermediaries as well, who are required to pay the corresponding fee (see section D.5). Under this Scheme eligible claimants (individuals and businesses with a turnover below 1 million) can seek compensation (of 100% of the loss for the first 2,000 and 90% of the remainder) for their losses if an intermediary fails and becomes unable to meet its obligations. D.5 The cost of regulating insurance mediation in the UK after the implementation of the IMD Under the new regime established by the FSA, insurance intermediaries are required to pay fees to the FSA and contribute towards the Financial Services Compensation Scheme (FSCS), according to their annual turnover. 144 In its review of the implementation of the IMD in Europe BIPAR reports the following fee schedule for the UK. 142 Davidson Review, paragraph Market impacts of regulating general insurance, CRA International, March An application fee of 1,500 is payable for new firms. 75

81 Table 8: Annual fees payable by insurance intermediaries in the UK Annual Turnover Annual Fee for 2006 Annual FSCS general levy for Below 200, , ,000,000 3, ,000,000 17, ,000,000 29, Source: BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9th update, December 2006, p. 71. In addition to these fees, intermediaries must also pay a general levy for the Financial Ombudsman Service, set at 50 per year per firm plus 400 per complaint. 146 Several industry sources have commented to CRA that the new regulatory regime under the FSA is more expensive than the previous voluntary regime. In addition, they have stated this is especially burdensome because fees to the FSA, FSCS and Ombudsman must be paid in one instalment at the same time. Moreover, the financial impact of the new regulatory regime is perceived to be heavier for smaller companies. In its response to the Davidson Review BIBA presented the results of a survey among its members about the cost of regulation which are summarised in Table 9. Based on these results, BIBA noted that the cost of the regulatory burden falls most heavily on smaller companies, since the smaller the company, the greater the proportion of their annual income is spent on meeting the demands of regulation In addition to the general levy reported in the table, BIPAR reports that the FSCS is mainly funded by a call, after the event, based on the number of defaults in the general insurance mediation sector. For general insurance intermediaries, this call can be up to a maximum of 0.8% of their annual eligible income. See BIPAR, Implementation of the Insurance Mediation Directive in the EU Member States 9th update, December 2006, p. 71 and the FSCS s website: There is no charge for the first two complaints in any one year and the charge is payable irrespective of whether the firm is at fault. See the FSA s Handbook, in particular: See BIBA, Response to the Davidson Review, p

82 Table 9: Cost of regulation for UK insurance intermediaries as a percentage of annual income Annual income Percentage of annual income spent on regulation Up to 100, % 100,000 1,000, % 1,000,000 5,000, % 5,000,000 15,000, % 15,000, ,000, % Over 100,000, % Source: BIBA, Response to the Davidson Review, p. 3. The cost of regulation includes the cost of the increased level of administration and bureaucracy. The FSA also provided an assessment of how costly the implementation of the IMD into the UK legislation was expected to be, since it is required to carry out a cost-benefit analysis of all its proposed rules. In March 2003 the FSA consulted on several requirements that mortgage firms and insurance intermediaries would have to meet under the new rules, including compulsory professional indemnity insurance, segregated client money, minimum capital requirements for new firms, and extension of the Financial Services Compensation Scheme. The FSA calculated that these proposed rules would have one-off direct costs of 20 million for the FSA comprising 5 million for setting up the new regulatory regime plus 15 million for authorising firms. Furthermore, according to the FSA, compliance costs for market players (including mortgage lenders, insurers, and general insurance intermediaries) would amount to approximately 57 million as one-off costs plus a sum in the range of million million on an ongoing basis. 148 In June 2003 the FSA also evaluated the costs of adopting new rules for the selling and administration of general insurance contracts. 149 The FSA s one-off costs of setting up the new regime were estimated as approximately Annex 1 of the Consultation Paper CP 174, Prudential and Other Requirements for Mortgage Firms and Insurance Intermediaries, published by the FSA in March 2003; The FSA had initially held a public consultation on the standards that insurers and intermediaries should meet when selling insurance and handling claims, including the information they should give to customers, in December FSA consultation paper CP 160, Insurance Selling and Administration: the FSA s High Level Approach to Regulation: 77

83 million, whereas the expected ongoing costs for maintaining the new regime amounted to around 12 million a year. Furthermore, the incremental compliance costs of the proposed rules for market players were calculated in 197 million one-off plus 166 million a year ongoing. 150 Comparable estimates are provided by the ABI, which recently reported that general insurance regulation (including both the IMD and the DMD Distance Marketing Directive) has an overall cost of 400 million per year for customers, comprising direct costs of 122 million and indirect costs for compliance of 266 million Annex 2 of Part I of the Consultation Paper CP 187, Insurance Selling and Administration & Other Miscellaneous Amendments, published by the FSA in June 2003: ABI The Regulation Of General Insurance Sales: One Year On, March 2006, p. 7: 78

84 Box 1: The FSA ICOB Review Interim Report of March 2007 The FSA review of March 2007 focused on 11 general insurance products which were grouped into two broad categories: personal protection products (including: payment protection; income; and, critical illness insurance) and other, more commoditised general insurance products, e.g. home, pet and private motor insurance. For commoditised general insurance products, the FSA found limited evidence of consumer detriment, e.g. consumers buying unsuitable or overly expensive insurance products, or not buying at all a product which would benefit them. Instead, the results of the FSA research showed that consumers view these products as straightforward, are price-focused and hence tend to shop around for the best price. Furthermore, consumers generally buy these standardised products without relying on disclosure documents from firms which are prescribed by the ICOB rules. Therefore, the FSA concluded that these markets work reasonably well in the interests of consumers and is now considering to remove most of the ICOB requirements that go beyond the minimum EU Directive rules. In particular, the FSA notes that for standardized general insurance products these super-equivalent ICOB rules are now ineffective or disproportionate in correcting market failures. Where this is the case we propose to use intelligent copy-out from the relevant EU directives. In other words, our rules for ICOB will be based on the copy-out directive text to avoid placing any unintended additional obligations on firms. In contrast, for personal protection products the FSA found that consumers are less price-sensitive, see these products as technical and complex and thus rely more on advice provided by sales advisers and brokers. Hence, according to the FSA, for those buying personal protection products the existing regulation of firms' selling practices has an important role in reducing the risk of consumer detriment. As a result of these substantial differences in consumers attitudes and risk of detriment across the various markets for general insurance products, the FSA is now moving towards a rebalancing of the ICOB rules, e.g. by removing most of the super-equivalent rules and guidance for standardised insurance products. 79

85 Annex E: Comparative tables The following tables summarise how the main provisions of the Insurance Mediation Directive have been transposed into the national legislation of France, Germany, the Netherlands and the UK. Table 10: Scope of the IMD compared to the national implementation rules France Germany Netherlands UK IMD Article 1.2 As per IMD As per IMD As per IMD As per IMD, except that all motor warranties fall under the scope of the FSA rules, irrespective of the premium IMD Article 2.3 As per IMD As per IMD National rules on insurance mediation apply to direct selling of insurance products by banks and insurers as well National rules on insurance mediation apply to direct selling of insurance products by banks and insurers as well Source: CRA research. Notes: According to article 1.2 of the IMD, the Directive does not apply to persons providing mediation services for insurance contracts if all the following conditions are met: (a) the insurance contract only requires knowledge of the insurance cover that is provided; (b) the insurance contract is not a life assurance contract; (c) the insurance contract does not cover any liability risks; (d) the principal professional activity of the person is other than insurance mediation; (e) the insurance is complementary to the product or service supplied by any provider, where such insurance covers: (i) the risk of breakdown, loss of or damage to goods supplied by that provider, or (ii) damage to or loss of baggage and other risks linked to the travel booked with that provider, even if the insurance covers life assurance or liability risks, provided that the cover is ancillary to the main cover for the risks linked to that travel; (f) the amount of the annual premium does not exceed 500 and the total duration of the insurance contract, including any renewals, does not exceed five years. Moreover, according to article 2.3, the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim, when undertaken by an insurance undertaking or an employee of an insurance undertaking who is acting under the responsibility of the insurance undertaking is not considered as insurance mediation. 80

86 Table 11: Professional requirements for insurance intermediaries established by the IMD and national implementation rules France Germany Netherlands UK IMD Article 4.1 Follows IMD As per IMD Fit and proper person test Fit and proper person test IMD Article 4.2 Follows IMD As per IMD As per IMD As per IMD IMD Article 4.3 Minimum limits of at least 1.5 million per claim and 2 million in aggregate As per IMD As per IMD Minimum limits equal to 1.5 million or, if higher, 10% of annual income (up to 30 million), in aggregate IMD Article 4.4 As per IMD As per IMD Provision a) article 4.4. of the IMD existed in the Dutch civil code before the IMD Use of segregated accounts or possibility of transferring risks to insurance company. Minimum capital requirements of 10,000 or 5% of the annual income, if higher. Specific solvency requirements in place Source: CRA research. Notes: Article 4.1 of the IMD prescribes that insurance and reinsurance intermediaries must possess appropriate knowledge and ability, as determined by the home Member State of the intermediary. According to article 4.2, insurance and reinsurance intermediaries must be of good repute. As a minimum, they should have a clean police record or any other national equivalent in relation to serious criminal offences linked to crimes against property or other crimes related to financial activities and they should not have previously been declared bankrupt, unless they have been rehabilitated in accordance with national law. Moreover, article 4.3 prescribes that insurance and reinsurance intermediaries must hold professional indemnity insurance covering the whole territory of the Community or some other comparable guarantee against liability arising from professional negligence, for at least 1,000,000 applying to each claim and in aggregate 1,500,000 per year for all claims, unless such insurance or comparable guarantee is already provided by an insurance undertaking, reinsurance undertaking or other undertaking on whose behalf the insurance or reinsurance intermediary is acting or for which the insurance or reinsurance intermediary is empowered to act or such undertaking has taken on full responsibility for the intermediary's actions. Lastly, article 4.4 requires the following: Member States must take all necessary measures to protect customers against the inability of the insurance intermediary to transfer the premium to the insurance undertaking or to transfer the amount of claim or return premium to the insured. Such measures take any one or more of the following forms: (a) provisions laid down by law or contract whereby monies paid by the customer to the intermediary are treated as having been paid to the undertaking, whereas monies paid by the undertaking to the intermediary are not treated as having been paid to the customer until the customer actually receives them; (b) a requirement for insurance intermediaries to have financial capacity amounting, on a permanent basis, to 4 % of the sum of annual premiums received, subject to a minimum of 15,000; (c) a requirement that customers' monies shall be transferred via strictly segregated client accounts and that these accounts shall not be used to reimburse other creditors in the event of bankruptcy; (d) a requirement that a guarantee fund be set up. 81

87 Table 12: Information requirements for insurance intermediaries established by Article 12 of the IMD and national implementation rules France Germany Netherlands UK As per IMD, plus the intermediary must disclose the name of the insurance company which accounted for more than 33% of his revenues in the preceding year. For complex products, the intermediary must explain recommendation of a specific product in writing. Brokers must inform clients at their request about the remuneration they receive if the contract covers professional risks and the annual prime exceeds 20,000. As per IMD, plus intermediaries need to document their advice in writing unless the client prefers to receive this in oral form or the insurance company assumes liability for the intermediary. The German law also states that the intermediary must inform the customer that not requesting written documentation could be detrimental to any damage claims the customer may want to make against the intermediary. As per IMD, plus disclosure of type of remuneration (i.e. fee/commission. For complex products, obligation of keeping written records of clients personal characteristics) and of advice provided during one year. Also, obligation to provide a risk sheet. Rules on transparency of fees will be stricter from As per IMD, plus intermediaries must also provide customers: a policy summary, including disclosure of any fees; a policy document; information about the claims handling process; information, where relevant, about cancellation rights; for any applicable compensation scheme mentioned in the policy summary, the extent and level of cover and how further information can be obtained, if not already included in the policy summary. Source: CRA research. Notes: Article 12.1 requires the following: Prior to the conclusion of any initial insurance contract, and, if necessary, upon amendment or renewal thereof, an insurance intermediary must provide the customer with at least the following information: (a) his identity and address; (b) the register in which he has been included and the means for verifying that he has been registered; (c) whether he has a holding, direct or indirect, representing more than 10 % of the voting rights or of the capital in a given insurance undertaking; (d) whether a given insurance undertaking or parent undertaking of a given insurance undertaking has a holding, direct or indirect, representing more than 10 % of the voting rights or of the capital in the insurance intermediary; (e) the procedures allowing customers and other interested parties to register complaints about insurance and reinsurance intermediaries and, if appropriate, about the out-of-court complaint and redress procedures. In addition, an insurance intermediary must inform the customer, concerning the contract that is provided, whether: (i) he gives advice based on the obligation to provide a fair analysis, or (ii) he is under a contractual obligation to conduct insurance mediation business exclusively with one or more insurance undertakings. In that case, he must, at the customer's request provide the names of those insurance undertakings, or (iii) he is not under a contractual obligation to conduct insurance mediation business exclusively with one or more insurance undertakings and does not give advice based on the obligation to provide a fair analysis. In that case, he must, at the customer's request provide the names of the insurance undertakings with which he may and does conduct business. Moreover, according to article 12.2, when the insurance intermediary informs the customer that he gives his advice on the basis of a fair analysis, he is obliged to give that advice on the basis of an analysis of a sufficiently large number of insurance contracts available on the market, to enable him to make a recommendation, in accordance with professional criteria, regarding which insurance contract would be adequate to meet the customer's needs. Lastly, according to article 12.3, prior to the conclusion of any specific contract, the insurance intermediary must at least specify, in particular on the basis of information provided by the customer, the demands and the needs of that customer as well as the underlying reasons for any advice given to the customer on a given insurance product. These details must be modulated according to the complexity of the insurance contract being proposed. 82

88 Acknowledgements During the course of this project we interviewed several trade associations and regulators across Europe and benefited from their comments. We are also grateful for the time and effort they put into completing a questionnaire that has fed into the analysis undertaken in this report. We would like to thank all of those involved in the preparation of this report for their help, in particular: ABI Association of British Insurers AFM Netherlands Authority for the Financial Markets ACAM Autorité de contrôle des assurances et des mutuelles AGEA Fédération Nationale des Syndicats d Agents Generaux d Assurances BIBA British Insurance Brokers Association BIPAR European Federation of Insurance Intermediaries BVK Bundesverband Deutscher Versicherungskaufleute e.v. CSA Chambre Syndicale des Courtiers d Assurances NBVA de Nederlandse branchevereniging van onafhankelijke financieel adviseurs NVA de Nederlandse vereniging van assurantieadviseurs en financiële dienstverleners STFD Stichting Financiële Dienstverlening 83

89 CITY RESEARCH SERIES The City of London is exceptional in many ways, not least in that it has a dedicated local authority committed to enhancing its status on the world stage. The smooth running of the City s business relies on the web of high quality services that the City of London Corporation provides. Older than Parliament itself, the City of London Corporation has centuries of proven success in protecting the City s interests, whether it be policing and cleaning its streets or in identifying international opportunities for economic growth. It is also able to promote the City in a unique and powerful way through the Lord Mayor of London, a respected ambassador for financial services who takes the City s credentials to a remarkably wide and influential audience. Alongside its promotion of the business community, the City of London Corporation has a host of responsibilities which extend far beyond the City boundaries. It runs the internationally renowned Barbican Arts Centre; it is the port health authority for the whole of the Thames estuary; it manages a portfolio of property throughout the capital, and it owns and protects 10,000 acres of open space in and around it. The City of London Corporation, however, never loses sight of its primary role the sustained and expert promotion of the City, a byword for strength and stability, innovation and flexibility and it seeks to perpetuate the City s position as a global business leader into the new century.