The Insurance Distribution Directive (IDD) is to insurance what MiFID is to investments. It repeals the directive on insurance mediation and regulates specific insurance-based investments, including inducements. It must be transposed into national legislation by 23 February 2018, although the application of the transposition measures adopted by Member States has been postponed to 1 October 2018. The postponement is meant to give insurance undertakings and distributors more time to correctly and effectively implement the IDD and to make the technical and organisational changes needed to comply with related delegated acts. Insurance undertakings and distributors should make the most of this additional preparation time.
Both the IDD and MiFID II regulate the payment of inducements. The aim of this article is to compare both regimes and to further explain how inducements are regulated under the IDD.
MiFID II inducement regime
In MiFID II the general rule is that inducements are banned for portfolio management and independent advice, but allowed for non-independent advice. The condition is that they enhance the quality of the service provided to the client. In cases where an unallowable inducement is given, it has to be retroceded in full to the client.
IDD inducement regime
Inducements are regulated differently under the IDD and in the Commission delegated regulation that supplements the IDD, particularly with regard to the information requirements and conduct-of-business rules applicable to the distribution of insurance-based investment products.
Distributors are not prohibited from receiving inducements, as is the case in MiFID II, but three conditions have to be fulfilled. First, the inducements must not have a detrimental impact on the quality of the relevant service provided to the customer; second, they should not impair the obligation of the distributor to act honestly, fairly, and professionally in following the best interests of its customers; and third, as the question of inducements implies a potential conflict of interest, such conflicts of interest must be disclosed (their source and nature) to the customer. However, the disclosure of conflicts of interest to customers is meant as a last resort, to be used only when effective organisational and administrative measures did not prevent or manage conflicts of interest.
The delegated regulation in Article 8 provides non-exhaustive criteria for assessing whether an inducement’s impact is detrimental. It is considered detrimental if:
- The inducement incentivises the distributor to offer a particular product, despite the existence of another product that better suits the customer’s needs.
- The inducement is based on quantitative, rather than qualitative, commercial criteria.
It also includes some further requirements for inducements:
- The inducement must take into account the appropriate qualitative criteria (including compliance with regulations, the quality of services, and customer satisfaction).
- The value of the inducement in relation to the value of the product must be given.
- The inducement must be paid (entirely or mainly) at the moment of the contract’s conclusion, or extend over the contract’s duration.
- There must exist an appropriate mechanism for reclaiming the inducement in cases where, for example, the product lapses or is surrendered at an early stage, or the interests of the customer are harmed.
- There must exist a threshold of some form (variable or contingent), or a value accelerator that is unlocked when a certain target (volume or value of sales) is achieved.
Although the MiFID II and IDD regimes are not exactly aligned, they do follow the same approach, the main difference being the extent to which inducements are allowed.
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