Clifford Chance

On 24 May 2023, the European Commission published its legislative proposal on the EU Retail Investment Strategy ("RIS") which aims at placing the consumers’ interests at the centre of retail investing and ensuring that retail investors receive the same treatment and protection regardless of which investment products, marketing and distribution channels they choose.

The RIS package consists of (i) a proposed directive (the “Omnibus Amending Directive”), which will revise and harmonise the existing investment protection rules which are currently set out on a sector-by-sector basis in the Markets in Financial Instruments Directive ("MiFID II"), the Undertaking for Collective Investment in Transferable Securities ("UCITS") Directive, the Alternative Investment Fund Managers Directive ("AIFMD"), the Taking-up and Pursuit of the Business of Insurance and Reinsurance Directive ("Solvency II"), and the Insurance Distribution Directive ("IDD"), and (ii) a proposal for targeted amendments to the PRIIPs Regulation (the “Amending Regulation”).

On its side, the EU Parliament's Committee on Economic and Monetary Affairs ("ECON Committee") has published two draft reports, both dated 2 October 2023, on each of these proposals which set out ECON Committee's proposed amendments to the European Commission's texts.

Some of the most significant implications of the RIS package for the insurance sector are set out below, together with the legislative and expected implementation timeline.

The Omnibus Amending Directive

The Omnibus Amending Directive mainly aims at:

• improving the regulatory disclosures framework by simplifying and reducing the information presented to retail investors and adapting them to the digital age and investors' sustainability preferences;
• protecting retail investors from misleading marketing communications and practices emphasising benefits only;
• harmonising and improving the conflicts of interests in the advice process and inducements rules;
• amending product oversight and governance rules to protect retail investors from excessive costs and ensure that they receive 'Value for Money' investments;
• ensuring that suitability and appropriateness tests are better adapted to retail investors' needs;
• strengthening supervisory enforcement in particular in the context of the growth of digital channels and as regards the cross-border provision of services; and
• promoting financial literacy.

Disclosure and marketing communications

First, the Omnibus Amending Directive includes amendments to the disclosure obligations to ensure more transparency and enabling retail investors to take informed decisions. In this respect, it proposes to amend Article 29 of IDD to impose the use of 'risk warning' in all information materials concerning high-risk products with the aim of alerting retail investors to specific risks of potential financial losses. ESMA and EIOPA have in this context been mandated to further define the concept of 'particularly risky products' in forthcoming guidelines.

The Omnibus Amending Directive also complements the existing provisions on pre-contractual disclosures in the distribution of insurance-based investment products ("IBIPs") by adding a requirement to disclose information on all costs and associated charges, and their impact on expected returns. Additionally, insurance undertakings and insurance intermediaries distributing IBIPs will have to set out annual statements with information on costs and charges, including third party payments, and performance.

In addition to this, the Omnibus Amending Directive provides for the modernisation and move of Articles 183, 184 and 185 of Solvency II into IDD. The proposed new Article 20(8a) of IDD introduces a new and user-friendly standardised insurance product information document ("IPID") for life insurance products other than IBIPs, which will complement the already existing IPID for non-life products and the PRIIPs KID for IBIPs.

With respect to marketing communications, Article 26a of the IDD introduces new obligations on insurance undertakings and insurance intermediaries distributing IBIPs for marketing communications to provide essential product characteristics in a fair, clear and not misleading manner. The Commission will be empowered to adopt a delegated act to specify the definition of the 'essential product characteristics' and the conditions to an appropriate design. Additionally, the existing record keeping obligation is extended to all marketing communications which are directly or indirectly made by insurance undertakings and insurance intermediaries.

Rules governing conflicts of interest arising from inducements

Whilst a full ban on inducements was first envisaged and highly debated, the Commission has finally decided to provide for a softened staged approach to address potential conflicts of interest by introducing a set of restrictions and safeguards in relation to inducements. First, the Omnibus Directive introduces a ban on inducement for ‘execution-only’ sales where no advice relationship exists between the insurance undertakings or insurance intermediaries distributing IBIPs and the client (i.e., non-advised sales of IBIPs). This partial ban aims at removing incentives for firms to give more prominence to certain products in their product offering and should also benefit retail investors that invest via execution-only services as they would avoid any charges due to the payment of inducements.

In addition to this, the Omnibus Amending Directive also introduces in IDD, in line with existing MiFID rules, a ban on inducements regarding independent advice. Article 30 of IDD is amended in this context to clarify the distinction between advice that should be considered as 'independent' and being as such subject to the ban, and advice given on a 'non-independent' basis for which inducements are allowed. According to the proposed amendment, advice can be considered 'independent' where the IBIPs distributor assesses a sufficiently large number of insurance products available on the market which are sufficiently diversified with regard to their type and product providers to ensure that the customer’s objectives can be suitably met and shall not be limited to insurance products issued or provided by entities having close links with the distributor and where the distributor does not accept and retain inducements from third parties. As highlighted by the Commission, such a ban should however not prevent insurance intermediaries and insurance undertakings offering advice to customers from accepting inducements, provided that the advice is not presented as 'independent' and that customers are informed of the inducements in line with applicable transparency requirements.

Finally, the Omnibus Amending Directive proposes to strengthen the conditions where inducements are allowed with the introduction of a strengthened 'best interest' test to replace the existing 'no detriment' test.

To act in the best interest of their customers, Article 29b provides that insurance undertakings and insurance intermediaries must:

(i) provide their advice on the basis of an assessment of an appropriate range of IBIPs and, where applicable, underlying investment assets;

(ii) recommend the most cost-efficient IBIPs and, where applicable, underlying investment assets among the IBIPs identified as suitable for the customer pursuant to Article 30(1) and offering similar features;

(iii) offer, among the range of these identified IBIPs, at least one IBIPs and, where applicable, underlying investment assets, a product or products without additional features that are not necessary to the achievement of the customer's objectives and that give rise to additional costs; and

(iv) recommend an IBIPs which insurance cover is consistent with the customer’s insurance demands and needs.

In its report, the ECON Committee's Rapporteur expressed some reluctance towards this proposal and proposes to delete the partial ban as she considers this measure unjustified and ineffective to address the conflict-of-interest issues. The Rapporteur further proposes to amend the review clause so that the assessment of the RIS package's amendments is only carried out after 5 years (instead of 3 years).

'Value for Money'

The Omnibus Amending Directive proposes to amend Article 25 of the IDD to strengthen the oversight and governance rules and regulate pricing processes that apply to PRIIPs and IBIPs both at manufacturers' and distributors' levels. Under the new framework, manufacturers and distributors will be required to ensure that only PRIIPs and IBIPs that deliver ‘Value for Money’ are offered to retail investors. This will be complemented by new requirements allowing for the identification and quantification of all costs and charges, and the assessment of whether such costs and charges do not undermine the value which is expected to be brought by the product.

The Commission's proposal further introduces reporting obligations for manufacturers towards national competent authorities and ESMA and EIOPA and these data will then be used by ESMA and EIOPA to develop its cost and performance benchmarks. Any deviation from such benchmarks should be considered as a presumption that costs and charges are too high and that the product will not deliver 'Value for Money', unless it can be demonstrated otherwise. In its draft report, the ECON Committee's Rapporteur indicates that while agreeing with the 'Value for Money' principle, the Commission's proposal could be disruptive on the market and clarifications are needed regarding the methodology applied to design the benchmarks. The benchmarks have consequently been deleted in the current ECON Committee's proposed amendments to the Omnibus Amending Directive.

During the ACA Insurance Days 2023, Valérie Mariatte-Wood, Head of the Consumer Protection Department at EIOPA also emphasized the fact that the Omnibus Amending Directive is only a level 1 legislation and that it expressly grants powers to the EIOPA to supplement it. Ms. Mariatte-Wood further noted that EIOPA is already working on draft guidelines and supervisory statements that will notably clarify that 'Value' should not only comprise 'costs' but also other elements such as advices or guarantees. It can be expected that the Commissariat aux Assurances will also take further action in Luxembourg in relation to the 'Value for Money' topic, following the results of its quantitative questionnaire in this area as published in its Information Note 23/4 and that this topic will gain importance going forward with the RIS implementation.

Suitability and appropriateness tests

The Omnibus Amending Directive proposes to amend Article 30 of the IDD with respect to the suitability or appropriateness assessment of IBIPs and introduces an obligation for insurance undertakings and insurance intermediaries distributing IBIPs to explain the purpose of the suitability or appropriateness assessment to customers before requesting any information from them, i.e. to ensure that the IBIPs that will be recommended are suitable for that person and, in particular, are in accordance with its investment profile, including also risk tolerance, ability to bear losses and need for portfolio diversification, or, where IBIPs are distributed without advising on them, to ensure that the IBIPs sold are appropriate in light of the person’s investment profile.

The proposal further specifies that the assessments must be carried out in good time before the customers are bound by an insurance contract or offer.

Besides, customers must be informed of the consequences for the quality of the assessment if they do not provide accurate and complete information and they must receive, upon request, a suitability assessment report enabling them to seek and obtain any necessary additional clarifications where needed.

The Omnibus Amending Directive also amends the list of elements to be considered in suitability and appropriateness assessments to include risk tolerance, ability to bear losses and need for portfolio diversification.

To promote the development of a less expensive independent advice market, the Omnibus Amending Directive further allows independent advisors to advise retail investors on diversified, non-complex and cost-efficient IBIPs on the basis of more limited information (i.e., no need to collect information on their knowledge and experience nor on their portfolio diversification).

The Amending Regulation

The Amending Regulation proposes changes to the existing PRIIPs Regulation and in particular to the Key Information Document (“KID”)’s content and how it is provided to retail investors.

Amongst the significant changes proposed by the Amending Regulation are the following:

• adaptation of the disclosures to the digital environment and the evolving needs of retail investors notably on sustainability;
• addition of a new ‘product at a glance’ dashboard to provide more visibility on the costs and risks of investment products;
• clarification of the scope of the PRIIPs Regulation to exclude some corporate bonds with make-whole clauses and immediate annuities;
• specification of costs information’s disclosures with respect to Multi-Option Insurance Products (MOPs). 

In its report, the ECON Committee highlights the need to introduce further adjustments to market practices and certain adaptations to the insurance sector and to further assess the alignment of the new sustainability section with the relevant existing legislation.

Other aspects and legislative timeline

In terms of legislative progress, the RIS proposal published by the European Commission in May 2023 is currently being considered by the Council and the Parliament. Once approved, the proposed Omnibus Amending Directive and the proposed Amending Regulation will enter into force on the 20th day following their publication in the Official Journal of the EU and member states are expected to implement the proposed Omnibus Amending Directive into national law within 12 months from the date of its entry into force and to apply the rules within 18 months after their entry into force. Similarly, the EIOPA will be expected to adopt guidelines and deliver draft regulatory and implementing technical standards within 18 months from the date of its entry into force.

Once adopted, there will be many points of the RIS package for the actors of the insurance sector to consider for further action. As such, while the national implementation of such package still appears far away, actors of the insurance sector keep a close eye on the next legislative steps and plan and prepare for their implementation.