Preparatory Guidelines on Product Oversight and Governance Systems by Insurance Undertakings and Insurance Distributors

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EIOPA
BoS
16/071 HR
Preparatory Guidelines on Product Oversight and Governance Systems by Insurance Undertakings and Insurance Distributors

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Introduction
1.1. According to Article 9(2) and Article 16 of Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (hereinafter: “EIOPA Regulation”)1, EIOPA issues preparatory guidelines addressed to competent authorities on the conduct during the preparatory period leading to the transposition of Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (hereinafter: “IDD”)2 and the application of delegated acts provided for under it. The preparatory guidelines are issued to establish consistent, effective and efficient supervisory practices regarding product oversight and governance systems as set out in Article 25 of the IDD, and to bridge the period while those IDD provisions are not yet fully applicable.
1.2. Product oversight and governance systems play a key role in consumer protection, ensuring that insurance products meet the needs of the target market and thereby mitigating mis-selling risks. They are a key element of the new regulatory requirements under the IDD. Given their importance for consumer protection, it is crucial that the new requirements are correctly implemented from the outset and applied as soon as possible. This justifies the issuance of preparatory guidelines to ensure that competent authorities follow a consistent and convergent approach regarding IDD implementation preparation.
1.3. The preparatory guidelines aim not only to support competent authorities in implementing the IDD, but also to achieve cross-sectoral consistency. Since the European Securities and Markets Authority (ESMA)3 and the European Banking Authority (EBA)4 have already issued guidelines on product oversight and governance systems, these guidelines aim to ensure level playing fields in financial markets and prevent regulatory arbitrage.
1.4. As these are preparatory guidelines, their intention is not to require full implementation by competent authorities if they become aware of practices that are not fully aligned with the guidelines, but rather to encourage competent authorities to discuss with market participants possible ways of appropriate corrective action. Therefore, the aim of these preparatory guidelines is to support and provide guidance to competent authorities in their preparatory steps leading to the consistent implementation of the organizational requirements regarding IDD product oversight and governance systems in the early stage. This enables competent authorities to take into account EIOPA's expectation of reduced risk from different approaches at the national level and the need for further alignment to ensure consistency and level playing fields among Member States in a later stage.
1.5. Furthermore, EIOPA will review the preparatory guidelines as soon as the delegated acts under the IDD are adopted to assess the extent of revision required.
1.6. In accordance with the Joint Statement of European Supervisory Authorities on product oversight and governance processes5, the guidelines take into account Recital 16, Article 40 and Article 41(1) of Directive 2009/138/EU of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)6, which prescribe the following:

• “The main objective of insurance and reinsurance legislation and supervision is the appropriate protection of policyholders and beneficiaries…..”7,
• “Member States ensure that supervisory authorities are provided with the necessary resources and have the relevant expertise, capacity and powers to achieve the main objective of supervision, namely the protection of policyholders and beneficiaries”8.
• “Member States ensure that the administrative, management or supervisory body of an insurance or reinsurance undertaking has ultimate responsibility for ensuring that the undertaking is in compliance with laws and other regulations adopted in accordance with this Directive”9,
• “Member States require all insurance and reinsurance undertakings to establish an effective management system that ensures sound and prudent management of the business”10.
  1.7. The preparatory guidelines also take into account the IDD provisions on product oversight and governance systems as established in Article 25, noting the following:
• “Insurance undertakings and intermediaries offering insurance products for sale to consumers maintain, manage and review the approval process for each insurance product or significant modification of existing insurance products before they are placed on the market or distributed to consumers.”
• “The product approval process is proportionate and appropriate in relation to the characteristics of the insurance products.”
• “The product approval process specifies the identified target market for each product and ensures that all relevant risks for such identified target market have been assessed, and that the distribution strategy is aligned with the identified target market, and reasonable measures are taken to ensure the distribution of insurance products on the identified target market.”
• “Insurance undertakings are required to understand and regularly review the insurance products they offer or sell, taking into account any event that may significantly affect the potential risk for the identified target market, so as to at least assess whether the product remains appropriate for the needs of the identified target market and whether the intended distribution strategy remains suitable.”
• “Insurance undertakings, as well as intermediaries that manufacture insurance products, make available to distributors all relevant information on the insurance product and the product approval process, including the identified target market of the product.”
• “If an insurance distributor offers or recommends insurance products that it does not manufacture, it must have established appropriate measures to obtain the information referred to in the fifth subparagraph and to understand the characteristics and identified target market of each insurance product.”
  1.8. Product oversight and governance systems should primarily be considered as the implementation of the fundamental objective of insurance supervision, namely the protection of policyholders and beneficiaries, as stated in the Solvency II Directive.
  1.9. Due to their purpose and objectives, as stated in the guidelines, organizational measures have a significant link with the governance system under Solvency II, requiring companies to have sound and prudent business management based on a risk-based approach, including an appropriate risk management system. Organizational measures aimed at ensuring the proper design of insurance products fall within the governance system of an insurance undertaking. The guidelines introduce very explicit procedures and measures relating to the design, development and monitoring of new insurance products.
  1.10. In this context, the IDD will ensure a detailed regulation taking into account specific transparency and consumer protection profiles regarding product design and distribution. On this basis, product oversight and governance systems are based on Solvency II and the IDD, with the latter specifying requirements from a consumer protection perspective and adding requirements for distributors not covered by the Solvency II framework.
  1.11. These guidelines are addressed to competent authorities. Regardless of explicit references to insurance undertakings and insurance distributors, this document should not be read as imposing any direct requirements on the aforementioned financial institutions. Financial institutions are expected to comply with the supervisory or regulatory framework applied by their competent authority.
  1.12. The systems described in these guidelines relate to internal processes, functions and strategies for designing and placing products on the market, monitoring them and reviewing them throughout their life cycle. The systems differ depending on whether regulated entities act as manufacturers and/or distributors of insurance products and relate to steps such as:
  (i) identifying the target market for which the product is considered suitable; (ii) identifying market segments for which the product is not considered suitable; (iii) conducting product testing to assess expected performance under various stress scenarios; (iv) reviewing products to verify whether product performance may cause harm to consumers, and if so, taking measures to change their characteristics and mitigate the harm; (v) identifying relevant distribution channels, taking into account the characteristics of the target market and the product; (vi) verifying whether distribution channels comply with the manufacturer's product oversight and governance systems.
  1.13. The administrative, management or supervisory body of an insurance undertaking is responsible for establishing and subsequently reviewing product oversight and governance systems. However, the implementation of product oversight and governance systems should not be interpreted as introducing a new key function for insurance undertakings. Moreover, such systems are not necessarily linked to risk management, internal audit, actuarial function or compliance function of insurance undertakings, as prescribed by Solvency II.
  1.14. Product oversight and governance systems are in line with point-of-sale disclosure rules (where applicable) requiring proactive publication of a description of the main characteristics of the product, its risks and the total price to be paid by consumers, including all related fees, charges and expenses.
  1.15. Product oversight and governance systems must be proportionate to the level of complexity and risks relating to products, as well as to the nature, scope and complexity of the regulated entity's relevant business.
  1.16. The guidelines cover systems generally relating to all insurance undertakings and all insurance distributors, including any natural or legal person carrying out insurance distribution activities, regardless of whether these activities are carried out as a main business activity or ancillary activity, by an independent broker or tied agent, provided that all activities fall within the scope of application of the IDD. However, competent authorities should take a risk-based proportional approach when applying these guidelines. These guidelines do not apply to services or products explicitly excluded from the scope of application of the IDD, such as certain ancillary activities as defined in Article 1(3), or to insurance products consisting of large risks under Article 25(4) of the Directive.
  1.17. Competent authorities are required to make all efforts to align with these guidelines regarding products that are newly designed or significantly modified. Competent authorities may consider requiring, from the date of entry into force of national implementing measures for these guidelines, compliance at least with Guideline 8 (Monitoring of Products) and Guideline 9 (Corrective Measures) Chapter I for products still distributed or placed on the market before that date.
  1.18. In applying these guidelines, where appropriate, competent authorities must also pay due attention to EIOPA's Guidelines on the System of Governance under Solvency II11, EIOPA's Guidelines for complaint resolution by insurance undertakings12 and EIOPA's Guidelines for complaint resolution by insurance intermediaries13.
  1.19. For the purposes of these Guidelines, the following definitions have been established:
• Manufacturer means an insurance undertaking and an insurance intermediary that manufactures insurance products for sale to consumers.
• Target market means the group(s) of consumers for whom the manufacturer designs the product.
• Distribution strategy means a strategy dealing with how insurance products are distributed to consumers, in particular whether the product should be sold only if advised as such.
• Products means categories of non-life insurance and life insurance listed in Annex I and Annex II to the Solvency II Directive.
  1.20. Terms not defined in these guidelines have the meaning defined in the legal acts cited in the introduction.

1 OJ L 331, 15.12.2010, p. 48.
2 OJ L 26, 2.2.2016, p. 19.
3 ESMA's Technical Advice to the European Commission on delegated acts for product oversight and governance systems in the MiFID II Directive: http://www.esma.europa.eu/system/files/2014-1569_final_report_esmas_technical_advice_to_the_commission_on_mifid_ii_and_mifir.pdf 4 EBA's Guidelines on product oversight and governance systems for consumers: http://www.eba.europa.eu/documents/10180/1141044/EBA_GL_2015-18+Guidelines+on+product+oversight+and+governance.pdf/d84c9682-4f0b-493a-af45-acbb79c75bfa 5 https://eiopa.europa.eu/Publications/Administrative/JC_2013-77__POG_Joint_Position_.pdf 6 OJ L 335, 17.12.2009, p. 1. 7 Recital 16 of Solvency II Directive 8 Article 27 of Solvency II Directive 9 Article 40 of Solvency II Directive 10 Article 41(1) of Solvency II Directive

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Chapter 1. Preparatory Guidelines for Insurance Undertakings and Intermediaries that Manufacture Insurance Products for Sale to Consumers
Guideline 1. Establishment of Product Oversight and Governance Systems
1.21. The manufacturer should establish and implement product oversight and governance systems that determine appropriate measures and procedures aimed at designing, monitoring, reviewing and distributing products for consumers, as well as taking measures regarding products that may cause harm to consumers (product oversight and governance systems).
1.22. Product oversight and governance systems must be proportionate to the level of complexity and risks relating to products, as well as to the nature, scope and complexity of the regulated entity's relevant business.
1.23. The manufacturer should establish product oversight and governance systems in a written document (product oversight and governance policy) and make it available to its relevant staff.
Guideline 2. – Objectives of Product Oversight and Governance Systems
1.24. Product oversight and governance systems should aim to prevent and mitigate harm to consumers, support proper management of conflicts of interest and ensure that consumer objectives, interests and characteristics are appropriately taken into account.
Guideline 3. – Role of Management
1.25. The administrative, management or supervisory body of the manufacturer or an equivalent structure responsible for insurance product design should confirm and be ultimately responsible for establishing, implementing, subsequently reviewing and maintaining continuous internal compliance with product oversight and governance systems.
Guideline 4. Review of Product Oversight and Governance Systems
1.26. The manufacturer should regularly review product oversight and governance systems to ensure they are still in force and up-to-date, and the manufacturer should modify them as necessary.
Guideline 5. – Target Market
1.27. The manufacturer should include appropriate steps in its product oversight and governance systems to determine the relevant target market of the product.
1.28. The manufacturer should design and place on the market only products with characteristics and through identified distribution channels that are aligned with the interests, objectives and characteristics of the target market.
1.29. When deciding whether a product is aligned with the interests, objectives and characteristics of a specific target market or not, the manufacturer should take into account the level of information available to the target market and the degree of financial capability and literacy of the target market.
1.30. The manufacturer should also identify groups of consumers who consider that the product will likely not be aligned with their interests, objectives and characteristics.
Guideline 6. – Skills, Knowledge and Expertise of Staff Involved in Product Design
1.31. The manufacturer should ensure that relevant staff involved in product design possess the necessary skills, knowledge and expertise to properly understand the main characteristics and features of the product, as well as the interests, objectives and characteristics of the target market.
Guideline 7. Product Testing
1.32. Before placing a product on the market, or if the target market has changed or changes to an existing product have been introduced, the manufacturer should conduct appropriate product testing including, if necessary, scenario analysis. Product testing should assess whether the product is aligned with the objectives of the target market throughout the product's life cycle.
1.33. The manufacturer should not place a product on the market if the results of product testing show that the product is not aligned with the interests, objectives and characteristics of the target market.
1.34. The manufacturer should conduct product testing in a qualitative and, where appropriate, quantitative manner, depending on the type and nature of the product and the associated risk of consumer harm.
Guideline 8. Monitoring of Products
1.35. After a product is distributed, the manufacturer should continuously monitor whether the product remains aligned with the interests, objectives and characteristics of the target market.
Guideline 9. Corrective Measures
1.36. If during the product's life cycle the manufacturer discovers circumstances relating to the product that lead to a risk of harm to consumers, the manufacturer should take appropriate measures to mitigate the situation and prevent recurrence of harm.
1.37. If necessary, the manufacturer should immediately notify involved distributors and consumers of all relevant corrective measures.
Guideline 10. Distribution Channels
1.38. The manufacturer should select distribution channels that are suitable for the target market with regard to certain characteristics of the product.
1.39. The manufacturer should carefully select distributors.
1.40. The manufacturer should provide distributors with information, including product details, that are of appropriate standard and are clear, precise and up-to-date.
1.41. Information provided to distributors should be sufficient to enable them to:

• understand and correctly place the product on the target market;
• identify the target market for which the product was designed as well as identify the group of consumers who consider that the product will likely not meet their objectives, interests and characteristics.
  1.42. The manufacturer should take all reasonable steps to supervise the operation of distribution channels in line with the objectives of the manufacturer's product oversight and governance systems.
  1.43. The manufacturer should regularly test whether the product is distributed to consumers belonging to the appropriate target market.
  1.44. When the manufacturer considers that a distribution channel does not meet the objectives of its product oversight and governance systems, it should take corrective measures regarding the distribution channel.
  Guideline 11. Externalization of Product Design
  1.45. When appointing a third party to design products on its behalf, the manufacturer should retain full responsibility for compliance with product oversight and governance systems, as described in these guidelines.
  Guideline 12. Documentation for Product Oversight and Governance Systems
  1.46. Relevant activities undertaken by the manufacturer regarding product oversight and governance systems should be appropriately documented, recorded for audit purposes and made available to competent authorities upon request.

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Chapter 2. Preparatory Guidelines for Insurance Distributors that Distribute Insurance Products they do not Manufacture
Guideline 13. Establishment of Product Distribution Systems
1.47. The distributor should establish and implement product distribution systems that determine appropriate measures and procedures for considering the range of products and services that the distributor intends to offer to its consumers, for reviewing product distribution systems and for obtaining all necessary information about products from the manufacturer.
1.48. Product distribution systems must be proportionate to the level of complexity and risks relating to products, as well as to the nature, scope and complexity of the regulated entity's relevant business.
1.49. The distributor should establish product distribution systems in a written document and make them available to its relevant staff.
Guideline 14. Objectives of Product Distribution Systems
1.50. Product distribution systems should aim to prevent and mitigate harm to consumers, support proper management of conflicts of interest and ensure that consumer objectives, interests and characteristics are appropriately taken into account.
Guideline 15. Role of Management
1.51. The administrative, management or supervisory body of the distributor or an equivalent structure responsible for insurance distribution should confirm and be ultimately responsible for establishing, implementing, subsequently reviewing and maintaining continuous internal compliance with product distribution systems.
Guideline 16. Obtaining All Necessary Information on Target Market from Manufacturer
1.52. Product distribution systems should aim to ensure that the distributor obtains all necessary information about the insurance product from the manufacturer, regarding the product approval process and target markets, so as to identify consumers for whom the product was designed and the group(s) of consumers for whom the product was not designed.
Guideline 17. Obtaining All Other Necessary Information on Product from Manufacturer
1.53. Product distribution systems should aim to ensure that the distributor obtains all other necessary information about the product from the manufacturer in order to fulfill its regulatory obligations towards consumers. This includes information on the main characteristics of the product, its risks and costs, as well as circumstances that may cause conflicts of interest to the detriment of consumers.
Guideline 18. Distribution Strategy
1.54. If the distributor establishes or follows a distribution strategy, it must not contradict the manufacturer's identified product distribution strategy and target market.
Guideline 19. Regular Review of Product Distribution Systems
1.55. The distributor will regularly review product distribution systems to ensure they are still in force and up-to-date, and should modify them as necessary, particularly the distribution strategy, if any.
Guideline 20. Providing Information on Sales to Manufacturer
1.56. The distributor should notify the manufacturer without undue delay if it finds that a product is not aligned with the interests, objectives and characteristics of the target market or if it finds that other circumstances related to the product increase the risk of harm to consumers.
Guideline 21. Documentation
1.57. All activities undertaken by the distributor regarding product distribution systems should be appropriately documented, recorded for audit purposes and made available to competent authorities upon request.