Recommendation 2011-R-03 of May 6, 2011, on the marketing of life insurance contracts in units of account consisting of debt securities issued by an entity financially linked to the insurance company, modified on December 6, 2019

1 Online publication on the ACPR website on 19/12/2019 Recommendation 2011-R-03 of May 6, 2011, on the marketing of life insurance contracts in units of account consisting of debt securities issued by an entity financially linked to the insurance company, modified on December 6, 2019

1. Context The Prudential Supervision and Resolution Authority (ACPR) has noted the development of the marketing of life insurance contracts in units of account consisting of debt securities issued by an entity financially linked to the insurance company. A single group can thus be both the producer of the insurance contract, the issuer of the debt security, the distributor of the contract, and the valuer of the security. With regard to the marketing process mentioned above, the ACPR highlights two sources of potential conflicts of interest that must be managed to ensure the protection of the interests of policyholders1 . • At the time of setting the issuance rate Debt securities are often offered by the insurance company prior to their issuance, via the selection of a waiting unit of account, with an arbitrage of the waiting support being performed towards target unit of account once the security is issued. Depending on the reference value used to determine the number of selected units of account2 , the choice of the issuance rate can lead to a loss of value prejudicial to the interests of policyholders. • In the event of a request for redemption, arbitrage, or termination of the contract before the maturity of the underlying security In most of these cases, either the issuer buys back its own securities, or the life insurance subsidiary reinvests them into the general asset. However, the intensity of orders placed on the markets on which the securities are admitted to trading does not always allow for the fixing of an objective realization value, particularly for certain

1 This term covers, in this recommendation, both policyholders and members as well as candidates for insurance (pre-contractual phase), natural persons. 2 The stipulations of the life insurance contracts in question are thus decisive in the choice of the counter-value of the units of account to be retained.

2 issuances dedicated solely to group clients. Thus, the provision to policyholders, throughout the life insurance contract, of a counter-value for the selected units of account must be performed under conditions ensuring its objectivity. In this context, the ACPR has decided to adopt a recommendation of best practices allowing to manage situations of conflicts of interest when units of account composed of bond securities and other debt securities of an issuer financially linked to the insurance company are offered to policyholders.

2. Scope of the recommendation 2.1. The unit-linked contracts concerned The recommendation applies to unit-linked contracts composed of bond securities and other debt securities referred to in 2° and 2°ter of A of Article R. 332-2 of the Insurance Code3 . This set is referred to below as "debt securities". 2.2. The persons concerned The ACPR's recommendation is addressed to insurance companies governed by the Insurance Code, mutual societies and unions governed by the Mutual Code, and provident institutions governed by the Social Security Code (collectively referred to as "insurance companies") as well as insurance intermediaries, including when these companies or intermediaries act under the freedom to provide services or freedom of establishment, provided that they market the concerned unit-linked contracts on French territory.

3. Recap of the legislative and regulatory framework Regulation imposes obligations on insurance companies and intermediaries, particularly regarding the protection of invested savings, information, and advice. 3.1. Sufficient protection of invested savings For unit-linked contracts, Article L. 131-1 of the Insurance Code4 stipulates that the securities and assets serving as units of account must offer "sufficient protection of the invested savings" and must appear in the detailed list in Article R. 131-1 of the same code5 . 3.2. Information obligations According to the provisions of Article L. 132-27 of the Insurance Code6 , the information, including communications of an advertising nature, on life insurance contracts and capitalization contracts must present "exact, clear, and non-misleading content". Furthermore, Articles L. 132-287 and R. 132-5-1 of the Insurance Code impose on

3 All article references below come from the Insurance Code, unless otherwise indicated; 4 Also Article R. 132-4 of the Insurance Code and see also Article L. 223-2 of the Mutual Code and L. 932-23 of the Social Security Code. 5 See also Articles R. 223-1 to R. 223-4 of the Mutual Code and, generally for provident institutions, Article R. 932-3-1 of the Social Security Code, which refers to the provisions of the Insurance Code. 6 See also Articles L. 223-25-2 of the Mutual Code and L. 932-23 of the Social Security Code which provide for the application of L. 132-27 to the regulations and contracts of provident institutions carrying out life insurance and capitalization operations. 7 See also Articles L. 116-5 of the Mutual Code and L. 932-23 of the Social Security Code which provide for the application of L. 132-28 to the regulations and contracts of provident institutions carrying out life insurance and capitalization operations.

3 insurance intermediaries to establish a written agreement with insurance or capitalization companies that specifies the respective obligations of the insurance companies and insurance intermediaries. It sets out the conditions under which: – the intermediary must submit to the insurance or capitalization company, prior to distribution, documents of an advertising nature; – the insurance or capitalization company must make the necessary information available to the intermediary to assess all characteristics of the contract. 3.3. Duty of advice and personalized recommendation service Article L. 522-5 of the Insurance Code provides for two levels of life insurance advice. Section I of Article L. 522-5 of the Insurance Code8 states: "The intermediary or the insurance or capitalization company specifies in writing the requirements and needs expressed by the potential policyholder or potential member, as well as the reasons justifying the appropriateness of the proposed contract.[…] To this end, this intermediary or company inquires with the policyholder or member about their financial situation and investment objectives as well as their knowledge and experience in financial matters." These provisions describe the obligations incumbent on all intermediaries, insurance companies, and capitalization companies for the exercise of their duty of advice and the assessment of the appropriateness of life insurance and capitalization contracts. Without prejudice to the aforementioned provisions, Section II of Article L. 522-5 states that "when a personalized recommendation service is provided by the intermediary or the insurance or capitalization company to the potential policyholder or potential member, this service consists of explaining to them why, among different contracts or different investment options within a contract, one or more contracts or options are more adequate to their requirements and needs and in particular more adapted to their risk tolerance and their ability to bear losses". These provisions introduce the possibility for an intermediary, an insurance company, or a capitalization company to provide, in continuation of their obligation of advice and information, a personalized recommendation service. This service is based on a comparative analysis of different insurance solutions to recommend to the client those that will best meet their requirements and needs. The provision of this service entails an assessment of the adequacy of the recommended contract(s) or option(s). Intermediaries, insurance companies, or capitalization companies that provide a personalized recommendation service within the meaning of Article L. 522-5 of the Insurance Code are subject to the provisions of Sections 1 and 3 of Chapter III of Delegated Regulation (EU) 2017/2359. For the application of the provisions of Section 1 of Chapter III of said regulation, the term "personalized recommendation" should be understood where the term "advice" is mentioned in the regulation9 . Intermediaries, insurance companies, or capitalization companies that do not provide a personalized recommendation service within the meaning of Article L. 522-5 of the Insurance Code are subject to the provisions of Sections 2 and 3 of Chapter III of Delegated Regulation (EU) 2017/2359. Furthermore, the second paragraph of Article L.522-6 of the Insurance Code places on the intermediary, the insurance company, or the capitalization company a duty of warning, prior to the conclusion of the contract, if the policyholder or member does not provide the information mentioned above.

8 This article applies to mutual societies and unions of Book II of the Mutual Code and institutions of Title III of Book 9 of the Social Security Code. 9 This reading results from the French transposition terms which retained the expression "personalized recommendation" in place of the term "advice" used by Directive (EU) 2016/97.

4 3.4. Prevention of conflicts of interest Article L. 521-1 of the Insurance Code states that "insurance product distributors act honestly, impartially, and professionally, and in the best interests of the policyholder or member." Regarding the marketing of certain life insurance products, Articles L. 522-1 and L. 522- 2 of the Insurance Code, also resulting from the transposition of the Insurance Distribution Directive (IDD), impose on intermediaries and insurance companies two essential obligations regarding conflicts of interest10:

• The implementation of effective organizational and administrative arrangements to take all appropriate measures intended to prevent such conflicts of interest from harming the interests of policyholders or members of life insurance or capitalization contracts (contracts whose scope is defined in Article L. 522-1 of the Insurance Code);
• The information, prior to the conclusion of any life insurance contract, of the general nature or of the sources of conflicts of interest if the measures, previously developed, are not sufficient to guarantee with a reasonable degree of certainty that the risk of harming the interests of the potential policyholder or potential member will be avoided. For the application of these two articles of the Insurance Code, Delegated Regulation (EU) 2017/2359 imposes various obligations on intermediaries and insurance companies regarding the prevention and disclosure of conflicts of interest under its Articles 3 to 7.

4. Recommendation When a debt security forming part of a unit of account is issued by an entity financially linked to the insurance company, the ACPR recommends, in accordance with 3° of II of Article L. 612-1 and the second paragraph of Article L. 612-29-1 of the Monetary and Financial Code, to insurance companies and insurance intermediaries to apply the necessary measures for the protection of policyholders' interests, and in particular to: 4.1. Request, for debt securities whose remuneration is expressed in terms of an interest rate applied to the nominal amount, an independent body to provide an objective evaluation of the interest rate that could be offered on the primary market at the date of determination of the issuance conditions. 4.2. Use, for the securities referred to in 2° of A of Article R. 332-2 of the Insurance Code: – either debt securities that are the subject of a public offering of financial securities, marketed in part, for own account or for third-party account, by entities not financially linked to the issuer and the insurance company, and whose realization value can be determined on a recognized market; – or debt securities whose relevance of the realization value can be assessed by comparison to a valuation performed based on the nominal value of a security and taking into account in particular interest rate and counterparty risks, excluding liquidity risk; this valuation, made available to policyholders on a regular basis and at least every 15 days, may be performed:

10 By conflicts of interest, in accordance with Article L. 522-2 of the Insurance Code, one must understand all conflicts of interest likely to arise between intermediaries and insurance companies, including with their respective directors and staff, with any person directly or indirectly linked to them by a control relationship, and with their policyholders or members or between two policyholders or two members, during the exercise of insurance distribution activities.

5 ● either by an independent body, ● or in application of a valuation device11 established prior to the issuance of the concerned debt securities, considering their particular characteristics; the valuation device and its possible subsequent changes after issuance being approved by an independent body, the independence of the bodies called upon to provide the evaluations and valuations recommended above, or to approve the valuation device used, being assessed both on a financial level (entities not financially linked to the insurance company and the issuer) and on a technical level (entities equipped with the means and skills necessary to provide an objective valuation of the securities). 4.3. Mention, in the most appropriate document provided to the policyholder before the selection of the concerned unit of account, that in the event of a request for redemption, arbitrage, or termination of the contract before maturity, the issuer or an entity financially linked to the issuer may decide to acquire the debt security. This information must prominently include the statement "Potential conflicts of interest on redemption or realization value". 4.4. Implement the means and procedures necessary to ensure appropriate internal control of the execution, by the insurance company or the insurance intermediary, of its information and advice obligations and the devices put in place, according to the modalities recommended in paragraphs 4.1, 4.2, and 4.3 above. These means and procedures should in particular ensure the monitoring and permanent control of the valuation devices used, as well as their periodic revision, to assess their objectivity and reliability and to allow for the remediation of any deficiencies identified. This recommendation, as modified, is effective as of its publication date and applies to marketing acts subsequent to this date.

11 This device includes the method and data used within the framework of the valuation process.