Recommendation 2024-R-01 of 28 June 2024 on the implementation of certain provisions from Directive (EU) 2016/97 on the distribution of insurance

Recommendation 2024-R-01 of 28 June 2024 on the implementation of certain provisions from Directive (EU) 2016/97 on the distribution of insurance

1. Context
   The Directive (EU) No 2016/97 on the distribution of insurance (hereinafter the "Directive") and its implementing acts1 have introduced new requirements for insurance product designers (hereinafter "designers") and for insurance product distributors (hereinafter "distributors"), oriented towards a single objective: the protection of client interests. Since the entry into application of the Directive on 1 October 2018 and its transposition into French law, primarily in Book V of the Insurance Code, the Prudential Control and Resolution Authority (hereinafter the "ACPR" or the "Authority") has conducted a series of on-site and off-site inspections, notably concerning life insurance products with surrender value invested in unit-linked funds, which have revealed heterogeneous practices, not always sufficiently respectful of client interests. This leads the Authority to recommend good practices regarding the governance and surveillance of insurance products, on the one hand, and remuneration and conflicts of interest, on the other.

2. Scope of the Recommendation
   This Recommendation applies to insurance companies governed by the Insurance Code, to mutuals or unions governed by Book II of the Mutual Code, to provident institutions or unions governed by the Social Security Code, to supplementary occupational pension schemes2 , and to insurance intermediaries, including when these insurance or insurance intermediary entities operate in France under the freedom to provide services or the freedom of establishment. This Recommendation covers the marketing of all insurance products excluding products tailored to the specific request of a given client3 . It recommends good practices to persons acting in the capacity of designers or distributors.

1 Notably the Delegated Regulation (EU) 2017/2358 concerning product governance and oversight requirements for insurance products and the Delegated Regulation (EU) 2017/2359 concerning information requirements and conduct rules applicable to the distribution of investment-based insurance products, as amended by Delegated Regulation (EU) 2021/1257 concerning the integration of sustainability factors, sustainability risks and sustainability preferences. 2 Supplementary occupational pension funds (FRPS), supplementary occupational pension mutuals or unions (MRPS, URPS), supplementary occupational pension institutions (IRPS). 3 In the case of collective insurance, "client" should be understood as the representative of a group of members who concludes an insurance contract on behalf of the group of members, each of whom cannot individually decide to affiliate, for example in the case of a mandatory occupational pension scheme.

3. Recap of the regulatory framework and questions-answers and declarations by the European Insurance and Occupational Pensions Authority

3.1 Governance and oversight of insurance products
The governance and oversight framework for insurance products aims to ensure that marketed products meet the needs and characteristics of the clients to whom they are intended, thereby reducing the risks of mis-selling. It constitutes in this regard a powerful lever for managing risks of harm to client interests, which must be taken into account from the design of products through to their marketing and throughout the life of the products by all actors in the process, designers and distributors. It notably involves identifying and managing conflicts of interest arising from the remuneration mechanisms of these different actors. Under this framework, designers are required to implement a product approval process comprising measures and procedures for each step: definition of a target market, product testing, development of a distribution strategy, monitoring and review of products, and, where applicable, corrective actions. These measures and procedures must be proportionate to the level of complexity and the risks associated with the products, as well as to the nature, scale and complexity of the designer's relevant activity. These requirements are set out in Article L. 516-1 of the Insurance Code, and by reference, in Articles L. 116- 6 of the Mutual Code and L. 932-53 of the Social Security Code. They are detailed by the provisions of the Delegated Regulation (EU) No 2017/2358. As indicated in Recitals 5 and 6 of Delegated Regulation (EU) 2017/2358, the definition of the target market by the designer should be understood as the description of a group of clients sharing common characteristics at an abstract and generalized level, with the aim of allowing the designer to adapt the specific features of the product to the needs, characteristics and objectives of this group of clients. The level of granularity of the target market and the criteria used to define it depend on the product: the definition of the target market must be all the more precise as the product is complex and carries a risk of harm to clients. A question-answer4 from the European Insurance and Occupational Pensions Authority (hereinafter the "EIOPA") clarifies the elements that may be taken into account for the determination of target markets for life insurance products with surrender or transfer value invested partially or wholly in unit-linked funds:

• The age of clients belonging to the target market,
• The personal situation of the household and dependents of clients belonging to the target market,
• The professional situation and relevant occupational pension and insurance scheme of clients
  belonging to the target market,
• The risk tolerance of clients belonging to the target market,
• The financial situation of clients belonging to the target market,
• The financial and non-financial objectives and investment horizon of clients belonging to the
  target market.
  The definition of the target market does not coincide with the exercise of the duty of advice, under which the distributor is responsible for proposing a contract that must be consistent with the requirements and needs of a specific client.

4 Cf. Question-answer No. 1612 published.

Under Article 1 of Delegated Regulation (EU) No 2017/2358, the requirements relating to governance and oversight of products are provided "for insurance products and for significant adaptations of existing insurance products before the introduction of these products on the market or their distribution to clients". A question-answer5 from EIOPA, published following a position of the European Commission, defines a significant adaptation of a product as follows:

• "A modification of the essential characteristics of the product, such as the risk coverage, the
  price and costs of the insurance product, the risks resulting from the underlying investments of an investment-based insurance product, a change in the target market identified by the designer of the insurance product, and any modifications to the rights to indemnity and guarantees for policyholders",
• Whose significant nature "must be assessed primarily from the situation of an
  average consumer" and with regard to the "change in the compatibility of the product with the pre-defined target market and the adaptation that would be required".
• As an example, EIOPA specifies that "the adaptation of the price and cost structure to inflation
  may be considered insignificant, whereas an increase in prices/costs that has a substantial impact on the return of an investment-based insurance product must be considered significant, as this increase modifies the return expectations of the investment-based insurance product." EIOPA also considers6 that a multitude of options in terms of underlying funds increases the complexity of a product. The product may indeed meet different needs or objectives depending on the options proposed, notably in terms of investment objectives and risk exposure, thereby justifying the segmentation of the target market. EIOPA recalls that the objectives, needs and characteristics of clients belonging to the target market must reflect the differences in terms of risk and value, and these can evolve significantly depending on the options chosen. Consequently, when determining the target market for such products, insurers must evaluate, according to the complexity of the product, whether it is appropriate to segment the target market into sub-groups, which represent the main categories of clients belonging to the target market in terms of investment objectives and risk exposure. Finally, EIOPA published a statement7 on 30 November 2021 aiming to harmonize the approaches of authorities in the context of the assessment of the implementation of governance and oversight requirements for products by designers and distributors, regarding the assessment of the cost-performance ratio of unit-linked life insurance products. EIOPA considers that a unit-linked product offers, for the client, a good cost-performance ratio when its costs are (i) proportionate to the benefits (performance, guarantees, coverage and services) it offers to its target market and (ii) reasonable. Furthermore, EIOPA specifies that designers of unit-linked products should be able to present, as part of their product governance and oversight procedure, a pricing process that allows justifying that:
• Costs are correctly identified, quantified and justified;
• Adequate tests have been carried out to assess whether the product offers benefits to its target market
  throughout the life of the product;

5 Cf. published question-answer No. 2266. ACPR Translation.
6 Cf. statement aiming to harmonize the approaches of authorities in the context of the assessment of the implementation of product governance and oversight requirements by designers and distributors, regarding the assessment of the cost-performance ratio of unit-linked life insurance products. 7 https://www.eiopa.europa.eu/document-library/supervisory-statement/supervisory-statement-assessment-of-value-money-of-unit_en

• The costs, performance, guarantees, coverage and services offered by the product are
  regularly reviewed;
• The granularity of the target market is proportionate to the complexity of the product.
  Finally, national benchmarks8 have been developed, in collaboration with professional federations, aiming to evaluate the cost-performance ratio of life insurance products distributed on the French market, including that of each of the investment funds. The evaluation methodology adopted relies on an examination of both the investment funds and the contracts in which they are referenced. Regarding the examination of unit-linked funds, the quantitative analysis of fees and performance is based on a benchmark resulting from a cross-reference between risk indicators (SRI) and asset classes from regulatory categorizations (CIC codes on the one hand and ECB classes on the other). Fees and performance are assessed by reference to market averages weighted by assets under management. The performance of unit-linked funds is assessed with regard to past performance.

3.2 Remuneration and conflicts of interest
The general principle relating to remuneration practices in the context of the distribution of all insurance products is set out in Article L. 521-1, Paragraph III of the Insurance Code. This provision aims to prevent behavioral biases of persons in charge of sales processes due to more or less advantageous remuneration. Furthermore, additional requirements are provided for regarding the distribution of life insurance products with surrender or transfer value and capitalization contracts, under Articles
L. 522-1 et seq. of the Insurance Code as well as by Delegated Regulation (EU) 2017/2359.

4. Recommendation
   The ACPR recommends to the persons concerned, in accordance with the provisions of Articles L. 612-1 II 3° and
   L. 612-29-1, second paragraph of the Monetary and Financial Code, the following good practices:

4.1 Obligations regarding capitalization and life insurance products with surrender or transfer value invested wholly or partially in unit-linked funds

4.1.1 Obligations regarding product governance and oversight
Regarding the notion of significant adaptations, the ACPR recommends that designers:

4.1.1.1. Adopt an analysis grid and objective criteria (notably in the form of indicators and
thresholds such as, for example, the percentage increase in premiums and fees relative to an objective metric such as inflation, etc.) to characterize the proposed adaptations of products.

4.1.1.2. Be able to justify by objective elements the significant or non-significant nature of the modifications
made to the product or to the consumer's rights and obligations. The following modifications are notably concerned:

• Modifications made to the loading levels of the product;
• Modifications relating to the product tariff, loyalty guarantees and contractual terms
  calculating and distributing profit participation;

8 Or "benchmarks" in English

• Modifications to the list of funds, such as the addition of a new type of investment fund
  that was not previously present in the list of offered funds9 or the removal of a type of fund10;
• Modifications, additions or removal of a management mode proposed by the product (mandated management, free management...).

Regarding the definition of the target market, the ACPR recommends that designers:

4.1.1.3. Take into account the product as a whole, including both the insurance wrapper and its
possible combinations of funds and investment options.

4.1.1.4. Adopt an analysis grid and objective criteria allowing measurement of the complexity of the product
and ensuring that the level of granularity of the target market is appropriate to the determined level of product complexity. To this end, the following should notably be taken into account: the nature of guarantees, the exercise of the surrender option, the nature of the product (collective or individual), the fee structure and its diversity, as well as the number and nature of unit-linked funds and investment options offered.

4.1.1.5. Use notably the following criteria to define the target market:
(a) Client knowledge and experience: the knowledge and level of practical experience that target clients should possess to allow them to understand the product (financial market, taxation, risk). (b) Personal and financial situation: the financial situation of clients belonging to the target market, taking into account their liquidity needs over different horizons11 (short, medium, long term). (c) Risk tolerance and capacity to absorb losses: the general attitude that target clients should adopt towards risks, by reference to determined categories (e.g., "balanced", "prudent") and defined through objective criteria such as volatility constraints. (d) Client objectives and needs: the investment objectives and needs of target clients that the product aims to achieve and meet, for example by reference to the expected investment horizon.

4.1.1.6 To avoid any confusion, clearly define the criteria, concepts and terminology used during
the definition of the target market.

4.1.1.7 After applying the due diligence mentioned in paragraphs 4.1.1.3 to 4.1.1.6, the target market of
the contract may be segmented, according to the complexity of the product and the management modes offered, with at most 6 sub-groups to allow the applicability of the framework.

4.1.1.8 When the product can respond differently to the criteria listed in 4.1.1.5, depending on the nature of the
investment funds or the management modes offered, segment the target market into an appropriate number of client sub-groups characterized by distinct profiles that meet needs

9 For example: the addition of one or more structured products, equity funds, or funds of a new risk class that were not previously in the list of funds or the integration of non-financial features into the product or its unit-linked funds. 10 For example, the removal of the only euro-denominated fund. 11 The designer must take into account, when defining horizons, the holding period recommended which it will have defined for the product.

and characteristics different from one another. A reasonable number of sub-groups is expected to allow the applicability of the framework12.

4.1.1.9 Define the general characteristics of asset allocation meeting the needs of the client sub-group13
. It is recalled that it will then be up to the distributor, within the framework of its duty of advice, to propose an asset allocation consistent with the requirements and needs of a specific client.

4.1.1.10 Define for the target market a group or sub-groups of clients when the target market has been
segmented in accordance with paragraph 4.1.1.7, who, with regard to the various criteria set out in 4.1.1.5, are not compatible with the product. As an example, the need for short or medium-term liquidity could be a criterion deemed incompatible with a product offering a surrender option only in exceptional situations (e.g., retirement savings plan).

4.1.1.11 Define a specific target market and a negative target market in accordance with paragraph 4.1.1.9,
for unit-linked funds constituted of French "formula-based" UCITS14, equivalent foreign structured UCITS or complex debt securities and equivalent financial instruments issued under foreign law and not offering, throughout their life, capital protection of at least 90% of the invested capital, as referred to in Recommendation 2016-R-0415.

Regarding the articulation between the target market and the definition of the distribution strategy, the ACPR recommends that designers and insurance sector professionals managing a distribution network16 :

4.1.1.12 Provide a distribution strategy and distribution channels that are compatible with
the distribution of the product to its target market, and to each of its segmentations if applicable, while taking into account the interest of members or policyholders.

4.1.1.13 Take proportionate measures to periodically verify that the product is
effectively distributed to the defined target market and that distributors and/or their distribution networks act in accordance with the distribution strategy.

4.1.1.14 When defining distribution channels, implement a distributor selection process allowing verification that these distributors are able to distribute the product
in accordance with the planned distribution strategy. This process requires the implementation of a collection of information and specific verification points from candidates for accreditation, as well as qualitative and quantitative selection criteria. The selection process must be integrated into the internal control policy, in accordance with paragraph 4.1.1.15.

4.1.1.15 Draw up a list of information necessary for distributors to verify that clients
actually belong to the target market and, where applicable, to one of its defined segmentations in paragraphs 4.1.1.7 to 4.1.1.9. This information must be clear, complete, up-to-date and communicated spontaneously to distributors. Characteristics of the asset allocations defined in paragraph 4.1.1.8 should particularly be transmitted to distributors, to allow them to fully understand the product and grasp the target market and each of its segmentations, as well as the characteristics of the incompatible client groups defined in paragraph 4.1.1.9, in order to allow them to carry out their distribution activities serving client interests best. The transmission of this information does not exempt the distributor from its legal and regulatory obligations, notably the duty of advice.

4.1.1.16 Integrate into internal control devices the good practices issued from this
Recommendation.

4.1.1.17 If the planned distribution strategy leads to the distribution of the product to clients for whom
the product would be contrary to their interests or to clients belonging to the group defined in paragraph 4.1.1.9, take appropriate actions such as:

• Either revise the distribution policy, by ending the use of distribution channels or agreements with distributors responsible for these situations;
• Or modify the remuneration structure of distributors;
• Or cease the marketing of the product.

Regarding product testing, the ACPR recommends that designers:

4.1.1.18 Conduct tests to ensure that the costs of the product are proportionate to the expected benefits
for the identified target market.

12 A reasonable number of sub-groups may be understood, depending on the complexity of the product and the management modes offered, between 3 and 6. 13 By specifying, for example, constraints in terms of volatility, allocation to risky funds or exclusion of certain types of funds. For example, the asset allocation corresponding to the most prudent segmentation of the target market might have general characteristics based on, for example, a maximum volatility of 2%, or an exposure to risky assets (class 6-7) of less than 30% or the exclusion of structured products. 14 Referenced in Article R. 214-28 of the Monetary and Financial Code1 15 Referenced in Recommendation 2016-R-04 of 13 December 2016 on the marketing of life insurance contracts in unit-linked funds constituted of complex financial instruments, amended on 6 December 2019. 16 This terminology refers to wholesale brokers, also concerned by the April 2023 publication of the ACPR Review entitled "The vigilance obligations of insurance sector professionals managing a distribution network in the monitoring of contract marketing".

in paragraphs 4.1.1.7 to 4.1.1.9. These information must be clear, complete, up-to-date and communicated spontaneously to distributors. Characteristics of the asset allocations defined in paragraph 4.1.1.8 should particularly be transmitted to distributors, to allow them to fully understand the product and grasp the target market and each of its segmentations, as well as the characteristics of the incompatible client groups defined in paragraph 4.1.1.9, in order to allow them to carry out their distribution activities serving client interests best. The transmission of this information does not exempt the distributor from its legal and regulatory obligations, notably the duty of advice.

4.1.1.16 Integrate into internal control devices the good practices issued from this
Recommendation.

4.1.1.17 If the planned distribution strategy leads to the distribution of the product to clients for whom
the product would be contrary to their interests or to clients belonging to the group defined in paragraph 4.1.1.9, take appropriate actions such as:

• Either revise the distribution policy, by ending the use of distribution channels or agreements with distributors responsible for these situations;
• Or modify the remuneration structure of distributors;
• Or cease the marketing of the product.

Regarding product testing, the ACPR recommends that designers:

4.1.1.18 Conduct tests to ensure that the costs of the product are proportionate to the expected benefits
for the identified target market.