Guidelines under the Insurance Distribution Directive relating to insurance-based investment products structured in a way that makes it difficult for consumers to understand the risks involved

©EIOPA 2017.
EIOPA-17/651
4 October 2017.
Guidelines under the Insurance Distribution Directive relating to insurance-based investment products structured in a way that makes it difficult for consumers to understand the risks involved

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Introduction
1.1. In accordance with 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 (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (hereinafter the "EIOPA Regulation")1 and in accordance with Article 30(7) and (8) of Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) (hereinafter the "IDD")2, EIOPA issues Guidelines on the assessment of insurance-based investment products which contain a structure that makes it difficult for consumers to understand the risks involved, as referred to in Article 30(3)(a)(i) of the IDD and on the assessment of insurance-based investment products classified as simple for the purposes of Article 30(3)(a)(ii) of the IDD, given that this classification is also based on an assessment of whether the product structure makes it difficult for consumers to understand the risks involved.
1.2. In accordance with Articles 30(1) and (2) of the IDD, as part of the sale of an insurance-based investment product, a suitability or appropriateness assessment of the insurance-based investment product for the consumer is normally required, which is carried out by an insurance intermediary or an insurance undertaking. Article 30(3) of the IDD allows Member States to derogate from these obligations and not require a suitability or appropriateness test during the distribution of an insurance-based investment product if various conditions are met. This type of sale is often referred to as "execution-only" sales, since the transaction is carried out without advice or an assessment of the consumer's personal circumstances. However, in accordance with Article 20(1) of the IDD, it is still necessary for an insurance distributor to determine the consumer's objectives and needs.
1.3. One of the conditions indicated in Article 30(3) of the IDD to determine whether an insurance-based investment product can be distributed by execution-only sales relates to the complexity of the insurance-based investment product. This assessment is based on the type of financial instruments through which a given insurance-based investment product provides investment exposure, as well as on the structure of the insurance contract with the consumer (Article 30(3)(a) of the IDD). In accordance with Articles 30(7) and (8) of the IDD, EIOPA is empowered to develop guidelines relating both to the assessment of complexity and to the assessment of simplicity.
1.4. The complexity of financial instruments through which an insurance-based investment product provides investment exposure depends on the provisions of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (recast) (hereinafter the "MiFID II Directive")3. In accordance with Article 30(3)(a) of the IDD, there is a distinction, on the one hand, between those insurance-based investment products that provide investment exposure to financial instruments considered simple financial instruments under the MiFID II Directive and, on the other hand, between other simple insurance-based investment products.
1.5. These Guidelines cover the assessment of all types of insurance-based investment products. Despite the difference between sub-points (i) and (ii) of Article 30(3)(a) of the IDD, it is important to ensure that only insurance-based investment products with risks that are easily understandable by consumers can be sold execution-only. The Guidelines primarily address the issue of identifying contractual structures or features that may make it difficult for consumers to understand the risks involved in an insurance-based investment product. However, they also cover a number of other issues that are important for assessing the complexity of insurance-based investment products.
1.6. Given the objective of the IDD regarding minimum harmonisation, as well as the fact that, in particular for execution-only sales, consumers are not afforded protection under certain relevant conduct of business rules, national competent authorities may retain or introduce stricter national provisions in this area to protect consumers.
1.7. In developing the Guidelines, EIOPA took into account other relevant regulatory requirements in the area of conduct of business standards, namely Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs)4.
1.8. Furthermore, EIOPA has considered the work of ESMA5 on the assessment of financial instruments containing a structure that makes it difficult for consumers to understand the risks involved. As stated in recital 56 of the IDD, this reflects the importance of avoiding regulatory arbitrage, while simultaneously taking into account the specific nature of insurance contracts.
1.9. These Guidelines are addressed to national competent authorities in Member States that have decided to apply the derogation from the first subparagraph of Article 30(3) of the IDD. Despite specific provisions describing the obligations that insurance undertakings and insurance intermediaries should fulfil, this document should not be interpreted as imposing any direct requirements on those financial institutions. Financial institutions are expected to comply with the supervisory or regulatory framework applied by their national competent authority.
1.10. For the purposes of these Guidelines, the following definition has been established:

• "Execution-only sales" refers to the distribution of insurance-based investment products in accordance with Article 30(3) of the IDD.
  1.11. Terms not defined in these Guidelines have the meanings given to them in the legal acts referred to in the introduction.
  1.12. The Guidelines apply from the date of publication of their translated versions.

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Section 1. Requirements applying to contracts providing investment exposure exclusively to financial instruments considered simple financial instruments under the MiFID II Directive (Article 30(3)(a)(i) of the IDD)
Guideline 1. – Investment exposure
1.13. An insurance intermediary or an insurance undertaking should ensure that the insurance-based investment product provides investment exposure exclusively to financial instruments considered simple under Directive 2014/65/EU. Such simple financial instruments include exclusively the following financial instruments:
(a) those established by Article 25(4)(a) of the MiFID II Directive; (b) those meeting the criteria set out in Article 57 of Commission Delegated Regulation (EU) 2017/565 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive; (c) those not considered complex under ESMA's Guidelines on complex debt instruments and structured deposits6. Guideline 2. – Contractual features relating to changes in the nature of the contract and the possibility of redemption of the insurance-based investment product
1.14. When a contract contains any of the following features, an insurance undertaking or an insurance intermediary should consider that the contract contains a structure that makes it difficult for consumers to understand the risks involved:
(a) it includes a clause, condition or "trigger" that enables the insurance undertaking to significantly alter the nature, risk or payout profile of the insurance-based investment product; (b) there are no available redemption options or other means of realising the insurance-based investment product at a value available to the consumer; (c) there are visible or hidden charges that have such an effect that, although redemption options for the insurance-based investment product technically exist, they may cause unjustified harm to the consumer, given that the charges are disproportionate to the cost borne by the insurance undertaking performing the redemption. Guideline 3. – Contractual features relating to the determination of maturity value, redemption value or death benefits
1.15. An insurance intermediary or an insurance undertaking should assess the impact of mechanisms determining maturity value, redemption value or death benefits, as well as whether they make it difficult for consumers to understand the risks involved, unless these mechanisms are directly based on national laws specifically aimed at protecting consumer interests.
1.16. In the course of the assessment, when a contract contains any of the features set out below, an insurance undertaking or an insurance intermediary should consider that the contract contains a structure that makes it difficult for consumers to understand the risks involved:
(a) maturity value, redemption value or death benefits depend on variables determined by the insurance undertaking, and their effect is difficult to understand for the consumer; (b) maturity value, redemption value or death benefits are based on different types of investment exposures or strategies, and their combined effect is difficult to understand for the consumer; (c) maturity value, redemption value or death benefits may frequently or significantly vary over different periods of the contract term due to the fulfilment of certain pre-established threshold conditions or the expiry of certain deadlines. This does not include changes in maturity value, redemption value or death benefits resulting from the payment of discretionary bonuses; (d) there is a guaranteed maturity value, redemption value or death benefits that depends on conditions or time limits, and their effect is difficult to understand for the consumer. This does not include changes in guaranteed maturity value, redemption value or death benefits resulting from the payment of discretionary bonuses. Guideline 4. – Contractual features relating to costs
1.17. In the course of assessing whether a contract contains a structure that makes it difficult for consumers to understand the risks involved, an insurance intermediary or an insurance undertaking should assess whether consumers have difficulty understanding costs, particularly the conditions under which significant changes in costs may occur during the term of the contract, including based on investment performance.
1.18. In cases where costs are directly based on national laws specifically aimed at protecting consumer interests, they should not be considered to contain a structure that makes it difficult for consumers to understand the risks involved.
Guideline 5. – Contractual features relating to the policyholder
1.19. When contractual provisions enable consumers to use atypical formulations for defining the person who benefits from the contract at its end (beneficiary clause), which may lead to difficulties in identifying the beneficiary and may consequently result in difficulties for the beneficiary regarding actual payout after the death of the policyholder, an insurance intermediary or an insurance undertaking should consider that the contract contains a structure that makes it difficult for consumers to understand the risks involved.

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Section 2. Requirements applying to "other simple insurance-based investment products" (Article 30(3)(a)(ii) of the IDD)
Guideline 6. – Contractual features relating to the determination of maturity value, redemption value or death benefits
1.20. An insurance intermediary or an insurance undertaking should assess the impact of mechanisms determining maturity value, redemption value or death benefits, as well as whether they make it difficult for consumers to understand the risks involved, unless these mechanisms are directly based on national laws specifically aimed at protecting consumer interests.
1.21. In the course of the assessment, when a contract contains any of the following features, an insurance undertaking or an insurance intermediary should consider that the contract contains a structure that makes it difficult for consumers to understand the risks involved:
(a) maturity value, redemption value or death benefits depend on variables determined by the insurance undertaking, and their effect is difficult to understand for the consumer; (b) maturity value, redemption value or death benefits are based on different types of investment exposures or strategies, and their combined effect is difficult to understand for the consumer; (c) maturity value, redemption value or death benefits may frequently or significantly vary over different periods of the contract term due to the fulfilment of certain pre-established threshold conditions or the expiry of certain deadlines. This does not include changes in maturity value, redemption value or death benefits resulting from the payment of discretionary bonuses; (d) there is a guaranteed maturity value, redemption value or death benefits that depends on conditions or time limits, and their effect is difficult to understand for the consumer. This does not include changes in guaranteed maturity value, redemption value or death benefits resulting from the payment of discretionary bonuses. Guideline 7. – Contractual features relating to costs
1.22. In the course of assessing whether a contract contains a structure that makes it difficult for consumers to understand the risks involved, an insurance intermediary or an insurance undertaking should assess whether consumers have difficulty understanding costs, particularly the conditions under which significant changes in costs may occur during the term of the contract, including changes based on investment performance.
1.23. In cases where costs are directly based on national laws specifically aimed at protecting consumer interests, they should not be considered to contain a structure that makes it difficult for consumers to understand the risks involved.
Guideline 8. – Contractual features relating to the policyholder
1.24. When contractual provisions enable consumers to use atypical formulations for defining the person who benefits from the contract at its end (beneficiary clause), which may lead to difficulties in identifying the beneficiary and may consequently result in difficulties for the beneficiary regarding actual payout after the death of the policyholder, an insurance intermediary or an insurance undertaking should consider that the contract contains a structure that makes it difficult for consumers to understand the risks involved.
Compliance and Reporting Rules
1.25. This document contains Guidelines issued in accordance with Article 16 of the EIOPA Regulation. In accordance with Article 16(3) of the EIOPA Regulation, competent authorities and financial institutions make all efforts to comply with the guidelines and recommendations.
1.26. Competent authorities that are complying or intend to comply with these Guidelines should incorporate them into their regulatory or supervisory framework in an appropriate manner.
1.27. Competent authorities confirm to EIOPA whether they comply or intend to comply with these Guidelines, stating reasons for non-compliance, within two months after the publication of the translated versions.
1.28. In case competent authorities do not submit a response within the stated period, they will be considered non-compliant with reporting and reported as such.
1.29. Competent authorities within Member States that have not decided to apply the derogation from the first subparagraph of Article 30(3) of the IDD are not subject to reporting obligations to EIOPA.
Final Review Provision
1.30. Existing Guidelines are subject to EIOPA's review, as well as periodic updates in accordance with Articles 30(7) and (8) of the IDD.