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15 January 2024
Coincidence of timing? Recommendation 2023-R-01 was issued by the French insurance regulator less than two months after the European Commission's adoption on 24 May 2023 of the proposed Retail Investment Strategy (RIS) directive, which aims to regulate all investment products across the board.
The RIS raises concerns in particular about the remuneration of distributors, by imposing a ban, partial for the time being, on incentives paid for non-advised sales of insurance-based investment products. They would remain authorised, at a minimum, for sales with advice, unless the advice is presented as being provided independently.
In order to demonstrate that the current regulations, reinforced by this recommendation, are sufficient to meet investor protection requirements, the Secretary General of the Autorité de contrôle prudentiel et de résolution ("ACPR") has alerted market participants to the need to comply scrupulously with the recommendation, the aim being in particular to preserve the French remuneration model, of which commission is the most widespread method.
It is in this context that the recommendation clarifies certain provisions stemming from Directive (EU) 2016/97 on insurance distribution (known as the "DDA") and from the Insurance Code in terms of product governance, remuneration and conflicts of interest.
As regards the scope of this recommendation, it is aimed at manufacturers and distributors of life and non-life insurance products, including those operating in France under the freedom to provide services or the freedom of establishment.
With regard to life insurance, the regulator specifies its expectations, particularly concerning the notion of significant adaptation, the determination of target markets and the concept of "value for money" or cost-benefit ratio.
The term "significant adaptation" is far from trivial, since insurance products that have undergone this type of modification must undergo a validation process in the same way as a new product.
However, this concept is not explicitly defined either by the DDA or the delegated regulations, or by French law. Only a question and answer from EIOPA (Q&A no. 2266) defined the notion of "significant adaptation" as a change in the essential characteristics of the product.
The recommendation provides a non-exhaustive list of changes relating to the product or to the rights and obligations of the product's consumer that may constitute "significant adaptations". These include: the level of costs, the price, the loyalty guarantees, the methods for calculating and allocating profit-sharing, the modification/addition/deletion of a management profile and the modification of the list of funds, such as the addition/deletion of a type of funds.
In order to assess whether one or more modifications to a product constitute significant adaptations, the ACPR expects product manufacturers to draw up an analysis grid and objective criteria, particularly in the form of indicators and thresholds.
The purpose of the governance and oversight system for insurance products is to ensure that the products marketed meet the needs and characteristics of customers.
To achieve this, the legislation in force imposes a validation process that requires a target market to be determined for each product, taking into account, in particular, the risk profile, complexity and nature of the product.
However, the texts do not precisely define this notion of target market.
Until now, only a question and answer published by EIOPA (Q&A no. 1612) specified that the determination of a target market should take into account customers' knowledge of products, their financial and non-financial objectives, their age category, their financial situation, their professional situation and their risk tolerance.
One of the key features of the recommendation is the segmentation of the target market into up to six sub-groups, depending on the complexity of the product and the management profiles proposed.
Manufacturers are therefore expected to have an analysis grid and objective criteria for measuring the complexity of the product and ensuring that the level of granularity of the target market is appropriate to the level of complexity of the product.
To this end, manufacturers are recommended to take into account the nature of the guarantees, the structure and diversity of charges, the number and nature of units of account, as well as the criteria already included in EIOPA's question and answer, namely: the customer's knowledge and experience, personal and financial situation, risk tolerance, objectives and needs.
Manufacturers will also have to define sub-groups that are incompatible with the product and, in the case of complex units of account, determine a specific target market and a negative target market.
EIOPA indicated in a November 2021 statement that insurance products offer, in its view, good value for money when costs and charges are proportionate to the benefits for the identified target market and are reasonable.
In June 2023, the ACPR communicated its expectations regarding the review of the value for money of units of account in a life insurance policy, welcoming the developments recommended to its members by France Assureurs, aimed at ensuring that the units of account referenced in life insurance policies present a cost-performance ratio that sufficiently protects customers' interests.
One of the other important contributions of the recommendation is the need for manufacturers of insurance products to take account of value for money when monitoring and reviewing products, it being specified that their performance, costs and risks are expressly referred to as an "essential characteristic of the products".
Manufacturers are expected to examine the performance of unit-linked funds by comparing their performance net of fees to the average performance of similar funds. The ACPR refers in particular to the methodology proposed in June 2023 by France Assureurs, indicating that manufacturers may implement a similar system.
The ACPR also expects manufacturers to take "appropriate measures" when circumstances are identified that could have a negative effect on the target market, such as:
If these "appropriate measures" are not detailed, the France Assureurs methodology referred to in the recommendation may lead to a unit of account being deregistered.
The French remuneration model, which combines both fees and commissions, complies with rules designed to prevent biased behaviour on the part of those in charge of the sales process due to more or less advantageous remuneration.
Broadly speaking, current regulations require distributors to:
They must not be remunerated or remunerate their sales staff in a way that is contrary to customers' interests. In particular, sales targets must not lead to the recommendation of one product when another would better meet the customer's requirements and needs.
More specifically with regard to life insurance, distributors must take all appropriate measures to prevent conflicts of interest from harming customers' interests.
In an attempt to preserve this French remuneration model in the face of European pressure, the ACPR's recommendation goes further by strengthening the requirements imposed on manufacturers and distributors.
After pointing out that they must not introduce a remuneration policy that encourages them to offer a less suitable product than another, the ACPR provides a non-exhaustive list of the types of remuneration policy that should be prohibited because they are likely to have a negative effect on the quality of service provided. These include variable remuneration based on sales volumes or additional or higher commissions attached to a particular type of fund.
Specifically for distributors, the recommendation points the finger at the indexation of sales staff remuneration to retrocessions from fund managers.
Lastly, the ACPR has set out specific measures for the conflict of interest situation it has identified, in which a distributor markets a product that it has itself underwritten.
We will know in the coming months whether the efforts of the French market will be taken into account when the RIS directive is adopted.
