Transcript Unit-linked/ index-linked insurance products and the

HILA-AIDA SUMMIT, Athens - Greece, 07 – 09 May 2014
Working Party: Distribution of Insurance Products
Cross selling practices in financial
products and transparency
implications
A l k i s t i s C h r i s t o f i l o u , P a r t n e r - R o k as ( A t he n s )
08.05.2014
IMD2 Article 21a para. 1 - Tying and bundling practices
When insurance is offered together with another service or ancillary product
 as part of a package or the same agreement or package,
 the insurance intermediary or the insurance undertaking
 shall inform and offer the customer the possibility of buying the different
components jointly or separately
 [and] provide for a separate evidence of the premium or prices of each
component.
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
IMD 2 – alignment to MiFID 2
 IMD 2 Recital 9: distribution of insurance contracts including investment
products should:
 be aligned between IMD 2 and MiFID 2
 Minimum standards must be raised to create level playing field for all packaged
insurance investment products
 MiFID 2 sets high and detailed standards of transparency and care for suitability of
customer’s investment needs
 MiFID 2 Article 24 para. 11: only duty to inform customers whether they can
buy the component services separately and to provide for a separate
evidence of the costs and charges of each component.
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
Tying and bundling – IMD 2 Definitions
 Article 2.1.(19): “tying practice” means
 the offering or the selling of an insurance product in a package with other distinct
ancillary products or services
 where the insurance product is not made available to the consumer separately
 => “Tying practices”: where the various components are not available
to buy on a standalone basis –> not allowed
 Article 2.1.(20): “bundling practice” …
 where the insurance product is also made available to the consumer separately but
not necessarily on the same terms and conditions as when offered bundled with the
ancillary services
 => “Bundling practices”: where the various components of a contract
can be bought separately -> allowed
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
Examples of cross-selling practices
– Is there a risk to the consumer?
 What is a “Gateway” product: current account, mortgage loan, investment
scheme, various insurances
Examples:
 Current bank account bundled with travel insurance, mobile phone
insurance, roadside recovery
 Mortgage loan with fire insurance and life / incapacitation insurance
 Health insurance bundled with life insurance linked to investment
 Municipalities and regional authorities buying complex structured
investment products in combination with deposits
 Bundling is coupled with loyalty or volume preferential contract conditions
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
IMD2 Article 21a para. 2 – explaining the risk
 Where the risks resulting from such an agreement or package offered to a
customer are likely to be different from the risks associated with the components
taken separately
 the insurance intermediary or undertaking shall upon the customer’s request
 * IMD2 Recital 21: The directive is an important step towards increased level of
consumer protection and internal market integration
 provide an adequate description of the different components of the agreement
or package
 and the way in which its interaction alters the risks.
 ** KIID PRIIPs Reg– Key information document for investment & insurance
products
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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IMD2 Article 21a para. 4
– Advising on packaged products
 Member States shall ensure that where an insurance intermediary or an
insurance undertaking provides advice, it ensures that the overall
package meets the demands and needs of the customer
=> MiFID 2; duty to investigate and understand customer needs
 Article 1.9: Advice is the personal recommendation to a customer, either
upon request or at the initiative of the insurance intermediary or
undertaking
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
Is cross-selling a good or a bad thing?
 IMD 2 Recital 41
 cross-selling practices are a common and appropriate strategy for retail
financial service providers throughout the Union
 IMD 2 Recital 41a
 When insurance is offered together with another service or product as
part of a package or as a condition for the same agreement or package,
it is subject to Directive 2005/29/EC on Unfair Commercial Practices
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
Directive 2005/29/EC on Unfair Commercial Practices
 Article 5.2 - unfairness test: a practice is unfair if cumulatively
 It is contrary to the requirements of professional diligence, and
 The practice materially distorts or is likely to distort the economic behaviour with
regard to the product of the average consumer whom it reaches or to whom it is
addressed
 Article 2(h): professional diligence
 is the standard of special skill and care which a trader may reasonably be expected
to exercise towards consumers, commensurate with honest market practice and/or
the general principle of good faith in the trader’s field of activity.
 Note: Professional diligence difficult to benchmark, particularly in financial services,
if the practice is widely followed by providers
 IMD 2 Article 15(1): Insurance intermediaries shall always act honestly,
fairly, trustworthily, honourably and professionally in accordance with the
best interests of their customers
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
Directive 2005/29/EC on Unfair Commercial Practices (2)
 Article 6: Misleading practices are unfair
 False and untruthful information, deceitful as to the benefits, risks, composition,
results, price calculation, advantages; omission of material information
 Article 8: Aggressive practices are unfair
 As they significantly impair (or are likely to) the average consumer’s freedom of
choice or conduct with regard to the product
 Unfair practices make the consumer take a transactional decision he would
not have taken otherwise
 Maximum harmonisation directive with exception of financial services
 => Member States may pass more stringent rules in financial services
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
From cross-selling to mis-selling
 Aggressive sales practices
 Pressure and inertia selling
 Churning
 Steering
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Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
From cross-selling to mis-selling - Examples
 Unclear terms on cover and price
 Sell services the consumer doesn’t need
 selling insurance against home emergencies and breakdowns, e.g. of water pipes, when
already covered
 by home fire insurance, and/or
 by water supply companies themselves
(UK HomeServe facing a GBP 3.4 m fine in 2014)
 Selling credit card insurance along with credit cards
(13 UK banks and CPP insurance were obliged by UK FCA to pay €1.5 bn to 7 m
customers)
 Selling PPI insurance along with credit (UK banks paid €11,7 bn)
 Forced bundling of life insurance on group health policies purchased by employers
(USA NYSE listed Humana Insurance required to pay USD 4.5 m for fines and a
consumer restitution refunds pool in settlement with the insurance commissioners of the
States of Mississippi, Missouri and Wisconsin)
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
Features of financial products promoting mis-selling
 Factual and psychological factors
 Information asymmetry between sellers and customers
 Strong element of trust and path-dependency embedded in “relationship
banking”
 Limited interest and awareness of customers in “shopping around” for best
deals
 Misleading information
 Various cognitive biases putting emotional pressure on consumers
 choice and information overloads
 endowment biases
 difficulty in handling uncertainty and risk
 misevaluation of future benefits and costs
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
IMD 2 Article 21a para. 4, 5 – The Regulator
 EIOPA, EBA, ESMA will develop and periodically update:
 guidelines for the assessment and supervision of cross-selling practices
 Indicating, in particular, situations in which such practices do not comply with Article
15(1) on proper professional conduct
 Member States may maintain or adopt
 additional stricter measures or intervene on a case-by-case basis to prohibit the sale
of insurance together with another service or product
 as part of a package or as a condition for the same agreement or package
 when they can demonstrate that such practices are detrimental to consumers
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
What does a financial regulator consider
as “mis-selling”?
 Example 1: UK FSA’s Final Guidance of January 2013 - Risks to customers
from incentive schemes to sellers of financial products
 Incentive schemes increase the risk of mis-selling if not closely monitored
by companies
 Conflicts of interest, if e.g. supervisor earns bonus on the volume of sales
made by his staff
 Mis-selling is the failure to deliver fair outcomes for consumers, i.e. when:
Customers are not treated fairly
They don’t understand the key features of the service
They do not understand whether they are given advice or only information
Information is not clear, fair and transparent;
Information does not enable customers to make an informed decision on whether to
buy or not;
 Customers buying on advised basis are not recommended products suitable to their
needs
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HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
Financial regulator’s guidance to avoid mis-selling
 Example 2: Bank of Greece 2013 Guidelines to banks when selling
insurance
 Upon commencing marketing, the bank officer shall make clear that:
 The bank is also acting as an insurance intermediary
 The client may provide his own insurance cover if compatible with the loan
agreement and the bank must accept it
 The client is entitled to cooperate with his own intermediary in finding the
appropriate cover
 The bank may in no way “recommend” an intermediary in a manner that
may be considered as obligatory for the client
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
In summary
 When insurance is part of a packaged product, the insurance intermediary
or undertaking shall
 Make each product separately available
 Provide separate price
 Explain how risk may vary from separate to packaged product and describe each
product components (upon customer’s request)
 If advice, i.e. personal recommendation is provided, the overall package of
products shall meet customer’s needs and demands
 Sales practices must be in conformity with the unfair commercial practices directive;
they shall not be aggressive, unfair, misleading
 Bundling may prove to the benefit of the consumer
 Tendency of aligning regulation across the financial sector starts becoming
reality
HILA-AIDA SUMMIT, Athens - Greece
Working Party : Distribution of Insurance Products
08.05.2014
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© Alkistis Christofilou - Partner
HILA-AIDA SUMMIT, Athens - Greece, 07 – 09 May 2014
Working Party: Distribution of Insurance Products
© Alkistis Christofilou - Partner