Last Updated on Thursday, 3 August, 2023 at 1:44 pm by Andre Camilleri
Three weeks ago, I had the opportunity to sit down with a few representatives of the insurance brokers. Certainly, I took the occasion to understand the strict regulations not just from an insurance point of view, but also when the regulatory arms are extended to the AML Directive. Directives and regulations are normally tested in the market once they are implemented. And this ensues obviously the negotiations in Council and the European Parliament. When it comes to European regulations, and directives, some ambiguity is always left as a caveat for the interpretation of the respective member states, especially when translated into their own language. I know because of my preceding posting in Brussels. Once, I even had an entire afternoon discussion, when I was presiding the Budget Committee, because my German counterpart was asking for the inclusion of a comma. He specified that if the sentence does not include a comma, the interpretation in German language would alter the context. And this related to a sentence in a new chapter of the financial regulation revision that structured financial instruments.
Normally, such negotiations hit our shores when they are finalised and imposed for implementation irrespective of our contribution in Council or EU Parliament. It hits other member states to a lesser extent because their financial markets are structured and function differently. Obviously, as a member of the European Union, Malta’s representatives in Council and the European Parliament must be more diligent when scrutinising texts. From a Council perspective, the Maltese government, primarily through its relevant authorities, requires additional consultations before agreeing to texts. And this is because we have a smaller administration relative to bigger member states. Certainly, what we all long for is to ensure, that the transposition of a directive, is eventually implementable and proportional to the relative business models of member states.
As already mentioned, the insurance brokers’ representatives explained two changes which are currently being discussed. Such changes might eventually alter the landscape of the insurance intermediation model. This relates to the Retail Investment Strategy, issued in the form of an Omnibus Directive, a proposal amending the IDD, MiFID II, Solvency II, AIFMD and UCITS along with a proposal for a regulation amending the PRIIPs Regulation. They told me that it would be regrettable if the RIS were to become an obstacle to its own objective, that of stimulating investment by European citizens. Investment in such an industry is crucial, especially knowing that such reserves are much higher on the other side of the Atlantic. Indeed, the representatives questioned the reasons why European insurers and reinsurers are taking a step back to not invest additional capital into the insurance markets. And the reason relates to the regulation’s proposal because it might result in a matter of either assisting or hindering the insurers’ capacities.
Undoubtedly, we all agree that customers – although it is still unclear which customers are being referred to in the regulation – should be fully aware of the costs associated with their products. However, let’s put everything into context. The proposed text puts into question the practice by even outlining a conflict of interest lest intermediaries are paid a commission for their service. Without disputing the regulatory part, pragmatically, sales entail administrative costs. However, such expenses must be proportional and reflected in the market, and perhaps this is why the regulation must be looked into. Also, many are asking whether this proportionality is imposed on other professions in the service industry, as otherwise it wouldn’t foster a level playing field. Ideally, this level of detail must be left in the hands of the supervisory authority of each country to impose the changes in the domestic legislation and perhaps apply proportionality. Apparently, the Levels II and III are quite risky if they are left unchecked at a European level, as they might hinder the practice.
Seemingly, such proposals might be adding unnecessary burdens on consumers, the intermediaries and providers. The representatives explained that this situation might be increasing the costs to ensure the same outcome, thereby directly affecting SMEs and customers. In The Netherlands such practices were already implemented, including the ban on commissions. As a result, less intermediaries are selling insurance-based investment products and therefore certain customers are now devoid of any guidance, especially when it comes to selecting sustainable products. When I was posted in Brussels, a few years after the financial crisis, insurance intermediaries played an important role, especially after the implementation of the Junker Plan. And this is important still for the implementation of sustainability products, at least, until we transition to a greener economy.
Similarly, the recent ECJ Ruling C-633/20 states that an insurance distributor as defined in the IDD, covers a legal person whose activity consists in offering voluntary membership of a group insurance. Also, it confirms that the status of distributor of insurance products is not incompatible with that of policyholder. Subsequent to this judgement, the EU requested member states to ensure that the policyholders offering group insurance on a voluntary basis and receiving a commission are to be licensed as insurance intermediaries, to distribute such products. Clearly, it is understandable for countries like Germany to ensure that the distributors are properly licensed. Nonetheless, in smaller member states proportionality must be applied. Obviously, established financial market players might be given a competitive advantage. Hence, clients might be skewed and restricted to specific sectors, thereby consolidating additional market concentration.
Certainly, competition is important for customers, as it fosters quality and better prices including transparency. However, the specificities of smaller member states must be taken into consideration when implementing directives and regulations, especially in the context to transit to a greener economy through the promotion of sustainable products. Such assistance is quite important. When one compares the larger insurance markets, for instance in Germany, France and Italy, the market composition is different relative to that of Malta. Here, we only host a few local insurance companies. Needless to say, we must ensure that negotiations in Council and in trilogue stages take into consideration member states’ specificities. And that entails a larger pool of personnel to sell additional sustainable financial products.