Are with-profits products complex or not under the IDD? FCA says not

Governance, risk & compliance
EU / European Parliament / EIOPA, FCA, Life insurance, Mutuals, Non-Life

19 January 2018

OAC attended the Association of Financial Mutual's (AFM) Regulation Committee Meeting in January where it discussed, with the FCA, the implementation of the Insurance Distribution Directive (IDD). There has been much discussion within the industry about the EIOPA's proposals for the classification of financial products for the IDD. The following is a summary from the AFM meeting about whether with-profits products can be classified as 'complex' or 'not complex'.

The FCA made a pointed note to refer to page 5 of the updated guidelines from the EIOPA dealing with this issue. These state:

"As stated in the explanatory text to the consultation paper, EIOPA does not consider that mechanisms such as profit sharing should automatically result in a product being deemed complex. The drafting of the Guidelines was intended to capture cases where the effects of these mechanisms can be difficult for the customer to understand.

Based on the comments received, EIOPA recognises that the drafting may have been too broad in some cases and has made some amendments to both the Guidelines and the explanatory text in order to avoid inadvertently capturing certain contractual structures that are used in traditional life insurance policies, such as the payment of discretionary benefits. In particular, the overarching provision regarding the existence of ‘complex mechanisms that determine the maturity or surrender value or pay out upon death’ has been replaced by the requirement that the effects of these mechanisms need to be assessed. The changes also take into account where specific consumer protection rules are laid down in national law."

(Source document: EIOPA - Final Report on Guidelines under the Insurance Distribution Directive on Insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risks involved)

The FCA noted that the UK and Germany were keen to avoid including with-profits products in the definition of complex business, hence the update from the EIOPA. In fact, the FCA’s primary anxiety was over unit-linked products.

The FCA confirmed that with-profits products, as long as the benefits can be understood by customers, can be treated as not complex. To evidence this, they would expect firms to make an assessment of the product’s complexity, perhaps through the firm’s internal governance systems (eg product committee or WPC), confirming whether customers were likely to understand the material nature of the contract design and the benefits payable. If firms were then satisfied that customers would understand the benefits, it would be reasonable to conclude that the product would not be complex. Holloway contracts would similarly fall into this approach.

OAC's opinion is that this seems a logical and sensible approach to the issue of determining whether with-profits products are complex or not. FCA also stressed that until the European Commission formally ratifies the proposed delay of implementing the IDD to 1 October, firms are urged to continue to work to the original deadline of 23 February.

OAC has a range of services for firms to help them implement and embed regulatory frameworks within their organisational structure. We offer a preliminary discussion to assess your requirements.

Cara Spinks

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Cara Spinks
Consultant Actuary

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