Carlos Montesinos, Managing Director of CGPA Europe Underwiting, CGPA Europe’s underwriting agency in Spain, comments on the recent implementation of the IDD into the Spanish legal system, highlighting issues both applauded by some and criticised by others.
As all of Europe knows, Spain was the last country to implement the European Parliament’s Insurance Distribution Directive 2016/97 (IDD). This late implementation is probably due to the political situation that has developed in Spain in recent years. The implementation was approved by Royal Decree Law 3/2020 on February 4th (RDL). Las Cortes (Parliament in Spain) began the parliamentary procedure in which Spain is currently immersed.
After such a long period of elaboration, everything suggests that the content of the IDD should have been fully accepted by the various stakeholders. Unfortunately, this has not been the case and, paradoxically, some issues are applauded by some while being criticised by others. Indeed, the organisations representing insurance intermediaries in Spain have expressed their opinion to a more or less receptive legislator.
It wouldn’t be an exaggeration to say that most of the content of the RDL is an almost in extenso translation of the Directive; therefore nothing has been added to it. In this article we won’t pass judgement on controversial issues, and will limit ourselves to listing and explaining them, regardless of whether or not they have finally been taken into account by the legislator.
Of all the issues, the most controversial is undoubtedly that of the tied insurance agent. It was indeed very surprising for the insurance industry to see that after having disappeared in the early projects, this category was reintroduced in the RDL. Of course, those opposed to this category argued that there was no need to reintroduce it, on the grounds that exclusive agents or brokers were perfectly able of adapting themselves to this distribution model.
Furthermore, a major controversy led Spain to introduce a requirement for insurance intermediaries to keep “customer accounts totally separate” from their own financial resources, i.e. accounts containing funds belonging to customers only. Opponents of this requirement have not really had the opportunity to express their opinion on this point, as it is nothing more than a mere transposition of the Directive. However, two contradictory interpretations have emanated from the wording of the same article: some people understand it to mean separate bank accounts, while others see it as separate and differentiated client accounts in the accounting sense. This is a point on which the regulator has already expressed itself verbally, having affirmed that this article refers to the obligation to have separate bank accounts, but this clarification has yet to be officially published. Another noteworthy point on which one might have expected the legislator to offer better protection for policyholders is the protection of these customer accounts from the rest of the intermediary’s creditors’ estate in the event of bankruptcy proceedings, as provided for in Article 10(6)(c) of the DDA: this aspect is not even envisaged in the implementation.
Finally, it is worth mentioning that some organizations have requested that the requirement for financial guarantee insurance be removed as a result of this new requirement to maintain separate accounts receivable. However, in spite of these requests, the requirement for financial guarantee insurance has been maintained.
Another subject that has given rise to many conflicts is the introduction of so-called “mediadores de seguros complementarios” (ancillary insurance intermediaries), who may carry out an activity of distribution of insurance products without being subject to the requirements set out in the implementation of the Directive. As a result, many intermediaries have tried to make it clear, without success, that the amount of the premium for an insurance policy does not reduce the damage that may be caused to a third party, as for example in the case of travel insurance associated with the sale of a holiday package.
Other important changes brought about by the transposition of the IDD include training. For example, training for level 1 (formerly Group A), i.e. for managers of brokerage firms has seen its hours of initial training reduced from 500 to 300, although a new obligation that did not previously exist has been created, i.e. a continuous training of 25 hours per year.
For the other levels, the initial training has been maintained (and even increased for level 3), and the continuous training has also increased. Other issues relating to this area have not yet been resolved, pending the publication of the implementing decrees.
All organisations without exception strongly questioned the need to amend the sanctions regime, with a view to adapting them to make them proportional to the financial situation of intermediaries. This demand was not taken into account either, so that the final text is that of the Directive.
Furthermore, Spain has for long time banned commissions for Insurance Based Investiments Products. The aim is to avoid that insurance distributors sell these products by favouring the potential remuneration they could receive rather than the interests of their clients. It should be noted that they may, however, receive fees from the client, but never from the insurer. As a result, when the RDL was drawn up, all professional organisations unsuccessfully requested that intermediaries could be remunerated by insurance companies for the distribution of insurance-based investment products in which the policyholder bears the investment risk. It should be noted that the positions of intermediaries and insurance companies on this issue have always coincided, the latter probably fearing a fall in sales by brokers for these products because of the impossibility of remunerating them.
Among the outstanding issues, one of them has been supported by the professional associations: the need to take advantage of this new legal framework to establish rules regarding the change of intermediary during the course of the contract. This topic was not included in the RDL, but despite the absence of a legal provision, intermediaries and insurance companies agreed on this point. In this respect, it should be noted that there is a request from the stakeholders in the industry, which is the deletion from the current text of the obligation to notify policyholders in the event that the broker sells his portfolio during the course of the contract. Article 156.5 of the RDL indeed makes it compulsory to obtain the policyholder’s consent to change intermediary in such circumstances, which is considered unproductive by many companies, as this requirement would in many cases make portfolio purchase transactions unviable.
No less important is the fact that insurance intermediaries have always lacked flexibility regarding a possible collaboration between agents and brokers, and between agents themselves, which would bring them closer to what has already existed in other European Union countries for years. This is not allowed either by the former law or by the new RDL.
And finally, this transposition and its requirements have opened a debate on whether these changes will lead to increased concentration of portfolios and thus to a significant contraction in the model for the distribution of insurance products by independent intermediaries: like many other questions, time alone will allow us to answer these questions.
The unanimous opinion is that this law is well structured and that consumer protection and the legal requirements applicable to all intermediaries, including companies’ own networks are points that are particularly well addressed by the text.
In conclusion, this implementation of the Insurance Distribution Directive represents a real attempt to harmonise with the different legislations of the other Member States of the European Union, and to seek greater consumer protection. This royal decree thus constitutes a firm step forward, which will undoubtedly help all the countries of the Union to move in the same direction, although there are still many points to be clarified so that everyone is satisfied.