The European Union is on the verge of passing legislation that will change the market in which IFAs operate.
It is moving to dismantle national legislation that prevents intermediaries in Euro-pean member states from operating easily in other EU states. UK IFAs must be prepared to defend their own market as well as start thinking about how they want to compete in other EU national markets.
In its efforts to open up a single market, the European Commission is championing the Financial Services Action Plan, which is expected to be adopted by 2002. It has three core strat-egic objectives – to create a single market for wholesale financial services, to ensure that retail markets are accessible and secure and to provide prudential rules and supervision.
Commissioner for financial services Frits Bolkestein says: “Insurance intermediaries are a vital link in the process of selling products in the European Union. They also play a pivotal role in protecting the interests of insurance customers, primarily by offering advice and assistance to insurance customers and by analysing their specific needs.
“The aim of the proposal is to make it eas-ier for insurance intermediaries to avail themselves of the freedom of establishment and freedom to provide services and to guarantee a high level of protection for the interests of customers who deal with insurance intermediaries.”
Proposals on the table are aimed at delivering the following professional requirements to protect customers:
Possession of the necessary general, commercial and professional knowledge and ability.
Being of good repute.
Possession of professional indemnity insurance or any other comparable guarantee against liability arising out of professional negligence.
Insurance intermediaries who handle customers' money must have sufficient financial capacity.
The regulations are intended to protect potential customers with more transparent dealings with intermediaries. The changes will require intermediaries to provide information about whether they are working for one or more companies and whether the advice given is based on an analysis of all products available in the market.
It is hoped increased transparency will empower customers both in the retail and business environment.
The legislation is also intended to open up the EU insurance market to more vigorous competition. The groundwork has already been laid in many ways. The current framework that governs intermediaries is directive 77/92/EEC and recommendation 92/48/EEC enacted in 1977 and 1992 respectively. These have helped bring national laws closer together.
In many ways, it could be said that the single insurance market has largely been established for insurance companies. Since July 1994, when the third life and non-life insurance directives (92/96/EEC and 92/49/EEC) came into force, insurance companies have been subject to a single set of administrative authorisation rules and prudential control arrangements imposed by the member state where they are based.
The so-called European Passport enables an insurance company to do business across the EU under the rules on establishment or the rules on the freedom to provide services. Since the directives came into effect, there has been an increase in activity in the European insurance sector, especially in areas involving industrial and commercial risk.
There has been less impact on private risk. This is probably due to the fact that the host member state (where the company is based) may impose general interest requirements such as consumer protection on service providers based in other EU member states. A second reason for a hitherto underdeveloped private risk market is the lack of an existing legal framework for insurance intermediaries to enable them to take advantage of two of the EU's fundamental freedoms – freedom of establishment and freedom to provide services to the single market.
As a result, intermediaries are unable to cater to customers' demands to insure a risk in other member states.
The professional association of insurance intermediaries, Bipar, states the difficulties faced by intermediaries even more starkly. It draws particular attention to:
Uncertainties surrounding European legislation applicable to insurance intermediaries.
The need to comply with the legal requirements of several different countries in cases where transactions have a cross-border element.
The lack of clear definition of the obligations of intermediaries when they do business in another member state. Problems are most likely to occur where intermediaries have to comply with a number of “general good” requirements that are not clearly defined.
This situation can reasonably be expected to change in time as the market becomes gradually more competitive. The Financial Services Action Plan is expected to deliver this competition through the further harmonisation of national rules, allowing for more cross-border business for intermediaries. As a result, intermediaries will rise in prominence because of increasing competition and the need to filter out the best options for clients as a result of the policies becoming complex.
The EU has already adopted legislation to help this along. Directive 77/92 and recommendation 92/48 began the long process of harmonisation of national rules but more work still needs to be undertaken.
Although there has been some harmonisation and increased competition, the fact remains that national rules still exist and effectively divide the market. The result is that customers do not have access to the widest range of insurance products to cover their needs. The end user is also prohibited from enjoying the benefits of competition among intermediaries that would result if national rules were torn down.
The final goal is the implementation of the Financial Services Action Plan expected to be adopted by the European Parliament and Council by co-decision procedure in 2002. This will allow for a truly integrated retail insurance market which will bring a greater degree of competition in insurance products but also in intermediary services.
Intermediaries will have to pay close attention to the legislation enacted as it will create a more competitive market with intermediaries from across Europe, theoretically able to compete across the Continent.