There is still much to do if the EU is to achieve its goal of financial services harmonisation. But for this to have any chance of happening, member states must embrace the Insurance Mediation Directive
Although established in 1957, it took a further 37 years for the European Economic Community (EEC) member states to remove all trade barriers and to turn their common market into a genuine single market in which goods, services, capital and even people could move around freely.
This process was formally agreed in 1992 with the signing of the Maastricht Treaty, which led to the creation of the European Union (EU). Key to all of this was the concept of harmonisation. However, it has been a slow process to enact complete harmonisation and even now, in 2006, there is still some way to go.
It also took another 10 years to formally introduce a single currency and even then only 12 of the 15 member states have switched to the euro. Despite the common goal of harmonisation, the playing field has not always remained level, due to the continual expansion of the EU and each nation's resolve to put their national priorities first.
One area where there is still much to do, is financial services and there has been a lot of discussion in recent years as to whether there should be a single market for the life insurance industry.
Currently, insurers who are based in one EU member state can operate in another by exercising their rights under the Third Life Directive either by Freedom of Establishment, which means having a branch or an office, or Freedom of Services, which allows products to be sold without having a permanent base in a country.
As a result, there is the belief that life companies have greater opportunities to sell cross-border within the EU, however, this is not always the case. There are still a number of barriers including taxation, insurance contract law and the notion 'general good', as set out by EU law, which has often been used as a protectionist vehicle.
There is also much debate as to whether the Insurance Mediation Directive (IMD) is a help or hindrance. The IMD was designed to change the face of European insurance mediation by requiring member states to implement its provisions into local law by 15 January 2005.
The directive covers authorisation, capitalisation and regulation of insurance intermediaries to enable 'passporting' across borders between the EU and European Economic Area (EEA) states in the same manner as insurers and it applies to both general and life insurance intermediaries.
Before the introduction of the IMD, regulators were able to ignore non-regulated activities, however, the changing nature of financial services in Europe and the need for greater consumer protection, has meant they could no longer afford to ignore non-authorised entities.
The IMD incorporates two areas: the regulation and registration in the home state and passporting into other European countries.
A number of countries have been slow to implement a regulatory structure and could take several years to catch up to more advanced countries, such as Ireland, the Netherlands and the UK. For the IMD to be effective, it is imperative member states have such an infrastructure in place to ensure it is being followed.
Each country is tackling the regulatory challenge in its own way. For example, the Czech Republic has worked closely with the Financial Services Authority in the UK to help establish a regulatory framework. It has recently introduced a new law [Act 38/2004] on insurance intermediaries and independent loss adjusters, which transposes the IMD and provides for penalties of between CZK1m (£24,230) and CZK10m for financial crimes.
The next step is the ability to trade in other EU countries (passporting). So far, eight countries have rules in place for a compliant regulatory environment. And it would appear, the UK is the only country to have a public register that shows an intermediary's authorisation status including those who operate in other EU states.
One of the biggest challenges to passporting for intermediaries will be complying with the host state's consumer protection and marketing rules, known as general good. It is not clear how individual countries intend to publicise their general good provisions but it is worth visiting regulators' websites on a regular basis.
A number of countries have also taken the opportunity to review their existing insurance contract law provisions and several new insurance contracts laws took effect from 1 January this year. These include revised disclosure provisions relating to policies and unit-linked funds.
It is likely some countries may introduce procedures similar to the UK, including specific disclosure documents in the local language and even commission disclosure. This may dissuade providers from cross-border sales because the cost of changing quote systems and providing the documentation in the local language would need to be justified against the sales levels in that market.
So as the IMD is given its teeth, it might be possible to see pan-European insurers looking to focus more on specific markets, depending on the extent of any general good and taxation rules introduced.
However, if this goes too much in favour of the local market, then the opposite effect may happen. For example, in Sweden, taxation in the pensions market was deemed to favour local products over those from competitor EU providers. This was addressed in 2005, when the government offered the same tax benefits to the products of cross-border insurers. The result has been incredible interest in pension products.
The effect of taxation on insurance products and how it affects business in Europe, in particular the Savings Tax Directive (STD) and Insurance Premium Tax (IPT) has also become a key factor in Europe's harmonisation. The STD was introduced in July 2005, to ensure effective taxation of savings income on individuals resident in other EU states. It does this mainly through exchange of information between member states.
However, it does not apply to insurance policies, personal pensions or purchased life annuities and has little effect on insurance sales in the EU. Neither is there any tax to pay relating to the STD, nor is there any reporting obligation because the insurer owns the unit-linked fund assets and the client only has notional units.
IPT is a simple way of raising revenue indirectly from consumers and is used in a number of countries in Europe. In the UK, it only applies to general insurance policies, not life products. However, Belgium extended its IPT to individual life insurance on 1 January 2006.
There are benefits to this tax - it raises revenue and is collected, usually by the insurers, on a government's behalf. In addition, it can have the same side effect as the local general good rules, leading some providers to reconsider the market and whether the sales in it outweighed the cost of collecting and remitting the tax.
All these factors mean the EU and its plans for a single market are beginning to take shape, but harmonisation is still a long way off.
Member states need to embrace the IMD and determine what they need to put in place for their own regulation. This will ensure consumers are better protected when it comes to the advice they are given at point of sale and beyond - helping to improve confidence in the industry.
The speed at which this happens is hard to determine but advisers will need to keep up to date with any changes. At the same time, it is expected insurers will follow the developments of local general good rules and taxes closely as it is imperative to be aware of any changes and how these could affect business models.
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