Notwithstanding the merits of a deep cross-sectoral harmonisation of all the information documents in scope of the PRIIPs Regulation, a further step to enhance the investor protection at least in the insurance sector for all the IBIPs products rely on the different approaches at national level related to the rules for the demands and needs test and the suitability assessment for retail investors. The IDD does not provide strict rules for the timing of the suitability assessments, presumably assuming that before each transaction with a client both a 'demands and needs' test and a suitability assessment have to be performed by the distributor. As the corresponding MiFID II rules show, the information gathered from a client may be part of a portfolio of data covering different transactions. Thus, a further step should be to provide clear rule enabling and encouraging the distributor to undertake one suitability assessment for more than one transaction.

Moreover, it would be highly recommended to rethink the process of collecting information through the demands and needs test or the suitability assessment from 'a client perspective'. If the questionnaires to be answered by retail investors are compiled with the assistance, and somehow under the influence of the distributor, uniform guidelines should be provided, as for financial instruments under the MiFID II/MIFIR package, to enhance the effectiveness of the information collection. Under MiFID II, a firm is entitled to rely on the information provided by retail clients and must take reasonable steps to ensure that the information collected is reliable.95 The actual high-level Delegated Regulation should be complemented by EIOPA Guidelines with the aim of increasing the effectiveness of the 'demands and needs' test or the suitability assessment from a client perspective and foster the supervisory convergence between a variety of market practices at the national level.

Among others, the IBIPs Guidelines we propose should include the means used to gather information about the retail investor with proper guidance depending on the way adopted to collect the information. According to behavioural studies, the guidelines should be specifically designed to be applied to a written questionnaire, or online profiling with or without human interaction, or by means of an interview.

95ESMA (2018) Guidelines on certain aspects of the MiFID II suitability requirements, 6/11/2018, ESMA 35-43-1163.

Furthermore, the information needed with regards to the retail investor's knowledge and experience, financial situation and investment objectives should be identified and the style of the advisory dialogue should also be set, in terms of the clarity and comprehensibility of the questions posed relating the preferences, economic situation, and risk-profile.

A further step to enhance the quality of the process of the collection of information from a client perspective requires special attention to the comprehensibility of the suitability reports and the suitability statements.96 The IDD Level 2 Delegated Regulation should be complemented by guidelines recognising good market practices about the comprehension and usefulness of the suitability reports and suitability statements provided to retail investors. Furthermore, from a client perspective, not only the content and the information needed should be identified but we also need to ensure the clarity and comprehensibility for the retail investor of such information, also as regards the decision to choose the more costly or complex financial instrument over an equivalent one.

#### 10 Conclusion

The chapter has aimed to analyse the recent reform of the EU regulatory framework in regard to IBIPs. The actual regime provided for IBIPs offers stronger protection to all customers, regardless of the distribution channel. In line with the EU plan to provide consistent cross-sectorial investor protection across all Member States, many provisions under the IDD are based on the corresponding rules under MiFID II, even though some differences remain and should be further elaborated in connection to the inconsistencies, overlaps and gaps in the investor protection as far as the distribution of the IBIPs is concerned. Furthermore, several Member States have exercised the discretions given by the IDD for the IBIPs mainly to gold plate investor protection measures. However, such an uncoordinated approach undermines the internal market. Therefore, the chapter advises EIOPA to use its powers to coordinate the diverging Member States' measures and ensure transparency about the measures NCAs have taken in this respect.

The European Commission is already required to review, by 2021, the IDD, assessing the specific characteristics of insurance-based investment products. Focusing on the long-term purpose and the variety of insurance-based investment products, we need to design and implement a tailored regime combining life insurance products regulation and conduct of business rules under a cross-sectorial regulatory framework of investor protection.

96Article 14 (1), (2) and (3) Commission Delegated Regulation (EU) 2017/2359.

#### References

#### Legislation and Other Legal Instruments

EIOPA (2017) Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, 1/2/2017, EIOPA-17/048

EIOPA (2017) Opinion on Monetary Incentives and Remuneration Between Providers of Asset Management Services and Insurance Undertakings, 17/295

EIOPA (2018) Q&A on Regulation (EU) No 2017-2359

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## Part II The Insurance Distribution Directive as a "Benchmark" for National Legislators

## The Notion of "Employee" in the IDD: A Harmonized Interpretation Based on the EU Law

Anna Tarasiuk and Bartosz Wojno

#### 1 Introduction

The general aim of the European Union's ("EU") regulations, regardless of their level, is to harmonize certain aspects of public and private relationships. Since EU directives are supposed to be implemented to the national laws of the EU Member States, the notions used in directives, if not explained in the directive itself, can cause interpretation problems. This may apply, in particular, when certain notions have well recognized meanings under national legislation, or in the case of gold-plating regulations, introduced by a Member State.

This chapter is devoted to the interpretation of the concept of an "employee of insurance undertaking", which was used in the Directive on insurance distribution,1 adopted in 2016 ("IDD"). It deals with the problem of the concept of an employee of an insurance undertaking in terms of the type of legal relationship and the scope of activities that are allowed to be performed only by such employees.

The intention of the authors of this chapter is to demonstrate that, in accordance with the previous case law of the European Court of Justice/Court of Justice of the European Union, the concepts contained in EU directives should be interpreted in accordance with EU law, taking into account its autonomy and its aim

A. Tarasiuk (\*)

Kozminski University, Warsaw, Poland

B. Wojno

© The Author(s) 2021

1 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) text with EEA relevance (O.J. L 26, 2.2.2016, pp. 19–59).

Lyszkiewicz Tarasiuk Kancelaria Radcow Prawnych Sp.p., Warsaw, Poland e-mail<EMAIL_ADDRESS>
Lyszkiewicz Tarasiuk Kancelaria Radcow Prawnych Sp.p., Warsaw, Poland e-mail<EMAIL_ADDRESS>
P. Marano, K. Noussia (eds.), Insurance Distribution Directive, AIDA Europe Research Series on Insurance Law and Regulation 3, https://doi.org/10.1007/978-3-030-52738-9\_6

(harmonization of legal systems of Member States). However, a simple translation of a particular term used in an EU directive into the language of a Member State may give rise to an incentive for that term to be interpreted in the context of a local legal system. As such approach may seem to be natural at first sight, it may lead to results rather unexpected by a European lawmaker.

When analysing the definition of an "employee", the risks related to the interpretation of this concept have been pointed out, using the example of the IDD implementation into Polish law in this respect. As regards the scope of activities that may be performed only by such employee, it has been attempted, in particular, to distinguish those activities that may constitute distribution activities, within the meaning of the IDD, by way of using rational criteria, including the risk of causing loss to a customer, if an activity is performed in an unprofessional or unfair manner. Since a clear indication of those activities, which are subject to the IDD's requirements, is fundamental from the point of view of legal certainty as a condition for the development of insurance market, the authors expect that relevant authorities of the European Union Member States will adopt a similar interpretation which will, in turn, be translated into appropriate jurisprudence.

#### 2 Brief Historical Background

The development of the European insurance regulations in the period of its 50 years of history has followed certain defined paths. As regards insurance undertakings, the European lawmaker has concentrated on the issues related to management of insurance activities, prudential regulation, and the enhancement of a single market within the Community.2 The latter aim, understood as facilitating effective exercise of freedom of establishment and freedom to provide services, almost at the same time, had served as the basis for the introduction of the first European regulation regarding the activities of insurance intermediaries as very important market players responsible for the delivery of insurance products to customers.3

The protection of customers' interests has always been the most important objective of those regulations. The facilitation of financial and organisational position of insurance undertakings enhances public trust to insurance providers as

2 Please see three generations of insurance directives, starting with the First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance (O.J. L 228, 16.8.1973, pp. 3–19) and the First Council Directive 79/267/EEC of 5 March 1979 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct life assurance (O.J. L 63, 13.3.1979, pp. 1–18).

3 Council Directive 77/92/EEC of 13 December 1976 on measures to facilitate the effective exercise of freedom of establishment and freedom to provide services in respect of the activities of insurance agents and brokers (ex ISIC Group 630) and, in particular, transitional measures in respect of those activities (O.J. L 26, 31.1.1977, pp. 14–19).

reputable debtors under insurance contracts. The possession of adequate capital and organisational resources by insurance undertakings is, therefore, the basic condition for effectively safeguarding the policyholders' interest. On the other hand, easy access to the whole European market also serves the interest of customers as it allows for a wider selection of insurance products and providers of insurance coverage, enabling the customers to meet their insurance-related expectations for competitive prices. The activities of insurance intermediaries are crucial from that point of view as they make it possible to connect insurance undertakings and entities interested in insurance services, without the need to establish separate sale structures by insurance undertakings.

However, the legal instruments aimed at the implementation of the protection of customers' interests have been limited, as the insurance private law, in particular insurance contracts, remain (with certain exceptions4 ) the sole competency of the Member States of the European Union and, consequently, local regulations. By the same token, the process of offering insurance product and concluding an insurance contract had for many years fallen beyond the scope of legal regulations at the European level. The European lawmaker introduced certain (but still very basic) information obligation of insurance undertakings in relation to life insurance.5 The sales of insurance products (as a part of financial market) using the means of distance communication had followed a separate path and also remained limited to particular issues only (information obligations and a right to withdrawal from the contract), comprising only the protection of consumers (non-professionals) as a particular group of customers.6

The Directive on insurance mediation7 ("IMD"), adopted in 2002, had been the first step as regards the introduction of a complex regulation in relation to the process of offering and concluding insurance contracts. It comprised provisions related to professional requirements of insurance intermediaries and an enforcement mechanism of those requirements,8 the intermediaries' liability towards their customers (including the protection of cash flows between a customer and an intermediary), as

4 E.g. Council Directive 87/344/EEC of 22 June 1987 on the coordination of laws, regulations and administrative provisions relating to legal expenses insurance (O.J. L 185, 4.7.1987, pp. 77–80) currently repealed by Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (O.J. L 335, 17.12.2009, pp. 1–155).

5 See regulation introduces by Article. 31 of Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and administrative provisions relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (OJ L 360, 9.12.1992, pp. 1–27).

6 Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC (OJ L 271, 9.10.2002, pp. 16–24).

7 Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation (O.J. L 9, 15.1.2003, pp. 3–10).

8 Article 3 par. 3 of the IMD: "Member States shall ensure that registration of insurance intermediaries - including tied ones - and reinsurance intermediaries is made subject to the fulfilment of the professional requirements laid down in Article 4."

well as information obligation of insurance intermediaries. The declared aim of the IMD was the "completion of the single market for financial services and (...) the enhancement of customer protection". 9

After the implementation of the IMD it became clear that there was a need of further development of the European legislation covering the interactions between customers and providers of insurance products from the legal side. In 2010 the Committee of European Insurance and Occupational Pension Supervisors10 ("CEIOPS") published the CEIOPS Advice to the European Commission on the revision of the Insurance Mediation Directive (2002/92/EC) ("CEIOPS Advice"), comprising a broad analysis of the regulatory framework of insurance mediation, and recommended possible legislative steps. In particular, it deliberated the future scope of a new regulation (at that time called the "IMD2"), by stating that: "The majority of Members support the inclusion of direct sales by insurance undertakings in the scope of IMD2. The main rationale for their inclusion is to ensure consumer protection. Members are in favour of a "level playing-field" in this respect. Members regard the protection afforded to consumers should be the same regardless of the sales channel through which they choose to purchase their insurance. Members were unanimous in their view that employees of insurance undertakings should not be registered under IMD2." 11

Consequently, the final effect of review of the IMD resulted in including "direct sales" of insurance products by insurance undertakings into the scope of the new regulation—the IDD. According to recital 6 of the IDD, "Consumers should benefit from the same level of protection despite the differences between distribution channels. In order to guarantee that the same level of protection applies and that the consumer can benefit from comparable standards, in particular in the area of the disclosure of information, a level playing field between distributors is essential." The equal treatment of sales channels has also been confirmed in recital 7 (second sentence) of the IDD: "Insurance undertakings which sell insurance products directly should be brought within the scope of this Directive on a similar basis to insurance agents and brokers." Moreover, the European lawmaker has emphasized that "There is a benefit to consumers if insurance products are distributed through different channels and through intermediaries with different forms of cooperation with insurance undertakings, provided that they are required to apply similar rules on consumer protection. Such concerns should be taken into account by the Member States in the implementation of this Directive." 12

9 Recital 8 of the IMD.

10Ref: CEIOPS CCP-59/10, https://register.eiopa.europa.eu/CEIOPS-Archive/Documents/ Advices/20101111-CEIOPS-Advice-on-IMD-Revision.pdf (last access: 29.05.2020).

11CEIOPS Advice, p. 23.

12Recital 16, second and third sentence of the IDD.

#### 3 Application of the IDD to Employees of Insurance Undertakings

It is clear that the intention of the IDD was to improve the requirements towards insurance intermediaries and to extend those requirements also towards insurance undertakings that perform direct sales of the insurance products. There is no doubt that there are substantial differences as regards the distribution of insurance products performed by intermediaries and by insurance undertakings themselves. Those differences result from the specific nature of each insurance undertaking and its business, as well as its status of a regulated entity under legal provisions concerning the conduct of insurance business. The complexity of the core activity of an insurance undertaking (including not only the sales, but also the whole process of "manufacturing" of insurance products and their governance at the level of a risk borne by an insurance undertaking and at the level of individual insurance contracts), as well as the regulatory requirements related to that activity, result in interactions between different legal regimes applicable to a given insurance undertaking. The number of legal regimes and their interactions sometimes may lead to legal uncertainty in the context of the provisions of the IDD. One of the examples is the exact identification of the activities subject to the legal rules on insurance distribution and the manner of application of those rules.

The notion "insurance distributor" under the IDD is understood as "any insurance intermediary, ancillary insurance intermediary or insurance undertaking". 13 An "insurance undertaking" has been defined as "an undertaking as defined in Article 13 point 1 of Directive 2009/138/EC of the European Parliament and of the Council". 14

Although the insurance undertaking itself is an insurance distributor, as a corporate entity it operates in the insurance market through natural persons duly authorized to perform activities with legal effect for the insurance undertaking. The regulatory requirements regarding insurance undertakings may apply in three different dimensions: the legal obligations may be imposed towards the insurance undertaking itself, its governing bodies (such as members of the management board, or its shareholders), or the staff of an insurance undertaking at the operational level. The IDD applied a mix of all the three dimensions. Therefore, the provisions of the IDD refer to an insurance undertaking as an entity (e.g. the obligations related to product oversight and governance), but also include certain rules directly addressed to its management board (directors), and its employees.

According to Article 10 § 1 of the IDD "Home Member States shall ensure that insurance and reinsurance distributors and employees of insurance and reinsurance undertakings carrying out insurance or reinsurance distribution activities possess appropriate knowledge and ability in order to complete their tasks and perform their

13Article 2 § 1 point 8 of the IDD.

14Article 2 § 1 point 6 of the IDD.

duties adequately." The same rule applies to continuing professional training and development requirements in order to maintain an adequate level of performance.15 Moreover, according to the IDD "Member States need not apply the requirements referred to in paragraph 1 and in the first subparagraph of this paragraph to all the natural persons working in an insurance or reinsurance undertaking, or insurance or reinsurance intermediary, who pursue the activity of insurance or reinsurance distribution, but Member States shall ensure that the relevant persons within the management structure of such undertakings who are responsible for distribution in respect of insurance and reinsurance products and all other persons directly involved in insurance or reinsurance distribution demonstrate the knowledge and ability necessary for the performance of their duties." 16 Similar rules have been laid down in the IDD as regards the requirement of good repute.17

The regulatory requirements applicable to the key persons (mainly management) of an insurance undertaking constitute a solution that has already been broadly used in the provisions of Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance18 ("Solvency II Directive"). It should be noted here that imposing obligations on other personnel members of the insurance undertaking constituted a new approach. This may be explained by a different object of regulations: as Solvency II Directive is concentrated on prudential governance of insurance undertakings in order to facilitate their financial solvency, the IDD focuses on the environment of direct interactions between insurance distributors and customers. In the case of insurance distributors, the focus on the aforementioned interactions requires the lawmaker to impose a regulatory burden directly on the persons involved in relations with customers, due to the fact that the actions undertaken by such persons constitute a key risk factor to the detriment of the interest of the customers.

It should be clearly pointed out that—although not directly specified in the provisions of the IDD—the insurance undertaking takes full responsibility for any actions undertaken by its employees, involved in insurance distribution activity. The insurance undertaking is the insurance distributor and any action undertaken by its employee related to the distribution of insurance products is to be treated as an action undertaken by the insurance undertaking itself. It applies to both the liability for losses suffered by customers under private law regime, and the administrative liability connected with possible supervisory sanctions under public law.

The application of the regulatory requirements to employees of insurance undertakings requires identification of a definition of an "employee of the insurance

15Article 10 § 2 first subparagraph of the IDD.

16Article 10 § 2 fifth subparagraph of the IDD.

17Article 10 § 3 of the IDD.

18Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (O.J. L 335, 17.12.2009, pp. 1–155).

undertaking" and the identification of activities of the employee carrying out insurance distribution activity that fall within the scope of the IDD.

#### 4 Defining an "Employee of the Insurance Undertaking": Contractual Relations

The IDD does not provide for a definition of an "employee of the insurance undertaking". What is more, there is no provision which would contain a reference to national legislation as regards the understanding of that notion.

The notion of an "employee" with reference to insurance undertakings19 appears in a number of provisions of the IDD: simply as "their (insurance undertakings) employees", 20 "employees of insurance and reinsurance undertakings carrying out insurance or reinsurance distribution activities", 21 "employees of insurance or reinsurance undertakings who are engaged in insurance or reinsurance distribution". 22

Moreover, the IDD mentions also "natural persons working in an insurance undertaking", 23 "staff directly involved in insurance distribution" 24 and "natural persons not directly involved in insurance distribution" 25 (the latter to apply to all kinds of insurance distributors). Those notions demonstrate that the IDD is not fully consistent as regards its wording.

Since the IDD does not differentiate between the above meanings or provide any legal reasons to differentiate between the above notions, one should assume that an "employee" means the same as (or at least is included in the scope of the meaning of) a "natural person working in" or the "staff" or "natural persons" and that the "employee of insurance undertaking" should be understood as a natural person who works for an insurance undertaking.

The IDD remains silent as regards the type of a legal relation between the insurance undertaking and the "employee". The identification of the type of an "employment" relationship seems to be relevant since it may be an invitation to an excessively narrow, or expanded, interpretation, especially in view of the national

19The IDD mentions also "employees of insurance and reinsurance intermediaries" (art. 10 § 2 of the IDD) and "employees of insurance distributors" (art. 10 § 3 second subparagraph, art. 17 § 3 of the IDD), therefore some issues deliberated in this article may have relevance also to employees of all kinds of insurance distributors, however issues related to employees of insurance companies are the most complicated from legal point of view.

20Article 2 § 1 point 3, art. 3 § 1 second subparagraph, art. 10 § 2 first and second subparagraph, art. 19 § 4 of the IDD.

21Article 10 § 1 of the IDD.

22Article 10 § 2 subpar. of the IDD.

23Art. 10 par. 2 subpar. fifth, art. 10 par. 3 subpar. third of the IDD.

24Art. 10 par. 3 subpar. third of the IDD.

25Art. 10 par. 3 subpar. third of the IDD.

legislations of the EU Member States. It is also of utmost importance from the point of view of the management of human resources of insurance undertakings as they are subject to rules of a free market economy and should be allowed to make use of work of natural persons under different types of legal relations (allowed by national legislations).

The IDD neither provides for an exact definition of an "employee", nor allows to define it by national legislation, or to interpret in accordance with national legislation of the EU Member States. Consequently, a widely accepted approach in the European case law that prohibits the pursuit of the meaning of a given notion in the provisions of a national legislation should be applied. Such an approach has a very long history and is well based in the legal system of the European Union. It has been stated in the grounds of a judgement of the European Court of Justice (the "Court") of 18.01.1984 Ekro26: "The need for a uniform application of Community law and the principle of equality require that the terms of a provision of Community law which makes no express reference to the law of the Member States for the purpose of determining its meaning and scope must normally be given an independent and uniform interpretation throughout the Community; that interpretation must take into account the context of the provision and the purpose of the relevant regulations." In many judgments that have been adopted after the cited case, the same conclusion has been repeated as the basic principle of interpretation of European law.27

The autonomy of understanding of notions used in the provisions of European law is fundamental for its uniform application in all Member States. If a national authority, or a national court refers to the national legislation in order to determine the understanding of a given notion, there would be a risk of different interpretations of the provision of European law among individual Member States. This would result in a different application of those provisions, putting into question the idea of adopting such regulations, in particular as regards the facilitation of freedom of establishment and freedom to provide services, which are usually based on mutual recognition of national regimes related to particular types of economic activity. Therefore, as the consequence of the autonomy of European law, the concept of autonomic meanings of notions, independent from national legal systems, used in the provisions of the European law, has been established by the Court.

Therefore, the notion of an "employee" under the IDD cannot be explained by a simple reference to national legislations, in particular national labour (employment) law.28 To be more specific, it would be against the principle recognized by the Court

26Case 327/82.

27As examples see Cases: C-287/98, C-467/08.

28Please see the Explanatory Statement to the Polish Act on Insurance Distribution that simply translates the word "employee" into Polish and referred to the employee in the meaning of the Polish Labour Code. The Polish Act on Insurance Distribution itself does not provide for any definition of an employee, but the justification to the draft act includes an improper assumption that the "employee of an insurance undertaking" shall be regarded an "employee" in the meaning of the Polish Labour Code.

to limit the notion of an "employee" only to persons employed on the basis of a contract of employment as understood in the national law, and to exclude persons providing work under other types of contract (usually civil law contracts). A common, European, meaning of an "employee" should be sought instead, taking into account the context of the provisions and the purpose of the IDD.

The EU lawmaker's intention, as expressed in the IDD, was the sole enhancement of the protection of customers in the process of distribution of insurance products. In other words, the concept of the IDD was to introduce the rules providing conditions aimed at preventing the situations that can be detrimental for the interests of customers. In order to achieve it, the lawmaker imposed certain obligations, that need to be fulfilled during the process of insurance distribution by insurance undertakings and, consequently, by natural persons acting on behalf of such insurance undertakings. Those obligation include, among other things, the provision of information about the distributor and the product offered, the performance of an analysis of demands and needs of the customer. The fulfilment of those obligations must be performed with the application of professional knowledge, and the distributors in question are obliged to act honestly and fairly, bearing in mind the best interest of customers as the ultimate condition.29 Such expectations of the EU lawmaker may be achieved if the persons acting on behalf of an insurance undertaking are of good repute and have sufficient professional qualifications, as well as if there are adequate control mechanisms in place within the insurance undertaking that allow to identify, mitigate or counteract any risks related to the actions undertaken by such persons. It is also clear that full responsibility for any consequences of the distribution acts rests within the insurance undertaking, in particular as regards any losses suffered by a customer.

Taking the above into account, it seems clear that the type of a contract between the insurance undertaking (acting as an insurance distributor) and the natural persons conducting insurance distribution activities on behalf of an insurance undertaking need to be regarded as irrelevant from the point of view of the purposes of the IDD. The "employee" may meet the requirements of professional knowledge and good repute, irrespective of the nature of a contractual relation with the insurance undertaking. If such nature of the contract or the applicable contractual provisions do not exclude the effective control of an insurance undertaking over the distribution activity of the "employee" (in order to manage risks related to insurance distribution), it is difficult to find, on the basis of the IDD provisions, legal arguments that would require a differentiation between various types of contracts allowed by the national legislation of the EU Member States or, in particular, recognize a contract other than a contract of employment (in particular, various civil law contracts) as not allowed under the IDD.

The above conclusion seems to be supported by those provisions of the IDD which do not refer to an "employee" but—having undoubtedly the same intention to "natural persons working", or the "staff". Such an approach makes it possible to

29Article 17 § 1 of the IDD.

maintain that there has been no intention of a narrow approach towards a type of a legal relation between an employee and an insurance undertaking.

It should, therefore, be underlined that when the IDD refers to the "employees of insurance undertakings", it does not impose an obligation to limit the possible contractual relation between the employee and insurance undertaking, exclusively to a contract of employment. Other types of contracts are also allowed, as far as they do not preclude an effective fulfilment of requirements provided for in the IDD.

The above conclusion seems to be coherent with the understanding of an "employee" under other legal regulations of European law. The extensive interpretation of the notion "worker" (as an equivalent of an "employee") has been adopted under art. 39 of the Treaty establishing the European Community. As stated in the grounds of the judgment of the Court dated 17.07.2008 Raccanelli:30 "(...) it must be noted that the Court has consistently held that the concept of 'worker' within the meaning of Article 39 EC has a specific Community meaning and must not be interpreted narrowly. Any person who pursues activities which are real and genuine, to the exclusion of activities on such a small scale as to be regarded as purely marginal and ancillary, must be regarded as a 'worker'. The essential feature of an employment relationship is, according to that case-law, that for a certain period of time a person performs services for and under the direction of another person in return for which he receives remuneration (see, in particular, Case 66/85 Lawrie-Blum [1986] ECR 2121, paragraphs 16 and 17; Case C-138/02 Collins [2004] ECR I-2703, paragraph 26; and Case C-456/02 Trojani [2004] ECR I-7573, paragraph 15)." It is worth noticing that the factor of a "direction of another person" may be connected with the contractual possibility of control, allowing the insurance undertaking to verify, if the activities of the employee are compliant with the requirements of the IDD. Therefore, the concept of "employment" elaborated by the Court in the Raccanelli case seems to fit into the purposes of the IDD, as leaves the "employer" (being the insurance undertaking) the possibility to influence the actions of the "employee" in order to manage the risks related to insurance distribution.

In light of the conclusion drawn, it should be underlined that defining "employee" under the IDD still may raise doubts in various national approaches transposing the IDD. For example, the Polish Act on Insurance Distribution31 (the "AID") does refer to an "employee conducting distribution activity in the insurance undertaking" but does not provide a definition of such "employee", neither by defining this notion in the glossary of the AID nor by a reference to any legal act, such as the Polish Labour Code32 (the "PLC"). The mere lack of the definition should not constitute a problem since the pro-EU interpretation should be applied. However, the explanatory statement to the draft AID that constitutes a legal requirement before any legal act is adopted by the Polish Parliament, included a reference to the PLC exactly and only in terms of the "employee conducting distribution activity in the insurance

30Case C-94/07.

31Act dated 15 December 2017 on insurance distribution (uniform text: J.L. 2019 item 1881).

32Act dated 27 June 1974 Labour Code (uniform text: J.L. 2019 item 1040, as amended).

undertaking". Evidently, the explanatory statement to the draft act (i.e. the bill) does not constitute legal provisions or any official or binding interpretation but may be, and often is, an indicator of the approach of the Polish lawmaker. Since the explanatory statement cannot be changed after the law has been passed and the statement itself should provide a lead to the interpretation of the provisions of the act, some representatives of the Polish legal doctrine tend to follow the assumption that the notion of an "employee" in the meaning of AID is the same as in the PLC. Such an approach, in the opinion of the authors of this chapter, for the reasons already presented, should be regarded as incorrect and may cause unnecessary interpretation problems.33

An entirely different approach is exemplified by the UK Financial Conduct Authority, which seems to apply an extensive understanding of the definition of an "employee". According to Chapter 28 the FCA's Handbook "Insurance distribution: specific knowledge, ability and good repute requirements", in relation to minimum knowledge, ability and good repute requirements for carrying out insurance distribution activities, the 'employee' in the said chapter: (1) is not restricted to an individual working under a contract of employment; and (2) includes (without limitation) any natural or legal person whose services are placed at the disposal of the firm, under an arrangement between the firm and a third party; and (3) also includes appointed representatives and their employees.34 The same, extensive, approach is used in Chapter 4.235 of the FCA Handbook.

The conclusion is that the IDD does not force insurance undertakings to use employees only on the basis of contracts of employment. In order to perform distribution activities, insurance undertakings may make use of the employees under different types of contracts (also a variety of civil law contracts). There may appear a question on a grey area between an employee representing the insurance undertaking and natural persons being an insurance intermediary (or ancillary insurance intermediary) acting on behalf of the insurance undertaking. The answer lies within the legal definition of an insurance intermediary36 (and an ancillary insurance intermediary37) under the IDD. That definition refers to a "natural or legal person, who, for remuneration, takes up or pursues the activity of insurance distribution". The specific nature of services of an insurance intermediary (an ancillary insurance intermediary) is that an intermediary "takes up or pursues the activity of insurance distribution" which means that it has a status of a legally independent entrepreneur.

33Unfortunately, the Polish Financial Supervisory Authority has not presented its official standpoint so far.

34SYSC 28.1.

35In TC 4.2 'employee': (1) is not restricted to an individual working under a contract of employment; and (2) includes (without limitation) any natural or legal person whose services are placed at the disposal of the firm, under an arrangement between the firm and a third party; and (3) also includes appointed representatives and their employees. https://www.handbook.fca.org.uk/ handbook/TC/4/2.html# (last access 29.05.2020).

36Article 2 § 1 point 3 of the IDD.

37Article 2 § 1 point 4 of the IDD.

The activity of insurance intermediary is therefore conducted somehow independently (from the insurance company) and at the economic risk of the intermediary, while an employee acts under the direction and control of the employer, the latter bearing the economic risk of the activity conducted with use of employees.

#### 5 Scope of Distribution Activities Performed by Employees of Insurance Undertakings

Another part of the discussed definition of the "employee of insurance undertaking" is the determination, as precisely as possible, of the scope of distribution activities that—when performed—make the employee in question subject to the regime of the IDD.

Several provisions of the IDD contain clear and unambiguous regulations that only an employee (directly) involved into distribution activity is the addressee of the obligations imposed in the IDD (and consequently in the national legislation implementing the IDD).

A definition of "insurance distribution" provided in Article 2 sec. 1 (1) of the IDD indicates that: "insurance distribution means the activities on, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance, of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim (...)".

The wide definition of "insurance distribution" is then limited by Article 2 sec. 2 of the IDD, which excludes the following activities from its scope:

	- (i) the provider does not take any additional steps to assist in concluding or performing an insurance contract;
	- (ii) the purpose of that activity is not to assist the customer in concluding or performing a reinsurance contract;

The starting point for the interpretative considerations on what activities carried out by an employee of an insurance undertaking can be classified as distribution activities should be the purpose of the IDD. We need to, therefore, return to recital 738 (second sentence) and recital 639 (first sentence) of the IDD. Additionally, a concept of distribution activities should be interpreted on the basis of the criteria quite similar to those previously applied to insurance mediation in the IMD, as the concept of the IDD is to introduce equal treatment of mediation and direct sales. In the IMD,40 mediation activities have been defined as "activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim". On the grounds of this definition, IDD exemplified that the distribution activities are the acts initiating the first contact with the customer but preceding the proposal to use the insurance service. Thus, in the classification of an employee's activity in an insurance undertaking, it is possible to rely on an assessment of those activities through the prism of the activities of a competent insurance intermediary. As such, distribution activities of an insurance undertaking correspond to the activities of the insurance intermediary as to its subject-matter, and they differ mainly as regards the entity which carries out those activities.

On the basis of recital 32 of the IDD,41 one should assume that distribution activities should, in principle, relate to substantive transactions relating to the preparation, conclusion of an insurance contract or the performance thereof, that is to say, those areas of activity which are most relevant and necessary for the insurance contract to be concluded, or performed.

The analysis of recital 28 of the IDD should lead to the same conclusion: "It is important to guarantee a high level of professionalism and competence among (...) the employees of insurance and reinsurance undertakings who are involved in activities preparatory to, during and after the sales of insurance and reinsurance policies. Therefore, the professional knowledge of intermediaries and ancillary insurance intermediaries and of the employees of insurance and reinsurance undertakings needs to match the level of complexity of those activities (...)."

It should be noted that a similar classification was made before the introduction of the IDD (indeed, with regard to the facts before the introduction of the IMD) for the purposes of tax regulation in the case-law of the Court. The Court, in the grounds for

38"Insurance undertakings which sell insurance products directly should be brought within the scope of this Directive on a similar basis to insurance agents and brokers".

39"Consumers should benefit from the same level of protection despite the differences between distribution channels".

40Article 2 (3) (first sentence) of the IMD.

41"Member States should not need to consider as relevant persons those managers or employees not directly involved in the distribution of insurance or reinsurance products. Concerning insurance and reinsurance intermediaries and undertakings, all employees directly involved in the distribution activity should be expected to possess an appropriate level of knowledge and competence, with certain exceptions, such as for those who are devoted solely to administrative tasks (...)."

the judgment of 3 March 2005—Arthur Andersen42 stated, with regard to the activities relating to "handling insurance applications, assessing the risks to be insured, determining whether a medical examination is required, deciding whether to accept the risk where such an examination is deemed unnecessary, issuing, managing and rescinding insurance policies and making amendments to contracts and modifying premiums, receiving premiums, managing claims, setting and paying commission for insurance agents and maintaining contact with them, handling aspects relating to reinsurance and supplying information to insured parties and insurance agents and to other interested parties, such as the tax authorities" and that "although they contribute to the essence of the activities of an insurance company, (...) they do not constitute services that typify an insurance agent either". Consequently, the Court has held that "'back office' activities, consisting in rendering services, for payment, to an insurance undertaking do not constitute the performance of services relating to insurance transactions carried out by an insurance broker or an insurance agent within the meaning of that provision." That judgment concerns tax law, which enjoys a specific terminological autonomy, but in the context of the legal considerations, the Court also took into account the relevant European rules on insurance mediation43 on measures to facilitate the effective attainment of freedom of establishment and freedom to provide services in relation to the activities of insurance agents and brokers, which defined intermediation in a manner very similar to the one specified in the IMD (and, possibly, similar to the definition of insurance distribution under the IDD). Consequently, the view that a number of activities connected with ensuring the operations of an insurance undertaking, including a possibility of concluding and performing insurance contracts, but not directly linked to the offering of insurance cover to customers and the conclusion and performance of insurance contracts, should not be classified as distribution activities.

Since the objectives of introducing the IDD was to protect the interests of customers, it should be underlined that the key manifestations of the activity of the insurance distributor are related to interactions with the customer. An example of such interaction is the client's demands and needs analysis, or a proposal to conclude an insurance contract on such basis (Article 20 (1) of the IDD). Such activity is, naturally, manifested in a number of detailed activities (e.g. asking questions about the customer's needs, serving the necessary documents, clarifying their content, receiving information about the insured risk). On a contrary, it is difficult to imagine acts which would form part of a legally defined insurance distribution and which would not involve a (direct or indirect) contact with the customer. Even if certain activities are carried out internally at the distributor concerned (e.g. an estimate of the value of the subject-matter of the insurance), such activity should be regarded as having no practical significance as a manifestation of the distribution of insurance until the result is presented to the customer. Consequently, it must be assumed that

42Case C-472/03.

43Council Directive 77/92/EEC of 13 December 1976.

only those activities which may affect the interests of customers by shaping the area of their rights or obligations, or affecting their conduct, must be regarded as the distribution of insurance.

The abovementioned interaction with the customer should not cover all possible acts performed by way of a direct contact with the customer. Firstly, simple technical or representation activities may be carried out by way of a direct contact with the customer which may not be classified as a part of a set of insurance distribution designations. Secondly, it may be that a person who does not actually carry out the activity (including insurance distribution) is directly in contact with the customer, but merely provides the customer with certain information without affecting its content.

The previously mentioned recital 7 of the IDD provides that "(...) the protection of consumers requires an extension of the scope of that Directive to all sales of insurance products. Insurance undertakings which sell insurance products directly should be brought within the scope of this Directive on a similar basis to insurance agents and brokers."

Consequently, the extension to insurance undertakings as insurance distributors of requirements which, before the entry into force of the IDD, had been applicable only to insurance intermediaries, is explained precisely by the need to protect the interests of customers.

The essential requirements referred to the above regulations concern the organisation and functioning of insurance distributors, in particular the integrity and professional knowledge of the persons carrying out distribution activities.44

Consequently, distribution of insurance should be regarded only as such activity in which the criteria of fairness and professional knowledge must be met, as conditions for effective consumer protection. This means that the distribution of insurance is the activity in which the failure to comply with the aforementioned criteria may jeopardise the effective protection of consumers. In other words, insurance distribution includes those activities, whose flawed (unprofessional, unfair) performance is likely to harm the interests of customers.

On the other hand, the manifestations of the activity of the persons employed in an insurance undertaking, which are not required to comply with the requirements relating to integrity and professional knowledge should not be regarded as distribution activities. This will include, for example, the activities of a technical nature, e.g. the mere service of a document or the provision of information which is not substantively relevant to the interests of the customer. The activities which fall within the scope of the exemption covered by Article 87 sec. 2 point (c) of the IDD should not be regarded as distribution activities, either. In such a case, there is only a preliminary association between the parties to a potential insurance contract in the future, in particular, an initial interest on the part of the customer as regards a mere possibility of obtaining insurance cover. Since the specification may, or may not, take place in the later stages of the distribution process, the mere invocation of

44Article 10 of the IDD.

interest has not apparently been regarded by the European legislation as an act to be carried out by a person with verified professional knowledge of insurance products.

Consequently, technical activities should not be classified as distribution activities, if they consist of entering contracts in the register, commissioning or printing of letters, addressing or dispatching them, registering declarations, the physical service of letters, etc.

In this context, the concept of the 'assistance in the administration of contracts', which forms part of the definition of insurance distribution, should not be read as the performance of technical activities, but as the activities of a substantive nature affecting the performance of insurance contracts, including those affecting the decision-making process of the customer.

The separation of the "administration of contracts" from the technical activities of an employee conducting distribution activities in an insurance undertaking should always be clearly specified. By way of an example, the delivery of the general conditions of insurance can be regarded as a purely technical act (if physically delivered by a courier) but in itself (delivery, or lack of delivery) directly affects the insurance undertaking's liability and thus affects the conclusion or performance of an insurance contract. Failure to deliver the general conditions of insurance will most likely be the liability of an employee of the insurance undertaking involved in the preparation of the procedures for service of documents or a substantive review of the proper performance of that obligation or an insurance undertaking employee performing a distribution activity directly, which included the delivery of the general conditions of insurance to the customer.

Another problematic issue as regards the identification of an employee conducting distribution activity in an insurance undertaking is the fact that the distribution of insurance products is a complex activity and the customer-related documentation can be developed in several stages and by different persons in a given insurance undertaking. In particular, it may be the case that one person develops a draft content of the information provided to the customer or the statement made to such customer, while another person approves the prepared content, reviewing it once more as a person authorized to represent the insurance distributor, and consequently bears organisational and substantive responsibility for the information or the declaration made.

The IDD rules do not address such a situation; they merely provide that the Member States do not have to apply the requirements regarding the integrity and professional knowledge to "all the natural persons working in an insurance or reinsurance undertaking, or insurance or reinsurance intermediary, who pursue the activity of insurance or reinsurance distribution, but Member States shall ensure that the relevant persons within the management structure of such undertakings who are responsible for distribution in respect of insurance and reinsurance products and all other persons directly involved in insurance or reinsurance distribution

#### demonstrate the knowledge and ability necessary for the performance of their duties. 45"

There may be some doubts about the classification of the activities of persons employed in an insurance undertaking which relate to the sphere of governance of an insurance product. The regulation of product governance is a novelty in the context of the IDD (there were no similar regulations in the IMD). It should be assumed that, although product governance is a regulated area in the IDD, it does not apply to the distribution of insurance and should not be treated as such by the local legislation.

Firstly, one can assume that the addressee of product governance obligations would be an entity which creates a given insurance product, and not the insurance distributor. An insurance product, according to Article 25 of the IDD, is manufactured by an insurance undertaking and sometimes also by an insurance intermediary. However, it may be the case that the product manufacturer remains completely separate from the distributor, for example in a situation where the product has been developed by an insurance undertaking and the distributors are simply insurance intermediaries.

Secondly, it is clear from the IDD rules that the product governance issues have been separated from the product distribution issues, since their launch times differs. According to Article 25 sec. 1 paragraph 1 of the IDD, that can be treated as a good example: "Insurance undertakings, as well as intermediaries which manufacture any insurance product for sale to customers, shall maintain, operate and review a process for the approval of each insurance product, or significant adaptations of an existing insurance product, before it is marketed or distributed to customers."

Consequently, product governance is a process carried out by the manufacturer of an insurance product, which is separate from the distribution of that product. There are only functional compounds between product management and distribution processes, i.e. proper product governance allows its distribution in a legally compliant manner, and the experience of distribution processes can improve the solutions adopted in the framework of product governance.

The same approach should be applied to underwriting activities of insurance undertakings. Such activities are specific to insurance business (risk assessment and accepting), and are not part of insurance distribution, although are performed in relation to a particular potential customer, in order to determine, whether the insurance cover should be granted or not. Still, it is a part of internal process within the insurance undertaking, and not a part of process of offering an insurance product. Such approach seems to have certain recognition by the European Insurance and Occupational Pension Authority ("EIOPA"). In one of its "Questions & Answers" 46 it referred to "EIOPA Final Report on Public Consultation No. 14/017 on Guidelines on the System of Governance" stating (in explanatory text for Guideline 61): "where an insurance intermediary is mandated to write insurance business or to settle claims on behalf of the undertaking, this is an outsourced service and, as such, the

45Article 10 sec. 2 paragraph 5 of the IDD.

46https://www.eiopa.europa.eu/content/1994\_en?source¼search (access 31.05.2020).

arrangement is caught by the Solvency II outsourcing requirements. The typical intermediation activities of an insurance intermediary, i.e. introducing, proposing or carrying out other preparatory work for the conclusion of insurance contracts, or concluding such contracts, or assisting in the administration and performance of such contracts, in particular in the event of a claim, as set out in the IDD, are not subject to the outsourcing requirements. In the case of outsourcing of underwriting activities, the application of the outsourcing requirements needs to be analysed taking into consideration the specific requirements applicable under the IDD". It seems that EIOPA separates underwriting activities and mediation (or, extensively, sales) activities as having different nature and, as such, subject to different legal regimes.

Another issue that can cause difficulties in defining the scope of activities falling within a definition of an "employee conducting distribution activity" is the "professional management of claims". The IDD does not specify what the "professional management of claims" means, but recital 14 of the IDD literal reading applies not to the general management of claims but to a "professional" one and made "on behalf of an insurance or reinsurance undertaking". It looks like this recital relates to the entities that perform certain functions, not as insurance distributors, but as performers of other professional activity.

On the basis of the principle of rationality of the European legislation, one should consider that the word 'professional' that appears in the text has not found its way there by accident. At the same time, the element of professional performance of the activity is also specified in Article 2 sec. 2 of the IDD. In light of the foregoing, one could conclude that, professional claims handling—in the understanding of the EU legislator—is only the handling of claims of an insurance undertaking by a third party and not by a group of employees of an insurance undertaking.

#### 6 Conclusions

The IDD does not provide for a definition of an "employee of an insurance undertaking", nor does it include an indication of how this term should be interpreted; it also does not point out to any reference to a national legislation. The IDD also does not indicate one type of legal relationship between the insurance undertaking and the "employee". The above should lead to a conclusion that the notion of the "employee" in the IDD should be interpreted in the context of EU legislation and case law, and not in the context of national legislation of the EU Member States.

Summing up, as regards the definition of an "employee of an insurance undertaking conducting distribution activity", the IDD does not provide for an obligation that the distribution activity in an insurance undertaking can only be performed by the "employees" employed on the basis of a contract of employment. This notion should be understood in a much wider manner, as any legal relationship that has been concluded between an insurance undertaking and the person that is to perform distribution of insurance products. Provided the local regulations of the EU Member States do not provide for some limitations within gold-plating practices, the insurance undertakings may benefit from the contractual freedom; they may employ persons performing distribution acts under different types of contracts of provision of work for a contractor of such work. The IDD itself has not introduced any limitations in this respect.

Another issue which may result in a legal uncertainty for insurance undertakings is the scope of their activities (and the activities of their employees) falling within the regime of the IDD as the acts of insurance distribution. The definition of insurance distribution remains very extensive and depending on the interpretation of the notion, some activities may be regarded, or not, as examples of distribution activities. Ultimately, taking the purposes of the IDD into account, the scope of application of the regulation of the IDD should be limited to those actions, which are conducted by way of a (direct or indirect) contact with a customer, where such contact is intended to establish insurance coverage, or to execute the existing insurance contract, and, eventually, the actions undertaken by an employee of an insurance undertaking may exert influence on the interest of the customer (it may be detrimental if such actions are unfair or unprofessional in nature).

#### Legal Acts

#### Case Law: European Court of Justice

#### Other Sources

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## Ensuring the Customer's Best Interest in the Polish Insurance Market

Wojciech Paś

#### 1 Introduction

Among the changes introduced by the Insurance Distribution Directive1 (hereinafter referred to as the Insurance Distribution Directive or the IDD Directive), it is certainly worth noting that Member States of the European Union are obliged to ensure that, when providing the distribution of insurance, insurance distributors always act honestly, fairly and professionally, in accordance with the best interest of their customers. This obligation results from Article 17 (1) of the aforementioned Directive and has been implemented into the Polish legal system in the form of Article 7 (1) of the Act on Insurance Distribution,2 which constitutes a reflection of the provision of the Directive in this respect. The main objective of this provision adopted by the European legislator is to try to limit the risk of misselling by insurance distributors, i.e. offering insurance products that are not adequate to the needs and requirements of the specific customer. The sources of misselling distinguished by the European legislator include mainly the remuneration policy of persons responsible for the distribution of insurance products, as indicated in Recital 46 of the Insurance Distribution Directive. According to the European legislator, such a policy should not affect the ability of such persons to act in the best interests of their customers. However, performance-based remuneration itself should not constitute an incentive to offer a particular product to the customer.

2 Polish Act of 15 December 2017 on Insurance Distribution (i.e. Journal of Laws 2018.2210).

The views expressed in this publication are those of the author and do not express the official position of the institution in which he is employed.

1 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (Official Journal of the European Union, L 26, 2 February 2016).

W. Paś (\*) PZU SA, Warsaw, Poland

© The Author(s) 2021

P. Marano, K. Noussia (eds.), Insurance Distribution Directive, AIDA Europe Research Series on Insurance Law and Regulation 3, https://doi.org/10.1007/978-3-030-52738-9\_7

The distribution of insurance products under the regime of the Insurance Distribution Directive should be carried out through a test of the customer's requirements and needs based on information received from him or her.3 Any insurance product offered to the customer should always meet his or her requirements and needs. The distribution of adequate insurance products to customers is one of the solutions adopted in the Insurance Distribution Directive, which aims to achieve the fundamental objectives of the Directive, such as increasing the protection of customers in the financial market and restoring their confidence in that market. The Insurance Distribution Directive itself is part of a series of legislative initiatives taken at the European level, designed to increase consumer protection in the insurance market.4

In Sect. 2, I interpret the principle of the customer's best interest in light of European and Polish insurance law and Polish supervisory practice, in particular, how this principle is understood in the IDD and MiFID, and what the relationship is between these two legal systems. Next, I analyse the best interest in light of the PFSA's recommendations and the supervisory sanctions which may be applied by the PFSA in the event of a breach of this principle.

The last section is devoted to ensuring the customer's best interest in the Polish insurance market. Within this section, I indicate what actions should be taken to ensuring this principle as well as the impact of the distributor remuneration system on ensuring the application of this principle.

#### 2 The Principle of the Customer's Best Interest in Light of European and Polish Financial Markets Law and Polish Supervisory Practice

#### 2.1 European and Polish Insurance Law

First of all, it should be stated that the principle of acting in the best interest of the customer is a new obligation resulting from insurance law. The previous Insurance Mediation Directive did not impose this obligation on insurance intermediaries.5

Ensuring the best interests of the customer is one of the motives of the IDD and appears repeatedly in the provisions thereof.6 It is the intention behind many of the obligations imposed on insurance distributors, starting with management and prevention of conflicts of interest by insurance distributors in a manner which ensures that they do not adversely affect the interests of customers, through a system of remuneration of distributors which should not adversely affect their ability to act in

3 In accordance with Recital 44 of the Insurance Distribution Directive.

4 Mrozowska-Bartkiewicz (2016), pp. 112–113.

5 Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation, Official Journal of the European Union, L 9, 15 January 2003, p. 245.

6 Malinowska (2018), p. 57.

accordance with the best interests of the customer. It also refers to cross-selling practices which must not lead to a situation where the interests of customers are not properly taken into account.

Article 7 (1) of the Act on Insurance Distribution is the main source of the obligation imposed on insurance distributors to act in the best interest of the customer present in the Polish law. Pursuant to this provision, when distributing insurance policies, an insurance distributor shall act honestly, reliably and professionally, in accordance with the best interests of customers. An insurance distributor within the meaning of the Act on Insurance Distribution is an insurance company, an insurance agent, an agent offering supplementary insurance or an insurance broker.

The development of principle of the customer's best interest is reflected in the requirements relating to the remuneration policy of insurance distributors.7 Pursuant to Article 7 (2) of the Act on Insurance Distribution, the method of remunerating insurance distributors and persons with whom the insurance agency activities or insurance brokerage activities are performed, as well as persons with whom the insurance company's distribution activities are performed, may not be contrary to the obligation to act in accordance with the best interests of customers, in particular, an insurance distributor may not make arrangements concerning remuneration, sales targets or other arrangements that could constitute an incentive to propose a specific insurance agreement or insurance guarantee agreement to the customer in a situation where the insurance distributor could propose another agreement that would be better suited to the customer's needs.

Another expression of the principle of the best interest of the customer consists in the requirements relating to the prevention of conflicts of interest by an insurance agent, insurance broker and insurance company in the course of distribution of insurance based-investment products, which are regulated in Article 15 of the Act on Insurance Distribution. In light of this provision, the aforementioned distributors are obliged to make use of organisational solutions aimed at preventing conflicts of interest in such a way that they do not have a negative impact on the interests of customers. Such solutions should be proportional to the business activity conducted and proposed insurance agreements as well as the type of distributor. Within the adopted solutions, distributors referred to in Article 15 of the Act on Insurance Distribution should undertake actions to identify conflicts of interest between them, including their management board members, proxies, employees or other persons related to them, and their customers, or between their customers, arising in the course of conducting business in the distribution of insurance-based investment products. In the event that organisational solutions are not sufficient to avoid the risk of customer detriment, the aforementioned distributors shall, before the conclusion of the insurance contract, disclose the general nature or sources of conflict of interest to the customer, including in particular whether the commission received under the insurance contract depends on the volume of insurance contracts concluded. The information is to be provided on a durable medium and must include appropriate data and

7 Ziemniak (2019), p. 35 and subsequent.

information taking into account the type of customer and enabling the customer to make an informed decision about the activity of the insurance distributor in relation to which the conflict of interest has arisen.

The principle of the customer's best interest is also subject to the requirements of both Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 regarding product supervision and management requirements for insurance companies and insurance distributors8 and Commission Delegated Regulation (EU) 2017/ 2359 of 21 September 2017 regarding information requirements and rules of business operations applicable to the distribution of insurance-based investment products.9

The requirement for the manufacturer of insurance products to provide all relevant information concerning those products, including information on the product approval process, the specific target market and the suggested distribution strategy, constitutes the implementation of the principle of the customer's best interest under the Regulation with regard to product supervision oversight and governance requirements for insurance companies and insurance distributors. At the same time, manufacturers and distributors of insurance products should take appropriate action when they determine that a product does not correspond or no longer corresponds to the interests, objectives and characteristics of a particular target market. The best interest of customers is also one of the criteria that should be taken into account in the approval process of an insurance product, i.e. at the stage of its development. The main source of obligations related to the principle of the best interest of the customer under the Regulation with respect to information requirements and business rules applicable to the distribution of insurance-based investment products is prevention and management of conflicts of interest and evaluation of incentives as well as incentive schemes under Article 8 of the Regulation.

The principle of acting in the customer's best interest itself can often interact with the existing rules of insurance law in the EU Member States, such as the principle of good faith.10 Such a situation may mean that the principle of acting in the customer's best interest may de facto constitute a repetition of the existing rules of insurance law11 or an emanation of those rules.12 Irrespective of how it interacts with the existing rules of insurance law, it will also undoubtedly create new obligations for insurance distributors, which may contribute to the harmonisation of legislation in

8 Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors, OJ L 26, 2.2.2016, p. 19.

9 Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, OJ L 145, 30.4.2004, p. 1.

10Malinowska (2018), p. 64 et seq.

11Marano (2017b), p. 11 and subsequent.

12Malinowska (2018), p. 71.

the EU and may also affect the relationship between the supervisory authority and the insurance distributor.13 In this context, the principle of acting in the customer's best interest will be a sort of a model of conduct for an insurance distributor in the course of its business and will be subject to assessment by a supervisory institution in accordance with the adopted model.14 From this perspective, it is desirable and justified for the stability and safety of insurance distributors that supervisory authorities publish their views on their understanding of the principle of acting in the customer's best interest, together with examples of actions which are either consonant with or contrary to this principle.

#### 2.2 MiFID

It seems that the provisions of Directive 2004/39/EC on markets in financial instruments (MiFID Directive)15 and Directive 2014/65/EU on markets in financial instruments16 could have been the reference point for the adoption of obligations related to acting in the best interest of the customer for insurance distributors, as could be indicated by Recital 10 of the IDD Directive, which states the need to ensure effective consumer protection in all financial sectors and the need to ensure the harmonisation of regulations. The concept of acting in the best interest of the customer adopted in the IDD Directive reflects the obligations imposed under the MiFID Directive. Pursuant to Article 19 of the MiFID Directive, Member States require that, when providing investment services and/or, where appropriate, additional services to customers, an investment company shall act honestly, fairly and professionally in accordance with the best interests of customers. The aforementioned provision is the source of the obligations associated with investment companies acting in the best interests of their customers.

The MiFID requirements for acting in the best interests of the customer focus primarily on customer information obligations in relation to the investment company providing the services, the financial instruments and the proposed investment strategies, which should include appropriate guidance and warnings about the risk associated with investment in such instruments or in relation to particular investment strategies, as well as information about the executors, costs and related fees. The aforementioned information should be structured in such a way that the customers or potential customers are able to understand the nature and risks of the investment

13Malinowska (2018), p. 11 et seq.

14Malinowska (2018), p. 11 et seq.

15Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/ EEC)—(MiFID).

16Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.

service and the specific type of financial instrument offered and thus to make informed investment decisions. Another area related to acting in the best interest of the customer is the obligation to examine the knowledge and experience of the customer in the field of investment relevant to the specific type of product or service, his/her financial situation and investment objectives in order to allow the investment company to determine whether the proposed investment service and financial instrument are appropriate for the customer. At the same time, when an investment company concludes that a product or service is not appropriate for the customer or potential customer, it must advise the customer of that fact. A similar obligation is imposed on the investment company in the event that the customer refuses to provide information about his/her knowledge and experience or if this information is insufficient for assessing suitability; in such a case the investment company is required to warn the customer that it is unable to assess the suitability of a particular product or service.

The principle of the customer's best interest is also the core of the MiFID II17 system of regulations, including in particular Directive 2014/65/EU on markets in financial instruments, which expands the scope of obligations related to this principle.18 In particular, in accordance with Recital 71 of Directive 2014/65/EU, investment companies should therefore understand the characteristics of the financial instruments they offer or recommend and develop effective strategies and arrangements to identify and review the categories of customers to whom products are to be delivered and services are to be provided. Member States should ensure that investment companies creating financial instruments guarantee that those products are developed in order to satisfy the specific needs of the target market, i.e. end-customers, within a specific customer category, that they take reasonable steps to ensure that financial instruments are distributed within a specific target market, and that they periodically review the target market identification data and the performance of the products offered. Investment companies offering or recommending financial instruments which are not products developed by them should also have adequate arrangements in place to obtain and understand relevant information regarding the product approval process, including the specific target market and the characteristics of the product they are offering or recommending. Such an obligation should apply without prejudice to any adequacy or suitability assessment to be carried out subsequently by the investment company in the course of providing investment services to each customer based on his or her personal needs, characteristics and objectives.

The overriding objective of the obligation to act in the customer's best interest is to protect investors from misconduct, which is not safeguarded by other more specific MiFID II requirements.19 Thus, a breach of the general requirement related to the obligation to act in the best interests of the customer does not necessarily

17Malinowska (2018), p. 59.

18Malinowska (2018), p. 59.

19Della Negra (2019), p. 34 and subsequent.

involve a breach of more specific requirements. The purpose of the duty to act in the customer's best interest is to safeguard the interests of the client in a comprehensive manner, which is not may be guaranteed by more specific requirements.20

Preventing asymmetry of information between a professional such as an investment firm or intermediary firms and a client is also identified as one of the objectives of the rules regarding the conduct of business in MiFID II.21

Under MiFID II, the customer's best interest is perceived through the implementation of the requirements set out in Articles 24–25 of MiFID II, consisting primarily in the assessment of the suitability and adequacy of instruments and reporting to clients.22 Moreover, the principle of acting in the best interests of its clients under MiFID II is also implemented by the product governance requirements.23

#### 2.3 MiFID vs. IDD

Undoubtedly, the MiFID regulations have influenced the shape of European insurance law, as can be seen in Recital 10 of the IDD, which states that there is a need to ensure effective consumer protection in all financial sectors and to ensure the harmonisation of rules. This phenomenon has been described in publications as "Mifidization" of European insurance law and is manifested by its impact on: (a) the sources of insurance law, (b) the insurance product management system, (c) customer protection, (d) interpretations of the rules on life insurance by the EU national courts.24

The adoption of similar legal solutions for MiFID-regulated investment products and IDD-regulated insurance-based investment products is intended to prevent regulatory arbitrage and thus to avoid encouraging the creation of financial products that are not subject to a more stringent legal regime.25

The best example of the impact of the MiFID on European insurance law is the Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 with regard to product oversight and governance requirements for insurance undertakings and insurance distributors, which reflects the legal framework adopted under the MiFID.26

This includes in particular requirements relating to the management of insurance products for manufacturers and distributors of insurance products, such as the obligation to construct a relevant target market and a relevant "antigroup", i.e. the

20Della Negra (2019), p. 34 and subsequent.

21Della Negra (2019), p. 27 et seq.

22Gortsos (2018), p. 68 and subsequent.

23Gortsos (2018), p. 71 et seq.

24Marano (2017a), p. 219 et seq.

25Marano (2017a), p. 221 et seq.

26Marano (2017a), p. 222 et seq.

customer group for which the insurance product will generally not be suitable given their needs, characteristics and objectives.

Although similar legal solutions have been adopted in both the MiFID and the IDD, there are also some differences between these legal systems (e.g. a regulation concerning incentives) which may contribute to the creation of a regulatory arbitrage within this framework.27 It is also significant that the MiFID II system is based on the maximum harmonisation of EU law within the legal orders of the Member States, as opposed to the IDD system, which is based on minimum harmonisation of the law, which means that EU Member States may introduce more restrictive regulations.28 Examples of such legal solutions adopted in selected EU Member States which increase the requirements for insurance distributors compared to the IDD regulation were presented in the EIOPA report—Report analysing national General Good rules in the context of the proper functioning of the Insurance Distribution Directive (IDD) and the internal market. 29

The objectives of both legal systems, i.e. the IDD and the MiFID, are generally complementary. Their core is to provide greater protection for recipients of financial products. Nevertheless, it should be agreed that the creation of regulations for financial institutions should take into account the specific nature of the products they create.30 The nature of insurance products is different from that of other products related strictly to investment. Therefore, similar legal solutions in the financial market should be adopted while taking into account the specificity of a particular business sector.

#### 2.4 Polish Supervisory Practices on the Insurance Market

Although the obligation to act in the best interest of the customer did not exist until the Act on Insurance Distribution came into force in Polish insurance law, the obligation to act as an insurance intermediary taking the best interest of the customer into account was already included in the recommendations of the Polish Financial Supervision Authority (PFSA) for insurance companies concerning their product management systems, in force since 1 July 2016. At this point, it should be noted that the PFSA's recommendations are not universally binding provisions of law, and constitute solely an expression of supervisory expectations addressed to insurance or reinsurance companies with respect to their operations. In this sense, a supervisory recommendation is an indication of what approaches by an insurance or reinsurance company are approved by the supervision authority and therefore not questioned by

27Kern (2018), p. 31; Noussia and Siri (2019), p. 42 and subsequent.

28Kern (2018), p. 31 et seq.

29https://eiopa.europa.eu/Pages/News/EIOPA-examines-national-general-good-rules.aspx.

30Cousy (2017), p. 48 et seq.

the PFSA.31 As a consequence, recommendations constitute an expression of how the PFSA perceives certain areas of an insurance company's activity, and actions by the supervised entity to the contrary may, in situations specified in legal regulations, result in the initiation of supervisory proceedings.32 However, it should be emphasised that the simple non-compliance of an insurance company with a recommendation cannot constitute the basis for imposing supervisory sanctions by the PFSA. Violation of the applicable provisions of law is a circumstance that constitutes the basis for the application of supervisory instruments by the PFSA. However, it is possible that a specific recommendation will adopt the content of a legal standard.33

#### 2.5 Responsibility Linked to the Principle of the Customer's Best Interest in the Polish Legal System

The above may have a special significance in the context of the insurance companies' implementation of the requirements resulting from the Act on Insurance Distribution, including the obligation to act in accordance with the customer's best interest. This is because the authority responsible for supervision of the performance of actions taken in the area of insurance and reinsurance distribution is the Polish Financial Supervision Authority, which is entitled to apply supervisory sanctions in the event of the distributors' failure to fulfil certain obligations. One of the bases for the PFSA to apply supervisory sanctions referred to in Article 84 (1) of the Act on Insurance Distribution is the distributors' violation of the obligation to act in the best interest of the customer, i.e. violation of the rule specified in Article 7 (1) of the Act on Insurance Distribution.34

34In this situation, the PFSA may choose from among the following administrative decisions:

31Wojno (2017a).

32Wojno (2017a).

33Wojno (2017a).

1. issue a public statement indicating the person responsible for the violation and the nature of the violation;

2. order the insurance or reinsurance distributor to cease the violation and refrain from repeating it;

3. suspend a member of the management board of an insurance or reinsurance distributor who is a legal person and is responsible for the violation for a period not exceeding 6 months;

4. impose a fine on an insurance or reinsurance distributor who is a legal person, not exceeding the amount of PLN 21,827,500 or 5% of annual net revenues on the sale of goods and services and financial operations or—in the event of an insurance or reinsurance company—5% of the gross premium written, disclosed in the last financial statements for the financial year, approved by the approval authority of the insurance or reinsurance distributor, or twice the amount of benefits obtained or losses avoided as a result of the violation, if these can be determined;

5. impose a fine on an insurance or reinsurance distributor who is a natural person, not exceeding the amount of PLN 3,055,850 or twice the amount of benefits obtained or losses avoided as a result of the violation, if these can be determined;

Applying the sanction referred to above may be preceded by the issuance of a recommendation by the PFSA against a distributor committing a violation under Article 84 (3) of the Act on Insurance Distribution. The application of supervisory measures by the PFSA is this authority's prerogative, but not its obligation.35 Nevertheless, the supervisory authority's obligation under Article 85 of the Act on Insurance Distribution is to take into account significant circumstances related to the breach when selecting the type and amount of the supervisory measure.36

Notwithstanding the above, it is also worth mentioning the consequences under civil law of the non-adaptation of an insurance product by the distributor to the demands and needs of a customer, which may take different forms depending on the situation.37

#### 2.6 Best Interest in Light of the PFSA's Recommendations

Referring to the obligation to act as an insurance intermediary, and taking into account the best interest of the customer referred to in the PFSA recommendations concerning the product management system, it should be pointed out that, in accordance with Recommendation No. 19.2, In the case of an intermediary for whom the amount of commission depends exclusively on the level of sales, the Company should ensure and demonstrate that the manner of determining the commission does not interfere with the intermediary's obligation to act in the best interest of the customer. These recommendations also refer to other obligations of the insurance company, which may be perceived as the elements of acting in the best interest of the customer. This applies especially to the obligation to distribute the specific insurance products to a specific target market and to identify an "antigroup", i.e. a group of customers for whom the product will not be adequate. In the preamble

6. withdraw the authorisation to conduct brokerage activity from an entity performing such activity, who violates the law, or remove an insurance agent or an agent offering supplementary insurance, who violates the law, from the register of insurance agents. 35Wojno (2017b).

36These circumstances include:

1. the gravity and duration of the violation;

2. the degree of responsibility of the insurance distributor or reinsurance distributor;

3. the financial situation of the insurance distributor or reinsurance distributor;

4. the amount of benefits obtained or the amount of losses avoided—when these can be determined;

5. the amount of losses incurred by customers and other persons in connection with the infringement—in the case when these can be determined;

6. the insurance or reinsurance distributor's willingness to cooperate with the supervisory authority;

7. the measures taken by the insurance or reinsurance distributor to prevent a repeated violation of the law;

8. the previous violations committed by the particular insurance or reinsurance distributor.

37See more in Kucharski (2019).

to the aforementioned recommendation, which constitutes a kind of statement of reasons for its issuance, the supervisory authority first of all pointed to the need to ensure an effective product management system covering the full product life cycle, i.e. from the moment of its design to the moment of its withdrawal from the market and fulfilment of contractual obligations by the insurance company, which have an impact not only on the financial results and solvency of the insurance company, but also on the quality of the insurance company's relations with its customers. It seems that the last element may have been crucial for the PFSA's need to issue the recommendations in question, taking into account the scale of missellings in the distribution of insurance products38 in recent years as well as in the context of the related risk for insurers. As the PFSA points out in the preamble to the recommendation, the quality of the product management system affects many important areas in the activity of insurance companies and may involve many different types of risks. The PFSA's recommendations are meant to indicate supervisory expectations concerning prudent and stable product management, including the risks associated with this process. In the context of the above, it is also worth mentioning the PFSA's parallel recommendations for insurance companies concerning product adequacy, which refer to the company's obligation to offer insurance customers investment products that meet both the needs and capabilities of those customers (in accordance with Recommendation No. 8). This should be preceded by an examination of the customer's knowledge, experience in the field of life insurance and his or her financial situation. According to the PFSA, these recommendations aim to increase the level of customer protection in the area of insurance-based investment products by ensuring an appropriate information policy towards them and to match them to their needs and capacities.

The need for insurance companies and insurance intermediaries creating an insurance product to identify the target market and the "antigroup" is also clearly highlighted in the EIOPA's preliminary guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors, published on 13 April 2016.39 In light of the preamble to the EIOPA guidelines, product supervision and management arrangements play a key role in customer protection and are intended to limit the risk of misselling by, inter alia, distributing insurance products to the target market. At the same time, the European supervisory body points out that they constitute a key element of the regulatory requirements of the Insurance Distribution Directive. It is important to underline that the EIOPA guidelines are preliminary in nature. Nevertheless, it should be noted that Poland has declared its willingness to comply with the guidelines through the PFSA

38Orlicki (2016), p. 4.

39Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors. https://eiopa.europa.eu/Pages/Guidelines/Preparatory-Guide lines-on-product-oversight-and-governance-arrangements-by-insurance-undertakings-and-insur ance-distributor.aspx.

recommendations concerning the product management system and recommendations concerning product adequacy testing.40

#### 3 Ensuring the Customer's Best Interest in the Polish Insurance Market

The obligation on the insurance distributor to act in the best interest of the customer, as laid down in the IDD and subsequently reflected in the Act on Insurance Distribution, is not an entirely new obligation for insurance companies. This obligation, although it had not been present previously in insurance law, had been reflected in the recommendations of the Polish Financial Supervision Authority for insurance companies relating to the product management system and product adequacy testing, which have been in force since 1 July 2016. The PFSA's recommendations were certainly inspired by the MiFID regulations, as well as the proposed EIOPA preliminary guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors and IDD regulations. The introduction of new requirements for insurance companies was caused by irregularities in the Polish insurance market in the area of distribution of insurance-based investment products. The main source of these irregularities was misselling.41

This may be significant in the context of meeting the insurance distributors' obligation to act in the best interest of the customer. One of the intentions behind the adoption of the aforementioned recommendation by the PFSA was to improve the relations of customers with insurance companies, and in particular to prevent the risk of misselling and ensure the usefulness of insurance for policyholders and the insured.42 These values also seem to have guided the European legislator, as can be seen in particular Recitals of the IDD. In this context, the realisation of the customer's best interest in the course of insurance distribution should be seen as ensuring the adequacy of the product to the customer's needs and requirements. In this sense, an insurance product offered to a customer should meet his or her needs and requirements for the desired insurance coverage. It seems that the intensity of efforts to ensure the customer's best interest should depend on the type of distributor offering a particular insurance product to the customer.43 This is because the role of an insurance agent is different from that of an insurance broker.

40Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors. https://eiopa.europa.eu/Pages/Guidelines/Preparatory-Guide lines-on-product-oversight-and-governance-arrangements-by-insurance-undertakings-and-insur ance-distributor.aspx.

41Communication from the Polish Financial Supervision Authority regarding the issued recommendations: https://www.knf.gov.pl/o\_nas/komunikaty?articleId¼54879&p\_id¼18. 42Orlicki (2016), p. 9.

43Also in: Malinowska (2017), pp. 120–121; Orlicki (2017), p. 24.

Acting in accordance with the best interest of the customer is interpreted by Polish legal doctrine as such a course of action that is "fair, honest, with regard to the highest level of reliable and exhaustive information and with regard to the customer's needs, on the basis of a professional analysis carried out in accordance with Article 8 (1) of the Act on Insurance Distribution". 44 This procedure should be characterised by the fulfilment of all the obligations resulting from the Act on Insurance Distribution, and its effect should be to propose an optimal insurance contract (i.e. one which is adequate to the needs and requirements of the customer), taking into account the type of distributor.45 The duty to act in the customer best interest of the client is a guarantee to safeguard her/his rights in situations when this is not guaranteed by more specific duties.

#### 3.1 Actions Aimed at Ensuring the Customer's Best Interests

The first step towards ensuring the customer's best interest, appropriate for each type of distributor, is first of all be to determine the needs and requirements of the customer in order to identify an adequate insurance product. Establishing the needs and requirements of the customer would seem to be an indispensable element for acting in his or her best interest.46 The lack of knowledge of the customer's expectations regarding the desired insurance coverage makes it impossible for the distributor to offer an insurance product meeting his or her needs. Moreover, the obligation of the insurance distributor to determine the customer's requirements and needs prior to conclusion of the insurance contract on the basis of the information obtained from the customer is laid down in Article 8 (1) of the Act on Insurance Distribution. In accordance with that provision, before an insurance contract or an insurance guarantee contract is concluded, the insurance distributor must, on the basis of the information received from the customer, identify his requirements and needs and provide objective information on the insurance product in an intelligible form in order to enable the customer to make an informed decision. The aim of the analysis of the customer's needs and expectations should be to identify the subject of the coverage and the risks the customer wants to insure against.47

Another element common to each type of distributor, the objective of which is ensuring the best interest of the customer, is to ensure compliance of the proposed insurance agreement with the needs and expectations of the customer in terms of insurance coverage, which has been specified in Article 8 (3) of the Act on Insurance Distribution. Nevertheless, it seems that the implementation of this obligation should take into account the specificity of each distributor. Compliance with this obligation

44See Nowak (2018), p. 72 et seq.

45Ziemniak (2019), p. 38.

46See more: Pokrzywniak (2018), p. 71 et seq.

47See Tarasiuk and Wojno (2018), p. 7.

by an insurance agent acting in the name and on behalf of an insurance company and an insurance broker acting in the name and on behalf of a customer should be assessed differently. The specificities of the different distribution channels are also recognised by the European legislator who, in Recital 17 of the IDD, states that this Directive should take into account the differences in the types of distribution channel. It should, for example, take into account the characteristics of insurance intermediaries who are under a contractual obligation to conduct insurance distribution business exclusively with one or more insurance undertakings (tied insurance intermediaries) which exist in certain Member States' markets, and should establish appropriate and proportionate conditions applicable to the different types of distribution.("...").

In this context, it should be stated that assessment of the fulfilment of the obligation to act in the best interests of the customer should be seen from the perspective of the distributor type. The role of an insurance broker should be to ensure that the maximum conditions of insurance coverage for its customer are provided. Other distributors, including insurance agents, who act in the name and on behalf of the insurance company should pursue the best interests of the customer by ensuring that the product is adequate to the customer's needs and capacities, in particular by ensuring the usefulness of the insurance product for the customer.48 At this point it should be emphasised that the obligation to act in the best interest of the customer applies to all actions performed by an insurance distributor in the course of insurance distribution.

#### 3.2 Distributor's Remuneration and the Customer's Best Interests

In my opinion, one main factor that may affect the activity of an insurance distributor in accordance with the best interest of the customer is how the distributor is remunerated. This has also been recognised by the European legislator as indicated in Recital 46 of the IDD. According to the European legislator, such a policy should not affect their ability to act in the best interests of their customers. However, performance-based remuneration itself should not constitute an incentive to offer a particular product to the customer. This principle has been reflected in the provisions of the IDD Directive and the Act on Insurance Distribution. Pursuant to Article 7 (2) of the Act on Insurance Distribution, the method of remunerating insurance distributors and persons with whom the insurance agency activities or insurance brokerage activities are performed, as well as persons with whom the insurance company's distribution activities are performed, may not be contrary to the obligation to act in accordance with the best interests of customers, in particular, an insurance distributor may not make arrangements concerning remuneration,

48Orlicki (2016), p. 9; Paś (2018), p. 57.

sales targets or other arrangements that could constitute an incentive to propose a specific insurance agreement or insurance guarantee agreement to the customer in a situation where the insurance distributor could propose another agreement that would be better suited to the customer's needs. This requirement is already present in the PFSA's product management system recommendations. On the basis of Recommendation No. 19.2, the insurance company should ensure and demonstrate that the manner of determining the commission does not interfere with the intermediary's obligation to act, with consideration of the customer's best interest.

In light of the above, the rules relating to the remuneration of insurance distributors should be designed in such a way that they do not encourage misselling and thus are not contrary to the duty to act in the best interests of the customer.49 The above should be perceived in terms of ensuring that the insurance product is adequate to the customer's needs and capacities. Thus, it seems unacceptable to construct remuneration rules that will motivate insurance distributors to distribute insurance products which do not meet the needs of their customers. However, it should be noted that insurance-based investment products are additionally subject to specific requirements set out especially by Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 regarding information requirements and rules of business operations applicable to the distribution of insurance-based investment products.

#### 3.3 Ensuring the Best Interest of the Customer as a Way to Limit Misselling

The distributors' implementation of the principle of the best interest of the customer should be seen as an imperative to deal with customers in a way that does not result in the distribution of insurance products which are not adequate to the needs and expectations of customers. In this context, the fulfilment of the obligation to act in the best interest of the customer could be treated as compliance with the prohibition of practices infringing on the collective interests of customers in the form of misselling in financial services, laid down in the Polish legal system in Article 24 (1) in conjunction with Article 24 (2)( 4) of the Act on Competition and Consumer Protection.50 In light of those provisions, it is prohibited to propose to customers that they purchase financial services which do not meet their needs as determined with regard to the information available to the trader concerning the characteristics of those customers or to propose to them that they purchase those services in a manner which does not correspond to their nature. The explanatory memorandum to the inclusion of financial service misselling in the catalogue of

49Ziemniak (2019), p. 35 et seq.

50Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentów (Act of 16 February 2007 on competition and consumer protection) (uniform text: Journal of Laws of 2017, item 229).

practices affecting collective customer interests explains the prohibition of inadequate financial services as follows: "The planned regulation, introducing a ban on offering financial services that do not meet the needs the consumers they are offered to, determined with regard to the information available to the trader about the characteristics of these consumers or proposing they purchase these services in a manner that does not correspond to their nature, is aimed at forcing traders to behave ethically when offering financial products to consumers. They must assess their products in terms of their suitability for certain groups of consumers and direct them to the groups for which the product is actually intended, in a manner which is not misleading and in conformity with the accepted principles of morality". 51 Consequently, it can be concluded that proper implementation of the best interests of the customer will certainly reduce the risk of breaching the ban on the misselling of financial services, including in the area of insurance distribution.52

#### 4 Conclusion

The obligation to act in accordance with the best interests of the customer is not a new obligation for the participants in the Polish insurance market. It has already been reflected in the PFSA's recommendations concerning product management systems. This obligation should be qualified as an imperative to deal with customers in a manner that does not result in the distribution of insurance products which are not adequate to the needs and expectations of customers. Proper implementation of the best interest of the customer will certainly reduce the risk of violating the ban on misselling of financial services. It seems that the intensity of efforts to ensure the customer's best interest should depend on the type of distributor offering a particular insurance product to the customer. The fulfilment of this obligation by insurance distributors should be assessed from the perspective of ensuring that the product is adequate to the needs and expectations of the customer, in particular guaranteeing that the insurance is useful for the customer, which means that it is adequate to his/her needs and capacities to cover his/her expected insurance cover. The duty to act in the customer's best interest is a guarantee to safeguard her or his rights in situations when this is not guaranteed by more specific duties.

51Wędrychowska-Karpińska and Wiercińska-Krużewska (2016).

52Orlicka (2015), p. 48.

#### References

insurance company). In: Malinowska K, Tarasiuk A (eds) Insurance challenges of Anno Domini 2018. Publikacja jubileuszowa AIDA 2018, Warszawa

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## Insurance Distribution Carried Out by Insurers in Spain

Javier Vercher-Moll

#### 1 Introduction

When legal operators embark on the study of insurance law, they must delineate which part of this regulatory block will be the object of their study. The law of private insurance can be defined as "the set of legal norms that specifically discipline the status of the private insurer, that of its collaborators and that of the insurance contract". 1 This is an area in which rules of public and private law converge, and this convergence is most acute in the hierarchy of applicable sources.2

The status of the private insurance entrepreneur is currently regulated by Law 20/2015, of July 14, on the organization, supervision and solvency of insurance and reinsurance entities, which transposes Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). The collaborators of the insurer, whose activity is focused on the distribution or production of insurance, either directly by the insurer or through a third party, is regulated mainly by Law 26/2006, of July 17, of insurance and private reinsurance mediation, which transposes Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation into the Spanish legislation. Finally, the insurance contract constitutes the third regulatory block of the private insurance system, and it is regulated by Law 50/1980, of October 8, on the Insurance Contract.

J. Vercher-Moll (\*)

This study has been carried out as part of the Research Project I+D "Hacia una protección del cliente más global". AICO2019/075. Generalitat Valenciana.

1 Sánchez Calero (1961), p. 14. 2 Del Caño Escudero (1971), p. 11.

University of Valencia, Valencia, Spain e-mail<EMAIL_ADDRESS>
P. Marano, K. Noussia (eds.), Insurance Distribution Directive, AIDA Europe Research Series on Insurance Law and Regulation 3, https://doi.org/10.1007/978-3-030-52738-9\_8

The legal regime applicable to the insurer can be divided into four fundamental sections: access to the insurance activity, that is, the insurance company's capacity to insure the assets of the insured party before an accident; the exercise of the activity, that is the guidelines that exist to safeguard the solvency of the insurance company so that it can provide the compensation to which it is contractually obliged; the system of infractions and penalties designed to prevent situations created by the insurance company that could endanger the solvency of the entity, or harm the insurance market in general; and finally, the intervention regime of the insurance entity that can the revoke its administrative authorization, and order its dissolution and liquidation.

A novel feature of this regulatory regime, and one that has not been the subject of attention to date, is the sale of insurance by the insurance company itself, a matter regulated by the new Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution. A priori, such regulation could be seen as superfluous because it is obvious that the insurer, as a commercial company, can offer and sell its services just like any other. In this sense, it would seem that nothing new is added by art. 10 of the Directive, given that it simply recognizes the factual circumstance that insurance companies demonstrate their corporate objective by contracting their products with customers.

However, despite this apparent superficiality, the justification for the article is that it imposes the same contractual obligations on all operators that offer insurance, so that differences between them are overcome for the benefit of uniformity.3

The preparatory work that led to the Directive4 evidences the concern of the European Commission for mediation in private insurance. The objectives of the Directive are : to attempt to resolve the differences in consumer protection that depend on where the product is purchased, to eliminate conflicts of interest between the consumer and the seller of insurance products occasioned by the remuneration of the latter; to overcome deficiencies in the information provided on the insurance product, whether due to bias caused by the insurance seller's system of compensation, or by insufficient technical training of the insurance sales personnel; to regulate the penalties that may be imposed in relation to the sale of insurance; and to promote access to cross-border markets, both through the free provision of services and the right of freedom of establishment.

The Directive attempts to answer the criticisms made by legal scholars5 regarding Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation, which excluded the sale of insurance through the insurance company itself from the mediation activity. Thus, insurance companies are now considered to be insurance distributors, which places them on equal terms with respect to other distributors.

3 Hofmann et al. (2018), p. 743.

4 COM (2012) 360 final, SWD (2012) 191 final.

5 Bataller Grau (2007), pp. 112–113.

The new Directive establishes the same conditions of competition for all insurance distributors, which benefits insurance consumers, as it makes it easier for them to enjoy the same level of protection despite the obvious differences between the distribution channels. It is an example of the phenomenon known as "Mifidization", after the Mifid regulations for the sale of insurance.6

The term "Mifidization" refers to the increase of consumer protection standards in insurance, even though the Mifid regulations do not apply to a specific insurance product. This impact on insurance affects the legal regulatory sources of insurance, the design of insurance products and their distribution, the protection of consumers, and the interpretation of the regulations governing life insurance.7

From the 2002 Directive up until the present day the legal panorama of the insurance business has changed radically. The reforms introduced in the areas relating to contractual information and the supervision and solvency of insurance entities, together with the constant evolution of the case-law interprets the insurance contract, obliges us to explain the transcendence of this precept within the existing regulatory framework.

From a contractual point of view, insurance companies that contract directly with their clients must act on equal terms with respect to other insurance distributors, so that there is no distinction with regard to their the duty to provide information on insurance products.8

In order to ensure equality among insurance distributors, the Directive also introduces an important novelty, as it requires compliance with certain subjective criterion of the employees of any company that distributes insurance, as well as of their insurance sales directors and managers. It is therefore pertinent to consider whether the regulation represents, not only a reformulation of the system of governance of insurance companies, but also whether, in attention to the principles of corporate governance and supervision it contains, the Directive will require the reformulation of the internal infrastructure of insurance companies, the concepts of the honourability and aptitude that must be shown by their employees, and the powers granted to the supervisory authorities of the Member States.

The problems posed by the Directive are not simple, because they might entail an urgent reform of current regulations.

From the perspective of corporate governance, it is worth asking whether the four fundamental areas that make up the governance system of insurance companies have become obsolete. The direct sale of insurance by insurers requires the creation of a new, autonomous area to complement the companies' systems of governance, and this begs the question of whether the reform of corporate governance is therefore necessary.

6 Marano (2017b), p. 10.

7 Marano (2017a), p. 416.

8 Quintans Eiras (2018), pp. 373–420; Miranda Serrano (2017), pp. 287–320; Peñas Moyano (2017), pp. 321–340.

The Directive requires certain subjective requirements of sales staff. They must have sufficient knowledge, skills and honorability to perform such work. These criteria deserve further examination as they contain important details regarding the training that the employees of the insurance company must have, who must possess the quality of honorability and what it means to be honorable in this context.

In any case, the Directive is a minimum standard. It lays down the minimum bases for Member States to transpose the Directive into their national law. This can generate both benefits and drawbacks. As a benefit, States may increase the level of consumer protection but, as a disadvantage, this may result in the level of protection of insurance consumers not being the same in each country.

#### 2 Governance System of Insurance Companies

Articles 258 to 272 of the Commission Delegated Regulation (EU) 2015/35 establish the regulation for the system of governance of insurance companies. All insurers and reinsurers are required to have an effective system of governance that guarantees the sound and prudent management of the activity and that is proportionate to its nature, volume and the complexity of its operations.

The company's system of governance must encompass the following functions: risk management, compliance verification, and internal and actuarial audits. In addition, it must contain written corporate governance policies that will include, among others, a transparent and appropriate organizational structure, with a clear distribution and adequate separation of functions, effective mechanisms to guarantee the transmission of information, and remuneration policies and practices adapted to suit the characteristics of the companies.9

Remuneration is one of the areas focused upon in the new Directive. Article 17.3 determines that "insurance distributors are not remunerated or do not remunerate or assess the performance of their employees in a way that conflicts with their duty to act in accordance with the best interests of their customers. In particular, an insurance distributor shall not make any arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to itself or its employees to recommend a particular insurance product to a customer when the insurance distributor could offer a different insurance product which would better meet the customer's needs". This provokes a situation which, as legal scholars have pointed out, leads to the coexistence of two types of remuneration: fixed remuneration for salaries or fees and variable remuneration based on the commissions earnt on the volume of insurance policies sold.10

The question which needs to be examined here is how article 10 fits into the system of corporate governance outlined in the Directive, as, from a first reading of

9 Tapia Hermida (2016), pp. 331–350.

10Hofmann et al. (2018), p. 749.

the text, direct sales do not seem to have a place within the framework of internal functions it creates for insurance companies.

It goes without saying that the Directive imposes a series of minimum requirements for the corporate governance of insurance companies, and that, having delimited these functions as those that are essential for the healthy and prudent management of insurance entities, the law requires that insurance companies incorporate them into their organizational structures. The exact area in which direct sales can best be included needs to be established, and this task entails an analysis of each of the areas covered by the Directive.