On 17 March 2020, IVASS and the Bank of Italy issued a joint communication regarding the cross-selling of insurance products and financing (the "Communication") to be delivered to the members of the management and supervisory bodies as well as to the heads of the Compliance and Internal Audit functions of banks, financial intermediaries and insurance undertakings.
The Communication calls on financial operators to ensure that their conducts safeguard the correctness of the relationships with customers and the awareness thereof on the characteristics, obligations and advantages deriving from the cross-selling of the products offered. Banks, financial intermediaries and insurance undertakings, indeed, are required to adopt and apply organizational and internal control procedures to ensure on an on-going basis the assessment of the risks linked to the simultaneous or combined offer of multiple contracts.
IVASS and the Bank of Italy stressed that the failure to comply with the rules in force, besides leading to the application of the sanctions and remedies provided for the violation of the conduct duties vis-à-vis customers, can expose operators to significant legal and reputational risks, with the possibility of an increase in capital requirements by the competent supervisory authorities.
In continuity with the previous letters to the market issued by IVASS respectively on 26 August 2015, 3 April 2017 and 18 December 2018 on the matter at issue, it can be considered that the Communication is intended for banks, financial intermediaries and insurance intermediaries enrolled in section d) of the Italian Single Register of Intermediaries (RUI) or in the attached List (dedicated to EU insurance intermediaries passported in Italy) but more generally also to intermediaries who place these types of products through horizontal or vertical collaborations with financial market players, as well as "manufacturing companies" and therefore insurance undertakings with registered offices in Italy and EU undertakings operating in Italy under the right of establishment or on a freedom to provide services basis.
The Communication is the result of the supervisory activity carried out by IVASS and the Bank of Italy, customers’ complaints and claims trend, reports as well as proceedings falling within the competence of other Authorities - including the Italian Competition Authority (AGCM) – and identifies the following areas for improvement and adjustment in the activity of intermediaries in order to ensure that insurance and financial products are correctly structured and sold and that clients may profit by the advantages of combined insurance policies:
- the qualification of the policy as compulsory (as essential for the grant of the financing or to obtain it under certain conditions) or optional;
- the placement, in conjunction with financing, of policies which do not have any functional link with the financing itself (so-called "unrelated policies");
- control of distribution networks and monitoring of mis-selling situations;
- conflicts of interest and cost levels;
- the correct management of requests for early repayment (even partial) of loans and the resulting initiatives on combined policies.
1. the qualification of the policy as compulsory or optional
In order to ensure the correctness of the marketing of combined policies and raise customers' awareness on the characteristics and costs of the services purchased, IVASS and the Bank of Italy require operators to give clear indications on the nature of the products offered, drawing attention on the compliance with the relevant applicable provisions. It is also pointed out that the costs of the policies qualified as compulsory shall be included in the total cost of credit for the purposes of calculating the APR (the annual percentage rate of charge). In the event where an insurance policy is required as compulsory - or as a necessary condition for obtaining the financing at specific conditions - intermediaries shall accept any policy that the client may present or find on the market, without changing the conditions for the granting of the financing.
2. placement, in conjunction with financing, of "unrelated policies"
In this case, the findings of the Supervisory Authority were based on the conduct of a number of financial intermediaries who, in some cases, actually required customers who wanted to obtain a financing to conclude a policy that was not linked to the financing itself, whose single premium was paid in advance by the intermediaries themselves. More in detail, the lack of any link between the policy and the financing was used as an argument for not proceeding to the repayment of the portion of the "outstanding" premium, in case of early repayment of the loan.
The cases in question gave rise to an investigation by IVASS, which resulted in a reporting to the AGCM of possible unfair business practices, which in turn initiated a number of proceedings against insurance undertakings and their banking and financial partners, some of which concluded with measures that have made compulsory the commitments proposed by the operators involved (in particular, in the cases examined, the measures that the AGCM considered suitable to overcome the critical points found and therefore to avoid the issuing of sanctions include: the provision of a period of time of at least 7 days between the granting of the financing and the conclusion of the policy; the commitment not to finance the insurance premium).
3. control of distribution networks and monitoring of mis-selling situations
IVASS and the Bank of Italy focused also on the remuneration systems, which should not encourage the placement of combined products to a greater extent than the separate sale of individual contracts. To this end, operators are required to make specific commitments, namely:
- to consider complaints in any form represented by customers and other indicators of potential anomalies in sales activities (e.g. frequency of withdrawal from policies, percentage of their activation, impact of complaints, etc.);
- give adequate attention to the training of distribution networks, to ensure that products are sold correctly and that clear indications of the costs and benefits of the products offered are provided.
The Authorities then recall the internal audit functions of insurance undertakings and intermediaries to additional initiatives (e.g. telephone calls to a sample of customers to assess the actual choice to subscribe combined products as well as the understanding of the related costs and expected benefits) in order to assess the level of customer satisfaction, the conduct of the network, and the existence of potential pressures for the placement of certain products.
4. conflicts of interest and cost levels
The Communication also focuses on potential situations of conflicts of interest as in the case of agreements defined as "participative or commercial" between the placing entity of the insurance product and the entity providing or placing or granting the financing as well as on the imbalance between the cost of the distribution/placement activity of policies and the remuneration received, in the light of the high level of standardization of the products.
The Authorities recommend implementing in a timely manner, as a result of the supervisory and monitoring activities, the necessary remedial action to stop placement practices that are not in line with the current regulatory framework (e.g., training of distribution networks, information campaigns towards customers and review of contractual schemes).
It is also recommended that the internal audit function of the operators involved plan and carry out periodic assessments at least every two years on the correct marketing of combined products.
5. the correct management of requests for early repayment (even partial) of loans and the resulting initiatives on combined policies
The Communication reminds that customers have the right to withdraw from a financing contract at any time and, in the event where the financing is combined with an insurance policy, the financial intermediary shall arrange for the early termination also of the insurance policy and for the return to the customer of the relevant "outstanding" premiums, in line with the provisions in force, without waiting for a specific request of the customer. Similarly, in the event of partial repayment of the financing, the operators will take action for the return of the portion of outstanding premiums. The insured's right to request that the insurance cover is maintained remains unaffected.
Banks and financial intermediaries are required to carry out an assessment of their offering policies and modalities for the simultaneous placement of other contracts in conjunction with a financing. Insurance undertakings will have to assess the design, the offering and distribution policies of their insurance products placed or aimed to be placed in conjunction with financing.
The assessments shall be carried out by the Compliance and Internal Audit functions and, if deficiencies and areas for improvement are identified, the necessary remedial action shall be taken to promptly remove areas of weakness and raise the level of customer protection. Appropriate measures are also expected to be identified to contain the legal and reputational risks associated with any irregularities, including, where appropriate, the adoption of compensation measures.
In view of the exceptional health situation at national level related to the emergency from COVID-19 and the measures taken to deal with it, the results of the assessments of the control functions were to be examined jointly by the management and supervisory bodies initially by 30 September 2020; however, on 8 June 2020 IVASS and the Bank of Italy published a joint communication in light of the ongoing health emergency at the national level which may affect the adequacy of the assessments carried out by the corporate control functions, stating that the two Supervisory Authorities - each for their respective profiles and within the scope of their respective supervisory powers - will not fail to take into account any situations of objective impediment to the completion of the required activities, provided that they are in any case completed by the end of the current year. IVASS and the Bank of Italy also stressed that, in any case, all the guidelines provided in the Communication dated 17 March 2020 remain unchanged, including the preparation of the necessary controls to ensure the correct placement of the policies in combination with financing and the adoption of timely remedial measures if deficiencies or areas for improvement are ascertained. It was also recommended that even more careful conduct is adopted to meet the needs of customers in the current phase of the health emergency.
Once the results of the assessments of the control functions have been examined jointly by the management and supervisory bodies, a report on the assessments carried out and the minutes of the boards shall then be sent to the Bank of Italy (by banks and financial intermediaries) and IVASS (by insurance undertakings) where significant deficiencies have been found in the offering and placement of insurance products combined with financing. In such cases, a detailed plan of remedial action shall also be transmitted, with an indication for each remedial action of the related timing for implementation, which shall be extremely tight.
In any case, the Bank of Italy and IVASS reserve the right to request the addressees of the Communication to provide the results of the analyses carried out as part of their supervisory activity and to exchange information on each other interest.
Authored by Silvia Lolli and Davide Valloni.