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28 April 2020
Qualification of policy as obligatory or optional and illustration of its minimum contents
Control of distribution networks
Conflicts of interest and cost levels
Early termination of financing and consequences for connected policies
Key principles to be complied with in distribution of connected insurance products
Checks by internal control function
By a letter of 17 March 2020, IVASS (the Italian insurance regulator) and the Bank of Italy once again addressed the issue of policies connected to loan and financing contracts, recommending the adoption of verification procedures by the internal control functions of insurance undertakings and financial institutions in order to identify and remedy the following possible critical issues.
The management and supervisory bodies of financial intermediaries must ensure that appropriate evidence is provided (eg, through websites) that it is compulsory or optional to purchase a policy in connection with a loan or financing agreement.
The correct qualification of any service or ancillary product as compulsory or optional must be examined in the context of the periodic review of the adequacy and effectiveness of internal procedures by the internal control functions.
The minimum contents of the policy must be clearly set out, so that customers can find equivalent products on the market.
IVASS and the Bank of Italy have highlighted that:
In the case of policies that have no functional connection with the requested financing (so-called 'decorrelated' policies), the refusal to repay the premium not enjoyed in the event of early repayment of the loan is deemed to be incorrect.
IVASS and the Bank of Italy recalled that, in the case of decorrelated policies, the antitrust authority (which recently penalised various banks for alleged mis-selling) did not impose penalties in the presence of the following:
Operators must carry out periodic checks on the matching indices of the products offered by type of distribution channel and individual distributor.
In order not to incentivise the placement of matched products to a greater extent than separate sales, it will be necessary to verify the adequacy of the placement targets for sales personnel and distribution networks, as well as the related remuneration levels.
The internal control functions of intermediaries and insurers should:
Audits by the internal audit function should take place at least every two years and corrective actions should be taken, which may include:
This is in order to avoid potential conflicts of interest, as in the case of commercial agreements between the promoter of the policy and the lender – namely, imbalances between the cost of the placement and distribution of insurance policies and the remuneration received.
In the event that a customer withdraws from a financing contract, the financial intermediary must take action for the early termination of the insurance policy and for the return to the customer of the related premiums not enjoyed in accordance with the provisions of Article 39 of IVASS Regulation 41/2018 in the matter of (re)insurance distribution. The insured has the right to request that the insurance coverage be maintained.
In the distribution of insurance products, IVASS and the Bank of Italy have stressed the need to respect the following key principles:
Banks, financial intermediaries and insurers will have to carry out a review of their offering policies and the way other contracts are placed together with a loan. To this end, appropriate information exchange processes must be structured between banks and insurers to ensure the creation of appropriate products in relation to customers' needs.
Audits are to be conducted by the compliance and internal audit functions, which are to verify periodically, by means of remote and on-site controls:
If deficiencies are found, necessary remedies must be taken, including the adoption of measures in the event of legal and reputational risks.
In view of the COVID-19 health emergency, the results of the audits of the control functions must be examined in a joint meeting of the management and control bodies by 30 September 2020.
In the event that significant deficiencies are found in the offer and placement of insurance products combined with financing, the control functions must send the Bank of Italy and IVASS a report on the checks carried out with the plan of remedial measures and the relative implementation schedule.
For further information on this topic please contact David Maria Marino or Karin Tayel at DLA Piper Studio Legale Tributario by telephone (+39 02 80 61 81) or email (firstname.lastname@example.org or email@example.com). The DLA Piper Studio Legale Tributario website can be accessed at www.dlapiper.com.
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