On 31 May 2018 the European Court of Justice (ECJ) gave its preliminary ruling on Case C-542/16. The case concerned the interpretation of the concept of insurance mediation with respect to fictitious insurance products and whether investment advice regarding insurance-wrapped financial instruments fell within the scope of the EU Insurance Mediation Directive (2002/92) or the EU Markets in Financial Instruments Directive (2004/39) (MiFID).
The questions were referred to the ECJ by the Swedish Supreme Court and had initially arisen in two liability insurance disputes in Sweden: Connecta (T 25-16) and EWMG (T 2761-15).
The ECJ's preliminary ruling was substantially consistent with Advocate General Campos Sánchez-Bordona's opinion on the case, which was published on 21 November 2017 (for further details please see "Insurance mediation or investment advice?").
Background In Connecta, a number of consumers had engaged an insurance intermediary of Connecta Fond och Försäkring AB to arrange certain capital life assurance contracts. The consumers subsequently paid the premium to Connecta. However, the insurance intermediary appropriated the funds without making the agreed investments on the consumers' behalf.
The insurance intermediary was later reported to the police. Connecta's insurance mediation authorisation was revoked and Connecta was declared insolvent. The consumers brought suit against Connecta's liability insurer, Länsförsäkringar Sak Försäkringsaktiebolag, seeking indemnity for the sizable losses that they had suffered as a result of Connecta's failure to make the investments. Länsförsäkringar declined coverage and argued, among other things, that the scope of the services covered by the liability policy did not include insurance mediation regarding fictitious products. The consumers won the case before the district court, but the appellate court held that the insurance intermediary's actions fell outside the scope of insurance mediation.
ECJ referral The Supreme Court referred questions to the ECJ in respect of the Connecta case, regarding the scope of activities covered by the EU Insurance Mediation Directive 2002/92. While the concept of insurance mediation includes preparatory work and does not require as such that an insurance contract be concluded, the Supreme Court asked the ECJ whether the insurance intermediary's intention to conclude such a contract, or the consumer's perception of the matter, should bear relevance.
ECJ ruling The ECJ held that the performance of work preparatory to the conclusion of insurance contracts falls within the scope of insurance mediation, whether or not it results in the conclusion of an insurance contract. There is no indication that an activity, in order to be classified as 'insurance mediation', is conditional on a specific intention on the part of the intermediary. The ECJ further concluded that consumer protection must apply where an intermediary fails to transfer the premium to the insurer where an employee appropriates the premium during work preparatory to the conclusion of an insurance contract.
The ECJ therefore ruled that the concept of insurance mediation, under the EU Insurance Mediation Directive, includes work preparatory to the conclusion of an insurance contract, even in the absence of any intention on the part of the insurance intermediary to conclude a genuine insurance contract.
Background In EWMG, a consumer had concluded a capital life assurance contract arranged by insurance mediation firm European Wealth Management Group AB. In respect of the financial instruments components of the capital life assurance, the insurance intermediary had advised the consumer to invest in an investment certificate. The investment subsequently lost its entire value.
EWMG was declared insolvent and the consumer brought suit against EWMG's liability insurer, Länsförsäkringar, which had declined coverage for the consumer's losses. Länsförsäkringar stated that, although the mediation of capital life assurance as such was within the scope of the EU Insurance Mediation Directive and thus covered by the insurance, the advice provided by EWMG that caused the loss concerned placements of capital in the insurance policy. Länsförsäkringar claimed that such advice did not constitute insurance mediation, but rather investment advice regarding financial instruments that was governed by the EU Markets in Financial Instruments Directive 2004/39 (MiFID). Länsförsäkringar lost the case before both the district court and the appellate court.
ECJ referral The Supreme Court referred questions to the ECJ in respect of EWMG, regarding whether financial advice relating to the placement of capital given as part of insurance mediation concerning the conclusion of a capital life assurance contract falls within the scope of the EU Insurance Mediation Directive or MiFID. Should they fall within the scope of each of those directives, the Supreme Court asked whether the application of one of those directives should take precedence over the other.
ECJ ruling The financial advice related to the placement of capital in an investment certificate in the context of insurance mediation and the capital as such consisted of insurance premiums. The ECJ held that the placement formed an integral part of the insurance contract and that the investment advice relating to the placement constituted work preparatory to the conclusion of an insurance contract. While financial advice in itself can fall within the material scope of MiFID, such advice is excluded from the scope of that directive insofar as it is provided in the context of mediation of the conclusion of an insurance contract.
The ECJ therefore ruled that financial advice regarding the placement of capital given in the context of insurance mediation relating to the conclusion of a capital life assurance contract falls within the scope of the EU Insurance Mediation Directive and not MiFID.
In tandem with EWMG, the transposition of the EU Insurance Distribution Directive 2016/97 into Swedish law has been subject to significant changes throughout the legislative process.
In the early stages of the process, the Ministry of Finance proposed that investment advice regarding financial instruments – whether inside or outside the scope of an insurance policy – would be governed by the Securities Market Act (based on MiFID II (2014/65)). Accordingly, the scope of the services allowed under an insurance mediation authorisation would be limited to providing advice regarding the insurance elements of a policy.
However, this segregation of services was abandoned when the government referred its proposal for the transposition of the EU Insurance Distribution Directive to the Council on Legislation. According to the proposal, an insurance intermediary authorised to provide life insurance mediation services would also be allowed to provide advice regarding the capital placement as such within an insurance policy. This structure, which is underpinned by and harmonises with the ECJ ruling in EWMG, was maintained in the government bill. The government bill was approved by the Swedish Parliament on 19 June 2018.
In terms of market impact, there are insurers in Sweden that regularly used to write liability insurance for life insurance intermediaries that have taken a restrictive approach to offering such insurance, pending the outcome of the ECJ ruling and national court cases. While any firm conclusions on the effect of the ruling are premature at this time, market adjustments are expected.
For further information on this topic please contact Caroline Landerfors or Alexander Galfvensjö at Magnusson by telephone (+46 8 463 7500) or email ([email protected] or [email protected]). The Magnusson website can be accessed at www.magnussonlaw.com.
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