Insurance Supervisory Law and Consumer Protection

The EIOPA Regulation forms the foundation of the relationship between the insurance supervisory regime and consumer protection. Under art. 1, para. 6, subpara. 1, sent. 2 f. of the EIOPA Regulation, “the Authority” expressly “contributes to enhancing customer protection.” This contribution, although the last-named of six areas of “contributing”, is incorporated into the objective of art. 1, para. 6, subpara. 1, sent. 1 of the EIOPA Regulation. Under this provision, “The objective of the Authority shall be to protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses.”⁵

The objective of “enhancing customer protection” will be achieved only if EIOPA in addition receives concrete tasks and powers. These are to be found in art. 8, para. 2 i and art. 9 of the EIOPA Regulation. First of all, in art. 8, para. 1 j, the EIOPA Regulation directs that the Authority shall “fulfil any other specific tasks set out in this Regulation… .” Thus, this mandate includes the “Tasks related to consumer protection and financial activities,” as set forth in the heading of art. 9. Paragraph 1 of Article 9 addresses consumer protection⁶ as does all of art. 9, contrary to its somewhat unclear heading. The introduction of Paragraph 1 states:

Four such tasks are then enumerated by way of example, viz.: collecting, analyzing, and reporting on consumer trends; mediating financial literacy and education initiatives⁷; developing training standards; and contributing to the development of the common disclosure rules. Thus, the transparency mentioned at the outset of the Article is of prime importance within these tasks. In view of the tasks and powers delegated to the EIOPA in the area of consumer protection, one may see at once that the issues concern only collective consumer protection and do not (also) touch individual consumer protection matters.

EIOPA powers arise both from special provisions and also generally from art. 8, para. 2 of the EIOPA Regulation. Article 8 states that “the Authority shall have the powers set out in this Regulation… .” Letter i of this paragraph names particularly the power to “develop common methodologies for assessing the effect of product characteristics and distribution processes on the financial position of institutions and on consumer protection… .” This power is fleshed out in art. 32, para. 2, sent. 2 c of the EIOPA Regulation. Under this provision,

Further, art. 9 of the EIOPA Regulation assigns the Authority special powers pertaining to consumer protection. Among these are the very far-reaching powers under para. 3 to issue “warnings in the event that a financial activity poses a serious threat to the objectives laid down… .” Moreover, under para. 5, the EIOPA can go so far as to “temporarily prohibit or restrict certain financial activities… .” Of course, narrow and specifically defined conditions must be met for the application of these powers.⁸

In addition, art. 37, para. 2, sent. 1 of the EIOPA Regulation addresses consumer organizations. The Insurance and Reinsurance Stakeholder Group is to include “consumers” “in balanced proportions” to the other groups included.⁹ And finally, consumer protection under the EIOPA Regulation is also significant in connection with a Member State’s recourse to the safeguard clause of art. 38 of the EIOPA Regulation to fend off a perceived interference in its fiscal responsibilities. Art. 38, para. 5 of the EIOPA Regulation bars Member States from “abuse” of the safeguard clause, “in particular in relation to a decision by the Authority which does not have a significant or material fiscal impact… .” Particulars substantiating this provision are set forth in Recital 50, sent. 4 of the EIOPA Regulation. As examples of such EIOPA decisions, the Recital adduces—in somewhat awkward language—such impacts “as a reduction of income linked to the temporary prohibition of specific activities or products for consumer protection purposes.” The EIOPA possesses the prohibitory power implicit in this provision under the already noted art. 9, para. 5 of the EIOPA Regulation pertaining to consumer protection.

Based on art. 9, para. 4 of the EIOPA Regulation, the EIOPA ultimately considers itself warranted in setting up a Committee on Consumer Protection and Financial Innovation (CCPFI). This Committee has the special characteristic that it also comprises national authorities that do not belong to the EIOPA as national insurance supervisory authorities but that do, however, fulfill certain functions in the area of supervising insurance mediation.¹⁰ This Committee is to contribute to the work of the EIOPA in the areas of consumer protection and financial innovation. A part of this contribution is to be the presentation of draft technical standards, policies, and advice. Despite the absence of pertinent legislation, the CCPFI members remarkably have awarded themselves extensive tasks and powers with the express objective “to complement the provisions in the EIOPA Regulation”.¹¹

The Solvency II Directive contains the phrase “consumer protection” only in Recital 79, where it is stated: “In an internal market for insurance, consumers have a wider and more varied choice of contracts.” In order for consumers to benefit from that diversity and the results of competition,

The Solvency II Directive, however, sets forth its fundamental objectives without any reference to consumer protection. Recital 16 and arts. 27 and 28 of the Solvency II Directive identify the protection of policy holders and beneficiaries of indemnity payments as the main objective. Of lesser importance are financial stability and fair and stable markets, which are of equal weight.¹² As may be seen also in Recital 17, the Solvency II Directive rules on solvency are not directed so much toward consumers as toward policy holders.¹³ In those places where the Directive does distinguish among persons, the distinctions are nevertheless not oriented toward the concept of the consumer. For example, the duty to inform set forth in the non-life insurance provisions of art. 183, para. 2 of the Solvency II Directive applies only when the policy holder is a “natural person.” A further example is seen in art. 186, para. 2 b of the Solvency II Directive, which allows Member States to omit a cancellation provision,

In like manner, the new plans under European law to introduce a regulation on “information documents for investment products” are divorced from any concept relating to consumers.¹⁴ Under art. 2 (a), the regulation shall apply also to the marketing of certain insurance products. The key information document, however, is not intended especially for consumers; rather, under art. 4 (c) of the proposed regulation, it targets “retail investors.” These are defined as “retail clients” within the meaning of the Markets in Financial Instruments Directive (MIFID, hereafter: MIFID Directive), i.e., as non-professional clients, and as “customers” within the meaning of the Directive on Insurance Mediation. The proposal for a new directive on insurance mediation is also tied in with the concept of the “customer.”¹⁵

The draft of an implementing regulation [DVO]¹⁶ for the second regulatory level of the Solvency II Directive does not contain any provisions on consumer protection.

For Level 3, the CEIOPS Consultation Paper, Draft Proposal for Level 3 Guidelines on the System of Governance, of December 2010,¹⁷ mentions consumer protection law in refs. 3.46 and 3.48 in relation to the inquiry into repute and integrity within the meaning of art. 42, para. 1 b of the Solvency II Directive. This mention occurs in the explanations to Guideline 13. Under this authority, breaches of consumer protection law would be taken into consideration in the inquiry into repute and integrity.¹⁸

The VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] addresses consumer protection only to note that earlier VAG [German Insurance Supervision Act] rules, such as secs. 10,10 a, 157, para. 1, sent. 2 of the superseded version, are now “obsolete” due to enhancements of insurance contract law, in particular with regard to consumer information.¹⁹ In addition, sec. 319, para 2, sent. 2 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] denotes representatives of consumer organizations as persons who should be a part of the Insurance Advisory Council to be assembled by the BaFin [Federal Financial Supervisory Authority]. Likewise, the primary provision on legislative intent, found in sec. 1, para. 1 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] relates not to consumers but generally to the “protection of insureds.”

At the same time, secs. 1 and 292 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] propose to continue the undefined general supervision according to the principles of abusiveness, a practice that contravenes European law and German constitutional law, this despite the fact that the Solvency II Directive expressly allows only supervision of legality.²⁰ As pertaining to the present subject matter under investigation, this result follows from other rules, which have not been considered in relation to the only legal supervision that will be permissible in the future. Initially, this applies in the case of art. 181, para. 1, subpara. 2, sent. 1 of the Solvency II Directive to review by supervisory authorities of general policy conditions in the area of life insurance. Under this provision,

Further support for the proposition that only legal supervision is possible may be found in art. 182, para. 2, sent. 1 of the Solvency II Directive. That provision concerns life insurance and allows the Member State of origin to

This passage provides, however, that this requirement may be imposed

Previously there has existed within the environment of supervision according to the principles of abusiveness a prohibition on limited coverage insurance,²¹ a prohibition that lacked a basis in law. This prohibition will not survive.

The consumer protection rules of the EIOPA Regulation also have an influence on the national insurance supervisory regime,²² although in fact consumer protection has not thus far been mentioned in the legal bases of BaFin [Federal Financial Supervisory Authority] activity. Nevertheless, according to the BaFin [Federal Financial Supervisory Authority], the general clause on supervision in the VAG [German Insurance Supervision Act] should encompass the objective of consumer protection.²³ And in line with this view, the Gesetz zur Stärkung der deutschen Finanzaufsicht [Act to Strengthen German Financial Supervision] has created a new Consumer Advisory Council at BaFin [Federal Financial Supervisory Authority].²⁴ In fact, the policy argument is being made that consumer protection should be fixed as a proprietary supervisory objective for the BaFin [Federal Financial Supervisory Authority].²⁵ Apart from the development of legal bases, the national insurance supervisory authorities are also compelled to attend to consumer protection issues if the EIOPA produces applicable guidelines and advice.

As has been seen in the systematic collection of references concerning consumer protection law in the future European insurance supervisory regime,²⁶ consumer protection has no role to play in supervision of insurance undertakings under the Solvency II Directive. A different situation obtains in reference to the EIOPA Regulation. Herein there appears to be a conflict between the European insurance supervision regime and European law as it relates to insurance supervisory authorities. In point of fact, however, this is not the case.

The determinative factors demonstrating the absence of a conflict are the objectives of the two legal acts and their rules on tasks and powers. It has been noted above that the main objective of the Solvency II Directive is the protection of insureds and of beneficiaries of indemnification payments, without regard to whether they are consumers. The subsidiary objectives of financial stability and of fair and stable markets do not touch upon consumer protection in any case. This is so because the concept of fairness, which also appears in the EIOPA Regulation, is not peculiarly the province of consumer issues.

These objectives of the Solvency II Directive do not alter any aspect of the EIOPA Regulation. To the contrary, art. 1, para. 6, subpara. 1, sent. 2 of the EIOPA Regulation denotes the prime objective of the Authority to be “contributing to the short, medium, and long-term stability and effectiveness of the financial system” in the “public interest.” This comports with the subsidiary objective of the Solvency II Directive. And the EIOPA’s “task” under art. 8, para. 1 h of the EIOPA Regulation to foster “the protection of policyholders, pension scheme members, and beneficiaries” corresponds precisely with the main objective of the Solvency II Directive.

Under art. 1, para. 6, subpara. 1, sent. 2 f of the EIOPA Regulation, the Authority shall contribute to “enhancing consumer protection.” To the extent the Authority does so, such action nevertheless does not affect the objectives of the Solvency II Directive and the role of the EIOPA in the application of this Directive. This conclusion follows i. a. directly from the fact that according to art. 1, para. 6, subpara. 1, sent. 2 of the EIOPA Regulation the Authority shall ensure the purposes within the meaning of art. 1, para. 6, subpara. 1, sent. 2 a through f of the EIOPA Regulation, by way of “efficient and effective application of the acts referred to in paragraph 2.” There are 19 legal acts in the paragraph referred to here. Along with the Solvency II Directive itself, these include not only the 13 acts repealed since 1 Nov. 2012 by art. 310 of the Solvency II Directive, but also, e.g., the Directive on Insurance Mediation, 2002/92/EC. According to Recital 8 of this Directive “the coordination of national provisions on professional requirements” for insurance brokers is meant to contribute “both to the completion of the single market for financial services and to the enhancement of customer protection in this field.” In line with this objective, the consumer frequently appears as the addressee of regulations in this Directive.²⁷ Against this background, it becomes clear that the consumer protection functions of the EIOPA under art. 1, para. 6, subpara. 1, sent. 2 f. art. 8, para. 2 i, and art. 9 of the EIOPA Regulation do not pertain to the responsibility of the EIOPA in connection with applying the Solvency II Directive. Rather, these functions relate solely to legal acts directed toward consumer protection.

This result is seen also when the adoption of the EIOPA Regulation on the one hand and the Solvency II Directive on the other are examined with a view to areas of responsibility. The legal basis of Solvency II Directive is the regulation of the free movement of services, formerly art. 47, paras. 2 and 55 of the EGV [Treaty on the European Community]. By contrast, the EIOPA Regulation is based on art. 114 of the Treaty on the Functioning of the European Union (TFEU), the rule governing competence for provisions “which have as their object the establishment and functioning of the internal market.” Consumer protection is not addressed in this rule, but in art 169, para. 1 of the TFEU. The relevant means are mentioned in art. 169, para. 2 of the TFEU, including measures adopted pursuant to art. 114 of the TFEU. Thus, the EIOPA Regulation comes full circle. To the extent the Regulation pursues consumer protection concerns, measures pursuant to art. 169, para. 2 a of the TFEU are involved. In contrast, the Solvency II Directive does not serve the purposes of consumer protection, but rather the implementation of basic freedoms for the purpose realizing the internal market for insurance.²⁸

In the final analysis, this assignment and determination of competence is congruent with the substantive regulatory content of the EIOPA Regulation. This is so because the consumer protection tasks and powers set forth in art 8, para. 2 i and art. 9 of the EIOPA Regulation are essentially independent of supervision over the licensing and activities of insurance undertakings and others to whom the rule is directed, as subject matter of the Solvency II Directive. In substance, the EIOPA Regulation is concerned with developments and trends, assessments, and transparency with regard to consumer protection.