What is Conduct of business risk and why does it matter?
Conduct of business risk refers to the set of risks you face when insurance companies or intermediaries conduct their business in a way that has the potential to cause you harm. You may be sold products you do not need, fail to buy the insurance products you need or be inadequately insured. In addition, you may experience a range of unfair outcomes, including not having your benefit and service expectations met.
In addition to the detrimental impact on you, inadequate conduct of business practices can damage the reputation of individual insurance companies and intermediaries as well as consumer confidence in the sector as a whole. Ultimately, inadequate conduct of business practices may have an impact on individual insurance companies and intermediaries, on the insurance market as a whole and put at risk the integrity and stability of financial markets.
EIOPA's strategic objectives
One of EIOPA's key tasks in the area of consumer protection is to take a leading role in promoting transparency, simplicity, accessibility and fairness in the market for consumer products and services across the EU. Considering that poor conduct of business practices may lead to widespread consumer detriment, the need to tackle conduct of business risk sits high on EIOPA's agenda.
How is EIOPA addressing conduct of business risk?
EIOPA's strategic approach to developing a comprehensive risk-based and preventive framework for conduct of business supervision plays a central role in how we are addressing conduct of business risk. This strategic approach entails a specific framework to set a continuous focus on the outcomes that matter to you and makes use of existing and upcoming tools that rely on data collected from EU countries.
In addition to the specific tools set out in the framework, EIOPA is also addressing consumer protection by leading the work in the development of new
‘Key Information Documents’ (KIDs) for investment products in the context of
the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation and by taking an active role in the development
of future measures under the upcoming Insurance Distribution Directive (IDD) and Product Oversight and Governance arrangements.
EIOPA's framework for conduct of business supervision
A key principle of the framework is "smart regulation", focusing on outcomes that are relevant to you and moving away from a legalistic approach.
The framework takes a preventive forward looking view by anticipating consumer detriment issues early, rather than reacting following the emergence of problems – solve the problems of the future, rather than the past. This complements a risk-based approach to identifying the depth and scale of the problems and focussing priorities and resources where they matter most and can have a meaningful impact in protecting you interests.
Tools used under the framework
As a starting point to implement this comprehensive framework, EIOPA will use as building blocks already existing and upcoming tools composed of complementary elements.
- Consumer Trends Reports:Consumer Trends Reports provide a snapshot of existing and emerging cases of consumer detriment in the insurance and pensions markets through quantitative and qualitative information collected from various EU countries.
- Deep and effective market monitoring: EIOPA continuously scrutinizes new and existing financial activities to identify trends, potential risks and vulnerabilities that may lead to consumer detriment.
- Thematic reviews: Thematic reviews are used to investigate in depth specific activities or products that may cause consumer detriment or create a barrier to the delivery of good consumer outcomes. They allow targeting issues that go beyond one national market, building a coordinated understanding across the EU.
- Retail risk indicators: EIOPA collects information on retail risk indicators at recurring intervals which allows to pre-emptively assess how product characteristics and distribution processes can affect you.
Reasons for developing a framework for conduct of business supervision
EIOPA has the duty to take a proactive role in intervening early to tackle tangible risks that may affect you. This is a fundamental element of the framework for conduct of business supervision.
The EU perspective
The development of a consistent European framework will support EIOPA in achieving its goals of ensuring a high, effective and consistent level of regulation and supervision across the EU. Today, conduct of business regulation is highly fragmented in the EU and countries are at different stages of development as regards their approach to consumer protection or the tools they use. The consequence is that similar issues may be treated in different ways to the detriment of consumers. The framework should further foster the convergence of conduct of business regulation and supervision across the EU. This will ensure that you get the same level of protection regardless of where you live or where you purchase products or services.
The framework will also promote a coordinated understanding of issues that go beyond one national market and a coordinated EU supervisory response which will, ultimately, benefit you. When a conduct of business risk emergences in one or several countries, it will allow for swift supervisory action to be taken before the risk spreads to other countries.
Benefits of the framework for conduct of business supervision
For European consumers
An effective and efficient framework for conduct of business supervision will play a key role in protecting you from unfair and abusive business practices. The framework will focus on identifying tangible risks at an early stage to ensure they are adequately tackled before fully materialising and affecting you. Exploring issues that have a cross-border element to them or that may arise in several national markets will help to build a coordinated understanding across the EU market which will be beneficial for European consumers as a whole.
In addition to the tangible benefits in protecting you from emerging risks of misconduct, EIOPA anticipates that the framework will promote comprehensive and constructive changes in the insurance market. A robust supervisory framework should contribute to a credible deterrence of market misconduct. Most significantly, it should contribute to the development of a comprehensive understanding and assessment of conduct of business risk by market participants. EIOPA expects you to benefit from a more consumer-centric culture within companies as they put themselves in your shoes, seek to avoid poor outcomes for you, and develop products that reflect well your changing needs.
For the European insurance and pension markets
A strengthening of conduct of business supervision is also particularly important to insurance companies and to the market as a whole. It promotes the orderly functioning of markets resulting in a level playing field, a healthy competitive environment, increased consumer confidence and financial stability.