"Advice" versus "Sales": ongoing confusion despite EU Retail Investor Package of May 2023

This text is an abbreviated version of a presentation made for Better Finance Legal Committee at Vienna / Austria on 12 October 2023.

I. Introduction:

As you know the proposal of RIP by the COM of last May included the provision that “independent advice” as a concept for distributors and intermediaries shall be introduced in the insurance sector as well. This shall be implemented in analogy to the already existing provision in MIFID II. This amendment would have the consequence that an insurance intermediary who declares himself as “independent” is not allowed to receive any commissions for an “insurance-based investment product” (life-insurance) sold by him, in parallel to an “independent” financial intermediary for the sale of a retail investment product (for ex. shares of a mutual investment fund).


I suppose that most of the consumer organisations welcomed this proposal, because the introduction of the notion of “independent advice” constitutes a real innovation for the insurance sector and will lead to an actual legal parallelism between the provisions of IDD and MIFID II at least for this issue.

So, the fundamental question now is: will this legal innovation actually lead to a level playing field in the market competition between fee-based “independent advisors” and traditional commission-based intermediaries in the insurance sector?

In my presentation I will first focus on the question, why – in my opinion – this will  probably not be the case, and which could be the possible judicial solutions in order to overcome - or at least to mitigate - the ongoing disadvantages of “independent advisors” in comparison to traditional intermediaries.

II. Current legal definition of “Advice” in IDD and MIFID II – resulting problems

The legal definition of “investment advice” in MIFID II is the following (cf. article 4 (1) (4) of EU/2014/65):

  • ‘investment advice’ means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments;

In IDD this prior legal definition of “investment advice” was adapted to insurance issues (cf. article 2 (1) (15) of EU/2016/97):

  • ‘advice’ means the provision of a personal recommendation to a customer, either upon their request or at the initiative of the insurance distributor, in respect of one or more insurance contracts.

Following to this judicial definition, the “personal recommendation” constitutes the core of the “advice” given by an insurance or financial intermediary. Additionally it has to be based on the “demands and needs of the customer” following to article 20 (1) of IDD. So, it is obvious that a “personalised recommendation explaining why a particular product would best meet the customer’s demands and needs”(IDD quote) can be given by any intermediary, be it a commission-based tied agent, a commission-based broker or a fee-based independent advisor.

“Sales where no advice is given” (as IDD says) are limited to those examples in which an intermediary has specified “[on the basis of information obtained from the customer,] the demands and the needs of that customer” and provided “the customer with objective information about the insurance product [in a comprehensible form to allow that customer to make an informed decision].” (article 20 (1) of EU /2016 / 97). In consequence, “sales” means that only pre-contractual product information documents like the IPID for non-life insurances or KID for IBIPs have to be given to the prospective customer and nothing more. At least for the German market I can clearly state that this reduced or shortened distribution practice of “pure sales” is usually only applied for non-life insurance contracts, but not for life, health or disability insurance contracts.

Therefore, coming back to “advice” based on the “personal recommendation”, IDD gives a hint how to make an additional qualitative difference of advice given by tied agents on the one hand and brokers and independent advisors on the other hand. This is included in paragraph 3 of article 20 (IDD):

“Where an insurance intermediary informs the customer that it gives its advice on the basis of a fair and personal analysis, it shall give that advice on the basis of an analysis of a sufficiently large number of insurance contracts available on the market…”

Having introduced the criteria of “sufficiently large number of insurance contracts available on the market”, it seems to be obvious that only brokers and independent advisors are able to fulfil this request. In contrast to tied agents, brokers and independent advisors must have concluded contracts with several insurers for various life and non-life products.

In consequence, four levels of distribution channels can be distinguished:

  1. Standards of “sales”, where no advice is given: Test of demands and needs of the customer and “objective” information on product (=> tied agents).

  2. Advice based on a “personal recommendation”: personalised recommendation “explaining why a particular product would best meet the customer’s demands and needs” (=> tied agents).

  3. Advice based on a “fair and personal analysis”: Test of demands and needs of the customer and personal recommendation based on an “analysis of a sufficiently large number of insurance contracts available on the market”   (=> brokers).

  4. Fee-based or “independent” advice: test of demands and needs of the customer, personal recommendation based on sufficiently large number of products on the markets (like brokers), but without any necessity of product sales in order to secure the remuneration of the “advisor”. I will come back to this point.

Unfortunately it was a bad surprise when reading the accompanying document (“Frequently Asked Questions”) of the RIP proposal of the COM of 24 May, I discovered the following wording: “the appropriate range of products can also be met by tied agents, if the advice on an appropriate range of products is ensured through products from one manufacturer” (FAQ, p. 6). If this proposal will actually be implemented, the beforementioned qualitative difference between tied agents on the hand and brokers and independent advisors on the other hand would completely be blurred. Any “personal recommendation” based on the product offers of even only one product provider would be acknowledged as “advice” based on a “fair and personal analysis”.

All in all, when assessing the proposal of the COM of last May I see three major problems with regard to the lack of differentiation between “sales” and “advice”:

  1. There is no legal definition of “independent advice”, only the consequences are outlined, i.e. prohibition of commissions.

  2. “Advice” based exclusively on “personal recommendation” can be given by all categories of intermediaries: tied-agents, brokers and fee-based advisors.

  3. The qualitative differences of “advice” given by an tied agent or by a broker and fee-based advisor could even be more softened.

III. Possible solutions for strengthening “independent advice”

The basic rationale in order to strengthen the position of “independent advice” should be the clear separation of “advice” and “sales” procedures. As already outlined by IDD, advice should be considered as a “personalised recommendation explaining why a particular product would best meet the customer’s demands and needs” and “based on an analysis of a sufficiently large number of insurance contracts available on the market”. By doing so, advice should be acknowledged as a standalone service delivered by an intermediary which has to be remunerated separately.

So, the difference is clear: a commission-based tied agent or broker is remunerated only if the result of the “advice” procedure leads to the sale of a product. A fee-based advisor is remunerated for the advice given to the customer independently from the outcome, i.e. if a financial product is sold or not.

That is why I advocate that the legal definition of “advice” fixed by IDD and MIFID II should be amended by including these two additional dimensions:

Personalized recommendation based on an analysis of a sufficiently large number of products available on the market and independent from any product provider.

Additionally if the legal definition of “advice” was amended in this way, it would be possible, to differentiate the professional denominations of the various categories of intermediaries more clearly: “advisors” are only those who work on fee-based remuneration, “intermediaries” are those who continue to work on a commission-based remuneration. As outlined, the legal protection of the professional denomination of “advisors” (in contrast to “intermediaries”) is one of the fundamental requests of the “Federal Association of Insurance Advisors” (BVVB) in Germany, of which the director of the supervisory board of BdV is a member.

Of course, the resistances against these amending proposals would be very strong. We just have to look at the official professional registers of insurance and financial intermediaries for example in Germany:

In July 2023 based on Official Register of Insurance Intermediaries of Chamber of Commerce (DIHK Versicherungsvermittler-Register):

  • Agents (tied and multi-tied): 136.000

  • Brokers: 46.500

  • Advisors: 325

Total:183.000 registered insurance intermediaries

In June 2023 based on Official Register of Financial Intermediaries of Chamber of Commerce (DIHK Finanzvermittler-Register):

  • Financial brokers (Finanzanlagen-Vermittler): 40.000

  • Mortgage brokers (Immobiliar-Darlehensvermittler): 57.600

  • Financial advisors (Honorar-Finanzanlageberater): 310

  • Financial advisors with additional banking services (registered by BaFin): 18

As you can see, fee-based insurance as well as financial advisors are only a very small minority in contrast to commission-based agents and brokers.

The decisive question is: does this strong imbalance / disequilibrium exist in other EU member states as well?  Therefor I would be very interested in knowing the equivalent figures in the other EU member states, which must be available, as these professional registers are mandatory by EU legislation (IDD and MIFID II).

IV. Conclusion:

By asking for an amendment of “advice” in the way I have outlined (inclusion of sufficiently large number of products on the market and independence from any product provider), Better Finance could advocate an additional approach, how to stress the difference between “sales” and “advice” procedures. For BdV this crucial difference constitutes one of the fundamental positions of consumer advocacy.

Über mich

Ich heiße Christian Gülich (Jg. 57) und war schon immer an Kontakten ins Ausland interessiert. Während meiner Zeit an der Universität Bielefeld (Fachbereich Soziologie) war ich zu Studien- und Forschungszwecken in Aix-en-Provence, Paris, Strasbourg und Brüssel. Da liegt es nahe, dass ich mich beim BdV hauptsächlich um die EU-Kontakte (Konferenzen, Stellungnahmen o.a.) kümmere. Hier im Blog möchte ich über diese Aktivitäten berichten. Denn leicht ist es, über die EU als Moloch zu lamentieren, viel schwieriger ist es, diese komplexen Zusammenhänge verständlich darzustellen.