The exercise provides an important insight into the MFSA's evolving approach to conduct supervision. Rather than focusing solely on whether appropriate policies, procedures and controls exist, mystery shopping allows the Authority to assess how regulatory requirements translate into the actual experience of prospective customers.
The review identified a number of recurring weaknesses across the customer journey, including demands and needs assessments, product comparisons, pre-contractual disclosures, explanations of costs and risks, and the distinction between providing product information and investment advice.
For insurance undertakings and intermediaries in Malta, the findings provide an opportunity to consider whether established distribution frameworks are delivering the intended customer outcomes in practice.
Understanding the customer before discussing the product
One of the key areas highlighted by the MFSA was the assessment of customers' demands and needs.In a number of interactions, products and quotations were discussed before sufficient information had been gathered about the customer's overall requirements and risk profile. The MFSA also identified weaknesses in documenting the information obtained and demonstrating how it informed the products subsequently discussed.
This highlights an important distinction between completing a customer assessment as a procedural step and using that assessment to drive the sales process.
Firms should be able to demonstrate a clear connection between the customer's circumstances, the assessment performed and the products presented. Where several products are discussed, the rationale for their relevance to the customer's identified needs should also be evident.
Product information or investment advice?
Another significant finding concerned the boundary between providing factual product information and regulated investment advice.
The TIIs covered by the exercise were not authorised to provide investment advice. Nevertheless, the MFSA identified interactions where the language used could reasonably have been interpreted as a personal recommendation. This included presenting particular products or investment options as the most suitable choice or expressing preferences for certain products.
This boundary can become particularly important during everyday customer conversations. A salesperson may intend to explain a product, but the way that explanation is framed could lead a customer to perceive it as a recommendation.
Insurance undertakings should therefore consider whether their policies, training and monitoring provide distributors with sufficient practical guidance on how to manage these conversations while remaining within their regulatory permissions.
Balanced communication throughout the sales journey
The review also identified concerns regarding how product benefits, risks, costs and other features were communicated.
Potential investment returns were sometimes given greater prominence than associated risks, while certain costs and charges were not always disclosed proactively. The MFSA also identified instances where tax incentives or government benefits became a dominant part of the product discussion, without equivalent attention being given to the product's underlying characteristics, objectives and long-term nature.
Similarly, product comparisons were not always supported by sufficient context or objective and verifiable information.
Taken together, these findings reinforce a simple principle: customers should receive a balanced picture of the product. Benefits should not be presented without corresponding risks and limitations, and comparisons should consider the overall characteristics of competing products rather than selected features that support a particular sales message.
Documentation should support informed decision-making
The timely provision of pre-contractual information was another area requiring improvement.
The MFSA identified a number of interactions where customers did not receive a Key Information Document (KID) or equivalent documentation during the sales process. In other cases, only limited supporting information was provided.
Pre-contractual documentation should not be viewed simply as paperwork that must eventually be provided. Its purpose is to enable customers to understand and compare products before making a decision.
Firms should therefore consider whether their processes ensure that the appropriate documentation is provided sufficiently early and consistently across distribution channels, with clear explanations that customers can understand.
Oversight extends beyond the intermediary
Importantly, the findings are not relevant only to individual TIIs.
The MFSA reiterates that insurance undertakings retain responsibility for compliance with applicable regulatory requirements even when they appoint tied intermediaries. This places considerable importance on the effectiveness of governance, monitoring and quality assurance arrangements across the distribution network.
Insurance undertakings should consider whether their existing oversight provides sufficient visibility over what actually happens during customer interactions. File reviews and compliance monitoring remain important, but they may not always reveal how products are verbally positioned or how customers experience the sales process.
Notably, the MFSA encourages insurance undertakings to consider conducting periodic mystery shopping exercises across their own distribution channels as a complementary oversight tool.
What should firms consider next?
The findings provide a useful basis for insurance undertakings and intermediaries to reassess their distribution arrangements. Areas for consideration include:
- the quality and documentation of demands and needs assessments;
- the distinction between product information and investment advice;
- the completeness and timing of pre-contractual disclosures;
- the presentation of costs, risks, returns and tax incentives;
- the objectivity of product comparisons;
- the training and competence of customer-facing personnel; and
- the effectiveness of monitoring and quality assurance across distribution channels.
Perhaps the broader message from the exercise is that effective conduct risk management cannot be assessed solely by reviewing policies and completed documentation. Firms also need to understand how their products are being presented, explained and experienced by customers.
The MFSA has indicated that it will continue monitoring practices through its supervisory activities, including further mystery shopping exercises, and may consider regulatory action where shortcomings are identified.
For firms distributing IBIPs in Malta, this provides a timely opportunity to assess not only whether their frameworks are compliant on paper, but also whether they are consistently delivering fair and informed customer outcomes in practice.
How can BDO Malta help?
BDO Malta can support insurance undertakings and intermediaries in assessing and strengthening their insurance distribution arrangements, including compliance with applicable Insurance Distribution Directive (IDD) requirements and related regulatory expectations.
By identifying gaps and areas for improvement, BDO Malta can help firms strengthen their distribution frameworks, customer assessment processes and oversight arrangements, while supporting compliance with IDD requirements and the delivery of fair and appropriate customer outcomes.
To discuss how your organisation can strengthen its insurance distribution arrangements and improve its alignment with IDD requirements, get in touch with our team.