Consultation proposes new rules on how financial intermediaries can be paid

• Certain types of commission and other inducements would no longer be acceptable under proposals
• Proposals will establish requirements for financial intermediaries to tell consumers how they are paid and introduce restrictions on financial intermediaries describing themselves as ‘independent’
• Proposals are supported by specific consumer focused research conducted by the Central Bank

The Central Bank has published Consultation Paper CP116 which contains proposals to enhance the protections for consumers when seeking advice from financial intermediaries. This includes proposals for stricter rules on how financial intermediaries can be paid commission (or other inducements) by the firms whose products they sell.  The proposed measures require firms to avoid conflicts of interest created by poorly designed inducement arrangements and provide greater transparency for consumers about how a financial intermediary, whose advice they are relying on, is getting paid.  The proposals will also introduce restrictions on financial intermediaries describing themselves as ‘independent.’

The proposals are set out under the following headings:

1. Inducements that give rise to conflicts of interest, and would no longer be acceptable, such as inducements linked to the size of a mortgage loan or inducements linked to targets that do not consider the consumer’s best interests. Examples of such inducements include targets linked to volume, profit or business retention.
2. Clarity about what constitutes ‘independence’.
3. Transparency of remuneration arrangements.
4. Acceptable inducements.

The proposals have been developed following analysis of this topic conducted by the Central Bank, including reviewing the position in other jurisdictions, emerging standards at European level, industry practices in Ireland and specific consumer-focused research.

In developing the proposals, the Central Bank considered the responses to its Discussion Paper on the Payment of Commission to Intermediaries, which was published in July 2016.

The Central Bank is also publishing the results of the consumer-focused research it conducted to gauge consumer understanding, perceptions and expectations with respect to this topic.  The research found that:

• 73% of respondents stated that it was important for a financial adviser/broker to describe themselves as independent and 63% stated a preference for choosing a financial adviser who described themselves as independent.

• 29% of respondents did not know how an independent adviser/broker was paid.

• 47% of respondents said they preferred a once-off, upfront fee based on the option of it being cheaper/more affordable or based on knowing how much they would pay. However, just 24% of respondents said they would be prepared to pay a fee to each financial adviser each time when shopping around specifically for financial advice.

• While 55% of respondents said they understood that financial advisers/brokers were remunerated by means of a commission payment, 57% also agreed with the statement that financial advisers/brokers were often paid an additional level of commission by financial service providers for reaching specific sales targets.

• 61% of respondents agreed that financial advisers/brokers primarily advise based on what products will earn them the most commission. However, 63% said they trusted their financial adviser/broker to understand their needs and to advise on a product that best suits their needs.

The Consultation Paper provides an opportunity for industry participants and other interested stakeholders to highlight any implementation issues or unintended consequences arising from the proposals, as well as any suggestions to enhance the proposals to ensure they achieve their stated aim. 

Director General Financial Conduct, Derville Rowland, said:

“Our objective in developing these proposals is to ensure firms act in the best interests of consumers.  By their very design, the manner by which financial institutions pay intermediaries who sell their products influences the behaviour of those intermediaries. It is imperative, therefore, that remuneration arrangements are designed to encourage responsible business conduct, fair treatment of consumers and to avoid conflicts of interest.  It is also important that financial intermediaries disclose these arrangements, so consumers know how the person they are going to for advice is getting paid.
The proposals here will bring greater clarity and consistency to consumers, and are aimed at eliminating the bias that can occur as a result of inducement arrangements related to the sale of financial services products to consumers.
I encourage those in industry and consumers to send us their views on these important proposals, so that the structure for intermediary remuneration in Ireland is designed to ensure that the best interests of Irish consumers are protected.”

Submissions to the consultation paper, along with comments and queries, can be emailed to: [email protected]

The closing date for submissions is 22 March 2018. All submissions will be published on the Central Bank Website.