Financial advisers and brokers may be banned from earning commission payments based on either the volume of business they do or the value of a mortgage they arrange, under new proposals published today by the Central Bank. In what marks a significant step change in strategy from the regulator on how financial advisers can be remunerated, advisers will also be required to display their commission arrangements in their offices and on their websites, much like dentists and doctors display their prices, and will be restricted in selecting products based on the level of compensation on offer.
While some countries, such as the UK and Australia, have banned commissions and inducements outright on certain product lines, it’s understood that the Central Bank has gone for a different approach, in restricting certain types of commission across all product lines. Concerned about the potential of an “advice gap” emerging, which may not be in the best interests of consumers, the Central Bank is hoping for a better-designed system.
“Intermediaries can continue to provide advice to consumers and to receive inducements, provided those inducements are properly designed,” the regulator said in a new consultation paper it published on Wednesday.
Firm intention
While still a proposal and open to consultation, it’s understood the Central Bank is firm on its intention to introduce new rules to govern the provision of financial advice.
"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," said Derville Rowland, Central Bank director general of financial conduct.
Brokers Ireland chief executive Diarmuid Kelly welcomed the proposals, but expressed concerns that it could leave those less well off excluded from financial advice.
“We need to be careful that we don’t lose out on the availability of impartial financial advice to consumers currently available in every town in Ireland, make it the preserve of the better off or reduce competition in the market,” he said, adding that consumers “by and large” favoured the commission model.
Specifically, the regulator says that inducements that give rise to conflicts of interest will no longer be acceptable. These include those that are linked to targets based on sales volumes; the size of a mortgage loan; “soft” commissions; and those which may exert a bias on which product the broker recommends to their client because that product offers a higher rate of commission.
This would mean that override commission, which is paid on meeting or exceeding agreed targets and is generally an increased percentage of commission per unit or a percentage uplift of the commission amount earned, would need to be “avoided” the regulator says.
With respect to mortgage loans, the regulator is concerned that consumers may be “encouraged” to take out a larger loan because the adviser is paid a higher fee (typically 1 per cent of mortgage value) if they do so, and as such, should again be prohibited. It also wants to clamp down on potential conflicts of interest by requiring firms to keep a record of how it has avoided conflicts in each transaction.
The proposals will also introduce restrictions on financial intermediaries describing themselves as “independent”; this will bring advisers and brokers into line with requirements under Mifid II, which comes into play across the EU on January 3rd.
“If an adviser is describing itself as independent, then that adviser needs to be truly independent,” the regulator says.
Currently, financial advisers in Ireland calling themselves independent must perform a fair analysis of the market for their clients, but they only have to give the option of charging fees – they can also earn commission on a product sale. This means most advisers can currently call themselves independent and is seen by some as being too opaque.
Under the regulator’s new proposals, however, advisers and brokers cannot call themselves independent if they accept and retain inducements. There are also hurdles to be overcome when it comes to fair analysis, which some fear could be pitched too high.
Legacy commission
Financial adviser David Quinn, managing director of Investwise, which earns about 50 per cent of its revenue from fee-paying customers, says the mooted changes are “very positive”. He has a concern, however, when it comes to legacy trail commission, noting that the Central Bank has not clarified what should happen to this if an adviser wants to be deemed independent.
The regulator also wants greater transparency in terms of how consumers are informed about how they pay commission. Much like a dentist must disclose their prices in their surgery, under the new proposals, financial advisers and brokers would be obliged to display on their websites and offices a “comprehensive summary of the details of the inducement arrangements they have with any product producers”. This must include the basis on which commission is paid, the percentage to be paid, and any other fees or benefits.
For Mr Quinn, it is this aspect of the regulator’s rules that could have a big shock on advisers.
“It’ll have a huge impact,” he says, noting that it could change consumer behaviour if customers see the monetary value – rather than a percentage – of their investments and pensions that is going on commissions.
“It will affect brokers throughout the country . . . the big jackpot commission payments won’t be gone, but they will have to stand over them,” says Mr Quinn.
The regulator’s consultation process will run until March 22nd next year, and submissions can be made via consumerprotectionpolicy@centralbank.ie.
