The Central Bank of Ireland (the "Central Bank") has published an addendum to the Consumer Protection Code 2012 (the "Code"), which incorporates new rules in the area of commission payments by product producers to financial intermediaries. The new requirements have been introduced to ensure greater transparency for consumers regarding commission arrangements and to minimise the risk of commission-related conflicts of interest.
Financial intermediaries, including insurance brokers and financial advisers, will be required by the Central Bank to publish information on their website relating to the commissions they receive from product producers such as banks and insurance firms. Furthermore, intermediaries will not be allowed to call themselves "independent" in situations where they accept commission for providing financial advice.
A financial intermediary's receipt of commission will be prohibited and deemed a conflict of interest where it is linked to targets that do not consider the best interests of the consumer. It will only be allowed where it does not impair compliance with the requirements of the Code or the European Union (Insurance Distribution) Regulations 2018. Non-monetary commission benefits will only be permitted where they demonstrably enhance the quality of the service for the customer. As such, free hospitality for intermediaries such as sporting event tickets and trips will no longer be allowed under the new rules.
Transparency and supervision
The Director of Consumer Protection in the Central Bank, Gráinne McEvoy, outlined that the rationale for the new rules is to ensure that customers know exactly what they are paying for when they purchase products recommended by financial advisers and to limit the potential for bias on the part of intermediaries. The Central Bank will begin supervising compliance with the new rules when they come into effect on 31 March 2020. Supervision will be carried out by the Central Bank conducting inspections and carrying out reviews of specific issues. The Central Bank will be able to request details of non-monetary benefits given to an intermediary and an explanation for how the inducements are beneficial to the customer.
Despite the new restrictions, the Central Bank stopped short of adopting the UK position. In the UK, broker commissions were banned altogether with the introduction of new rules stemming from the Retail Distribution Review (the "RDR") which were brought into force on 31 December 2012. The RDR essentially brought the commission system to an end and introduced a fee-based model known as "adviser charging". Under adviser charging, intermediaries are classified as either independent (who must consider all potentially suitable retail investment products) or restricted (who can limit their assessment to a restricted product range).
The new rules in Ireland, in comparison to the UK approach, means that broker commissions are retained while significantly restricting their application. From the time of implementation, intermediaries must:
- inform the customer about any commissions received for selling a financial product or service;
- not describe themselves as "independent" where they receive a commission;
- not take commission that could be contrary to the best interests of the customer; and
- not accept free hospitality packages or tickets from financial product or service providers.