The Central Bank of Ireland (the “Central Bank”) recently published an Addendum to the Consumer Protection Code 2012 (the “Addendum”) to (the “CPC”) that will impact on remuneration arrangements in the insurance sector from March 2020. The changes introduced by the Addendum have been anticipated by the market for some time following the Central Bank’s consultation paper on Intermediary Inducements – Enhanced Consumer Protection Measures (“CP116”) in November 2017 and the Addendum now brings clarity on the permissibility of certain commission payments to intermediaries. The overall objective of the Addendum is to reduce conflicts of interest and increase transparency requirements in relation to commission payments for the benefit of consumers.
Given the unique position of an intermediary in terms of its relationship with both the insurer and customer, there are concerns from a conflict of interest perspective where an intermediary receives commission for the sale of a product or provision of a service to a customer. In order to reduce the risk of this conflict of interest having the potential to impact an intermediary’s duty to act in a customer’s best interests, the Addendum prohibits the following:
- volume linked remuneration, including override commission and bonus payments linked to business retention;
- soft commission arrangements, including hospitality such as golf trips and sporting event tickets.
It is worth noting that profit-related remuneration arrangements are not prohibited by the Addendum, provided such arrangements do not interfere with an intermediary’s duty to avoid conflicts of interest and consider the consumer’s best interests. In addition, certain minor non-monetary benefits will still be permitted for example, attendance at a conference in Ireland, access to IT software or platforms, or hospitality of a reasonable de minimis value such as food and drink during a business meeting or conference. However, where any non-monetary benefit is provided, it must be designed to enhance the quality of the service ultimately provided to consumers.
Where previously conflicts of interest arising from remuneration arrangements could be mitigated through following appropriate procedures and disclosure to customers, this is no longer permitted under the Addendum. It is also important to note that the requirements apply to both those who pay and receive any form of remuneration in connection with the provision of a regulated activity to a consumer. Therefore, all entities in the distribution chain will need to consider the impact of these requirements in the context of their own commercial arrangements.
In order to increase transparency for the benefit of consumers, intermediaries will be restricted from using the description “independent” where they accept and retain any form of remuneration (other than a minor non-monetary benefit) from a regulated entity for the provision of advice to consumers, even where such advice is ultimately provided on the basis of a fair market analysis. It is important to note that similar terms such as “impartial” will also be prohibited.
In addition, summary details of all remuneration arrangements with product producers must be published on an intermediary’s website, including:
an indication of the agreed amount or percentage of remuneration payable to the intermediary; an explanation of the arrangement, including details of the type of remuneration payable (eg, sales commission, trail commission or upfront commission) and any other detail affecting the remuneration such as claw back provisions; details of any other agreed fees, administrative costs or non-monetary benefits under such arrangements, including any benefits which are unrelated to the intermediary’s individual sale.
This will clearly represent a significant change in disclosure requirements for insurance intermediaries, which up to now have only been obliged to disclose the nature of any remuneration received and the basis on which it is paid to customers. Intermediaries will also have an express obligation to bring the above information to its customers’ attention prior to concluding a contract and retain documented evidence of having done so.
Consequential amendments arising from the IDR
In order to give full effect to the European Union (Insurance Distribution) Regulations 2018 (the “IDR”), the Addendum has also clarified the applicability of certain provisions of the CPC to insurance distributors as follows:
conflicts of interest procedures and suitability requirements relating to the distribution of insurance-based investment products will governed by the IDR, rather than the CPC; insurance distributors will no longer be prohibited from bundling under the CPC, provided the relevant cross-selling requirements of the IDR are satisfied; and manufacturing obligations of insurance distributors will be governed solely by the product oversight and governance requirements under the IDR and associated regulation.
This brings welcome clarity to the obligations of insurance distributors in these areas.
The Addendum is effective as of 31 March 2020. Therefore, both insurers and intermediaries will need to review their remuneration arrangements with commercial partners over the next 6 months to ensure they are designed in a way which encourage best practice, avoid conflicts of interests and promote consumer protection. As part of this review, consideration should also be given to the fact that specific details of each arrangement will need to be made available online and brought to the attention of customers prior to concluding a contract. Finally, intermediaries will also need to consider whether their use of “independent” or any similar term in their trading name or customer terms of business remains permissible.
In our experience, the Central Bank assesses compliance with changes in regulatory requirements through a thematic inspection of practice in the market. Given the significant changes introduced by the Addendum, we expect remuneration arrangements are likely to come under the spotlight over the next 12 to 18 months. Therefore, it is important that all entities in the distribution chain take action to implement the necessary changes prior to 31 March 2020.