Banks, insurers, intermediaries and other firms will be interested in the Central Bank of Ireland’s recent proposals to amend the Consumer Protection Code (“CPC”) to better regulate inducements. This includes amendments:
- requiring the disclosure of minor non-monetary benefits;
- specifying the criteria that must be met for an inducement to be considered acceptable;
- prohibiting certain inducements that are deemed to give rise to a conflict of interest, including soft commission arrangements;
- prohibiting firms from describing themselves or their regulated activities as “independent” where they accept and retain inducements;
- introducing new transparency measures relating to inducements.
The sectors of industry captured by the CPC with regard to inducements include firms authorised under the Investment Intermediaries Act 1995, mortgage intermediaries and insurance intermediaries.
Overview of Inducements
Product producers, including banks, investment firms and insurers frequently pay intermediaries to sell their financial products to consumers and others. Such payments may be in the form of commission that is paid on a once-off or on an interval basis. Intermediaries may also receive soft commission, such as access to software or other facilities, as well as other non-financial rewards, including entertainment or marketing budgets. Such commissions, fees, and other monetary or non-monetary benefits are collectively referred to as inducements.
In 2016 the Central Bank published a discussion paper on the risks and benefits of inducements to the consumer. It has now published a consultation paper, CP 116, in which it is soliciting views on a number of proposed amendments to the CPC which seek to ensure that inducement arrangements are structured to encourage responsible business conduct, fair treatment for consumers and to avoid conflicts of interest.
The CPC will contain two new definitions of the terms “inducement” and “minor non-monetary benefit”, respectively. An “inducement” will be defined to mean:
“a fee, commission or non-monetary benefit, whether target-based or otherwise, paid or provided to a regulated entity by a third party or a person acting on behalf of a third party, other than the consumer or a person acting on behalf of the consumer, excluding minor non-monetary benefits."
A minor non-monetary benefit will be defined to mean:
“such benefits that are capable of enhancing the quality of the service provided to a consumer and are of a scale and nature such that they could not be judged to impair compliance with the regulated entity’s duty to act in the best interests of the consumer.”
Minor Non-monetary Benefits
A regulated entity will be required to clearly disclose minor non-monetary benefits prior to offering, recommending, arranging or providing a product or service.
The CPC will include a new provision stipulating a number of conditions which must be satisfied before a regulated entity is permitted to pay or receive an inducement from a product producer in connection with the provision of a service to a consumer. Specifically, the relevant inducement must:
- be designed to enhance the quality of the relevant service to the consumer;
- not impair compliance with the regulated entity’s duty to act honestly, fairly and professionally in the consumer’s best interests; and
- not impair compliance with the regulated entity’s obligation to satisfy the suitability requirements set out in the CPC.
Under the proposed amendments, a regulated entity will be required to avoid (rather than manage) conflicts of interests relating to inducements, including:
- inducements linked to the achievement of targets that do not consider the consumer’s best interests, such as targets relating to volume or profit, or bonus payments linked to business retention;
- inducements linked to the size of a mortgage loan; and
- soft commission arrangements.
According to the CPC, an intermediary that describes itself as “independent” must fulfil certain requirements. Specifically, it must provide its principal regulated activities on the basis of a fair analysis of the market and allow the consumer the option to pay in full for its services by means of a fee.
The Central Bank is proposing to amend these requirements in a number of respects. The proposed amendments differentiate between intermediaries generally and a regulated entity providing MiFID Article 3 Services. A regulated entity will provide MiFID Article 3 services if it:
- does not hold clients' funds or securities;
- does not provide any investment service other than reception and transmission of orders or investment advice, or both, in relation to transferable securities and units in collective investment undertakings;
- only transmits orders to certain types of entities.
In both cases, an intermediary and a regulated entity providing MiFID Article 3 Services will only be able to describe itself as “independent” in any description of:
- the firm, where all its regulated activities are provided on the basis of a fair analysis of the market; or
- a regulated activity where it provides that activity on the basis of a fair analysis of the market.
Generally, an intermediary will not be permitted to describe either the firm or a regulated activity provided by the firm as “independent” if it accepts and retains an inducement for the provision of advice for any of its regulated activities, other than a fee paid by a consumer to whom the advice is provided.
A regulated entity providing MiFID Article 3 services will only be able to describe the firm or a regulated activity provided by the firm as independent where the factors that it takes into consideration in conducting its fair analysis of the market include the criteria set out in Article 53(1)(d) of Commission Delegated Regulation 2017/565. Specifically, the relevant intermediary’s criteria for selecting financial instruments must include all relevant aspects such as risks, costs and complexity as well as the characteristics of the investment firm's clients, and shall ensure that the selection of the instruments that may be recommended is not biased.
The Central Bank is proposing to introduce a new transparency provision requiring intermediaries to publish their inducement arrangements. According to the proposals, an intermediary will be required to display in its public offices a comprehensive summary of the details of all inducement arrangements that it has agreed with product producers. This information must be displayed in a manner that is easily accessible to consumers and be placed on the intermediary’s website.
The Central Bank is also proposing to:
- prohibit an intermediary from recommending a product to a consumer as being the most suitable product from a range where there are different levels of inducements offered for the range of products involved; and
- impose new record keeping requirements, obliging firms to retain certain records so as to be able to demonstrate their compliance with the proposals set out in the consultation paper.
The consultation is open for comment until 22 March 2018 and may be accessed here.