Brokers selling mortgages, insurance, or market investments in Ireland will be banned from accepting free sporting and social tickets from financial firms under a crackdown by the Central Bank it emerged over night.suggests this is a big step in the right direction but more needs to be done.
IN January 2018 the implementation of MIFID II, a new EU tome on new financial regulation for investment products, brought a draw bridge down on undisclosed inducements for investment products.
Two months beforehand the Central Bank of Ireland issued a consultation paper aimed at the domestic banking and insurance industry specifically targeting inducements, undisclosed commissions and related arrangements that lead to conflicts of interest and compromise the duty that the intermediary has to act in the best interest of the consumer.
Life Insurance investments were not legislated for, however. Last night that posse caught up.
The Central Bank has just released a summary of conclusions, to be adopted into the Irish Consumer Protection Code from March next year.
The response of the Irish Regulator will bring the curtain down on practices that are offensive to consumer interests in the domestic Life Insurance industry.
This goes to the heart of whether a Broker or intermediary is acting as the agent of the consumer or the firm currently offering the juiciest commissions and soft payments from golfing buddies. The full paper is expected to be released later today but here are the main outcomes:
- Intermediaries who receive commissions of any type may not refer to themselves as ‘Independent’. This is in line with the strict definitions in MIFID II. Independent firms will need to derive all their income by levying fees on consumers, so you will see the term ‘Independent’ disappear entirely from the financial services lexicon on April 1st.
- Inducements such as hospitality and trips are to be prohibited. This is not a decade too soon and has been a blight on the industry for far too long, developing a chummy network between senior executives of product providers and brokers to the exclusion of consumers.
- Commission constructions that have as their effect the arrangement of targets and undertakings that compromise the requirement to act in the consumers interests are also to be banned. This is the murky world of upfront commission payment systems that create hidden but extended financial bondages between providers and brokers much the same way a loan or a line of credit would. Imagine your GP’s equipment financed by a big Pharma company and you’ll grasp the issue about conflicts of interest.
The game is up for large volume intermediaries that have developed especially close arrangements with favoured Life Offices to benefit from undisclosed volume override payments and other soft supports that make them captive or quasi tied agents at the detriment of advice to clients.
All commissions structures between providers and brokers will need to be disclosed to consumers, these are likely to make an appearance on websites and in extended Terms of Business most of which do not make these disclosures at present.
Although this is a big step in the right direction it is incomplete because churning insurance investments, the practice whereby brokers swap around the same client capital pool across Life Offices purely to generate upfront sales commissions will remain in the undergrowth.
This has become so deeply embedded that the Life industry is almost entirely dependent upon it. Churning means that capital invested in one Life office product is churned to the next as soon as exit penalties designed to cover up large sales commissions, expire typically after five years.
This isn’t a charge it is a fact, quite evident during the austerity years when life insurance investment sales grew despite large scale destruction of Irish wealth.
It was outlined in my own submission to the Central Bank by mapping so called new sales against surrender payments on existing policies.
While the new addendum to the 2012 Consumer Protection Code greatly restricts oxygen supply to these practices it ducks banning upfront sales commissions entirely leaving the door open to serial churning.
The new rules will still allow the continuation of arcane structures by Life Offices that give with the one hand but take away with the other.
Competition between Life Offices about who can offer brokers the best upfront commissions will remain, although it will be better disclosed.
Until brokers move to flat and transparent charging structures that reward advice on existing products and bans the incentive for churning, the overwhelming bias towards product substitutions will continue.
The collateral from greater disclosure has created a boom in the sale of unregulated products that pay a multiple of conventional commission rates but are not subject to disclosure provisions, by certain firms otherwise regulated by the Central Bank.
The favoured instrument sold is a loan note that lures consumers with a gravity-defying interest rate but is typically backed by weak and unquoted companies. These unregulated junk bonds which are not subject to laws dealing with prospectuses will return to haunt the Central Bank who will inevitably be faced with questions.