All in the name of ‘Consumer Protection’

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consultation on Intermediary Inducements Enhanced Consumer Protection Measures – CP 116 was published on the 22nd of Nov 2017 by the Central Bank with the closing date for submissions the 22nd of March 2018. The Consultation paper follows on from the 2016 discussion paper on the payment of commission to Intermediaries which focused on the risks & benefits to the consumer of the payment of commission to Intermediaries. Interestingly, no consumer body or individual consumers made a submission on the discussion paper to highlight any concerns with the current system.

For Brokers, this is one of the most fundamental Consultation Papers published by the Central Bank – under consideration is Brokers remuneration. The proposals relate to the application of MIFID standards across the whole industry, restrictions on the term independence, enhanced requirements in relation to conflicts of interest and most importantly the way in which brokers are paid for the services they provide and the products they sell.

The key points of the Consultation are:

• Change in terminology
• “Mifidisation” of the market
• Enhanced Quality of Service
• Use of the term Independent
• Transparency
• Conflicts of interest
• Proposals in relation to restricting payment of commissions

Brokers Ireland have considerable concerns in relation to these proposals and the response to the consultation paper is a key priority of the association. Given the potential impact to members business model and in order to gauge members opinions on the proposals, member meetings were held in 8 locations throughout Ireland with the high attendance indicative of the concern of the membership about the proposals.

The Central Bank has outlined that the primary aim of the proposals is to eliminate/remove product provider bias and address conflicts of interest that are in place and achieve the highest standards across the board, i.e. Mifidise.

A key proposal is in relation to a change in terminology, the Central Bank are proposing that the term Inducement will be substituted for the term commission.   Member feedback clearly indicates that the term inducement is not acceptable.

The Oxford Dictionary definition of inducement is:

• a thing that persuades or leads someone to do something.
• bribe.

It is clear that this term has very negative connotations and perceptions with Irish consumers. It is misleading to the consumer and does not reflect the role of the Broker in researching, advising and carrying out administration on behalf of both the client and the provider. Fortunately, the Central Bank is not required by legislation to introduce this pejorative term.

Brokers Ireland are gravely concerned about the papers proposals to “mifidise” the distribution of insurance/mortgages in Ireland. This is being proposed notwithstanding the fact that both are inherently different which was recognised by the different approach taken by the EU legislators in the Insurance Distribution Directive (IDD), which is the more up to date directive. When the IDD was first proposed it was planned that it would replicate the approach being adopted in MIFID II. This was rejected by the EU legislators but is now being proposed by the Central Bank. It needs to be recognised by the Central Bank that the nature of MIFID products differ greatly from the nature and complexity of products which fall under the IDD and Mortgage Credit Directive (MCD).

A number of the proposals seek to apply MIFID standards such as the introduction of the concept of Enhanced Quality of Service and restrictions on the use of the term independent.

The Central Bank is proposing that one of the requirements for “inducements” to be acceptable, they must:

• be designed to enhance the quality of the relevant service to the consumer;

The concept of enhanced quality of service is solely contained in MIFID II. It must be recognised that commission payments fundamentality differ between MIFID and IDD/MCD firms. MIFID firms are predominantly remunerated by client fee and any additional commissions and non-monetary benefits earned are payments/benefits in addition to the fee received. Therefore, it is appropriate to demonstrate what additional service that the client is receiving for the extra payments/benefits that the firm/advisor is receiving.   The receipt of this additional commission payment differs from commission payments for the vast percentage of IDD/CMCAR firms where it is the mainstream income of these firms and this is how the firm is remunerated for their work and services provided to product producers.

It is also proposed that firms would no longer be permitted to describe themselves and their regulated activities as ‘independent’ where they accept and retain “inducements”.

This restriction comes from MIFID but is not required by the IDD/MCD and we believe that the current provisions of the CPC in relation to the use of the term independent are sufficient. The proposed changes mean that choice of method of how they would like to pay will be taken away from the consumer. Removal of choice is not to the benefit of consumers.

For both of these proposals, the Central Bank has the choice to not apply the MIFID requirements and choose the IDD wording. All proposals will significantly increase the regulatory burden on Brokers with questionable benefit to consumers. Members outlined their grave concerns about the proposals at the member meetings and reiterated how the broker industry brings competition and choice to the market and the ultimate impact of these proposals will be the removal of choice for consumers.

In conclusion one has to question; in whose best interests are all of the above proposals being put forward? There is a Consumer Protection Code that deals with Transparency, Conflicts of Interest and Disclosure to Consumers already in place. The ‘gold plating’ carried out by the Central Bank in 2012 not only addressed the requirements of the Insurance Mediation Directive but also went a very long way to addressing the requirements of the Insurance Distribution Directive even though implementation is not required until 01 October 2018. Make no mistake; intermediaries are already accountable for all of the decisions and recommendations they make to their customers. The Central Bank through the online reporting system and the ability to audit firms already has the where with all to check to see if the broker is acting in the best interest of the customer. Why does the Central Bank need to add another layer of disproportionate and inappropriate regulation that does not in any way enhance protection of the consumer?

The very last thing any consumer needs is further paperwork and convoluted processes to put in place straightforward, non-complex insurance policies in place. The most important thing for consumers is market stability coupled with the availability of a choice of insurance policies suitable for their needs at a fair price. Can anyone explain how the above proposals deliver either of the objectives?