Following on from a consultation carried out between 2017 and 2018, the Central Bank has published new rules on the payment of commission to financial intermediaries.
The new rules will be included in the Consumer Protection Code 2012 (Code) and will have effect from 31 March 2020.
The new rules are designed to ensure transparency of commission arrangements between financial intermediaries (such as brokers and financial advisers) (intermediaries), and producers of financial products (such as banks and insurance firms) (producers), and to minimise the risk of conflicts of interest relating to commissions arising when consumers receive financial advice from an intermediary.
Under the new rules, intermediaries who receive commission from producers will not be permitted to describe themselves as ‘independent’. Intermediaries will be required to make available in their public offices or on their website, details of the commission arrangements they have agreed with producers. At a minimum this information must include: -
- an indication of the agreed amount or percentage of any fee, commission, other reward or remuneration;
- an explanation of the arrangement including details on the type of fee, commission, other reward or remuneration paid or provided to the intermediary, for example, sales commission or trail commission, and details affecting the fee, commission, other reward or remuneration paid or provided to the intermediary, for example, clawback provisions; and
- details of any other agreed fees, administrative costs, or non-monetary benefits under such arrangements, including any benefits, which are not related to the intermediary’s individual sales.
Fees, commission, other rewards or remuneration linked to the achievement of targets that do not consider the consumer’s best interests eg targets relating to volume and bonus payments linked to business retention will not be permitted. In addition, intermediaries must avoid agreements under which they receive a fee, commission, other reward or remuneration in the form of goods or services, in return for directing business through or in the way of another person. Free hospitality for intermediaries such as golf trips and sporting event tickets will also be prohibited under the new rules. Any commission received in the form of non-monetary benefits must demonstrably enhance the quality of the service to the consumer (eg attendance at a conference). Finally, any commission must not impair compliance with the intermediary's obligation to satisfy the conflict of interest and the suitability requirements of the Code or the Insurance Distribution Regulations 2018.
The Central Bank uses a number of methods to monitor compliance with consumer protection requirements including conducting inspections and specific reviews on particular topics. As part of these processes, Central Bank officials will be able to request details of any non-monetary benefits provided to an intermediary, including the rationale for explaining how the benefits enhance the quality of the service to the consumer. Intermediaries will be obliged to provide this information where requested.