knowledge | 4 October 2019 |

Commission Payments and the Consumer Protection Code

The Central Bank of Ireland has published a series of consumer protection measures in the area of commission payments. Broadly the new measure seeks to ensure that commission payments are transparent and properly designed so that they encourage responsible business conduct, fair treatment of consumers and avoid conflicts of interest. However, some types of commission payments will be prohibited once the new measures start to apply.

Commission Payments

In November 2017, the Central Bank published a consultation paper on Intermediary Inducements – Enhanced Consumer Protection Measures (“CP 116”) in which it consulted on a series of proposed consumer protection measures in the area of commission payments (including fees, commission, other reward or remuneration). Following on from that consultation, the Central Bank has published its Feedback Statement on CP 116 (here) and an Addendum which amends the parts of the Consumer Protection Code 2012 (the “CPC”) dealing with Conflicts of Interest (Chapter 3) and Provision of Information (Chapter 4) as well as the definitions set out in Chapter 12 (here) (the “Addendum”).

According to the Central Bank:

the new rules aim to ensure transparency of commission arrangements between financial intermediaries (such as brokers and financial advisers), and product producers (such as banks and insurance firms), and to minimise the risk of conflicts of interest relating to commissions arising when consumers are getting financial advice from the intermediary.

The Addendum also contains consequential amendments to the CPC arising from the European Union (Insurance Distribution) Regulations 2018.

The amendments set out in Addendum will take effect from 31 March 2020.

Conflicts of Interest

An entity that is a regulated entity for CPC purposes will need to comply with new conditions in order for a commission to be acceptable. Specifically, a regulated entity that pays or is paid a third party inducement when providing a regulated activity to a consumer must ensure that the inducement does not impair compliance with the regulated entity’s obligation to:

  • act honestly, fairly and professionally in the consumer’s best interests and
  • satisfy the conflicts of interest and the suitability requirements set out in Chapters 3 and 5 of the CPC, respectively.

Moreover, where the inducement is in the form of a non-monetary benefit, it must be designed to enhance the quality of the service to the consumer.

Certain types of commission payments are no longer permissible. Specifically, a regulated entity must avoid payments linked to the achievement of targets that do not consider the consumer’s best interests eg, targets relating to volume (including override commission) and bonus payments linked to business retention. A regulated entity must also avoid conflicts of interests relating to agreements under which it receives a commission in the form of goods or services, in return for which it agrees to direct business through or in the way of another person.

Provision of Information

The Addendum contains provisions regulating the use of the word “independent” by an intermediary and requiring certain information to be made available to a consumer.

Independence

An intermediary that wishes to accept and retain a third party commission will no longer be able to describe itself as “independent” or use a similar alternative description (such as impartial), unless the relevant commission is a “minor non-monetary benefit” (“MNB”) which term is defined to mean a benefit:

that is capable of enhancing the quality of the service provided to a consumer and is of a scale and nature such that it could not be judged to impair compliance with a regulated entity/s duty to act in the best interest of the consumer.

MNBs include, for example, attendance at a conference in Ireland, IT software or platforms, or hospitality of a reasonable de minimis value such as food and drink during a business meeting or conference.

Consumer Information

An intermediary must publish a summary of the details of all the commission arrangements it has agreed with product producers in a manner that is easily accessible to consumers. This summary must be made available in the intermediary’s public office or on its website. Where an intermediary operates a website, it must publish the summary on its website.

The summary must include the basis on which any commission is paid, an explanation of the commission arrangement including details on the type of commission being paid, any agreed fees or administration costs and any additional non-monetary benefits that may be provided to the intermediary as part of the arrangement. An intermediary must also:

  • bring this information to the consumer’s attention and provide any clarification requested by the consumer, before concluding a contract for a financial product or service;
  • keep records demonstrating compliance with the above requirements.

Comment and Next Steps

As set out above, entities have a 6 month lead-in time to review their existing commission arrangements and ensure that they comply with the new requirements.

In response to submissions received in response to CP 116, the Central Bank has decided to postpone its proposal to amend the CPC to specify that inducements linked to the size of a mortgage are deemed a conflict of interest and must be avoided, until further research is undertaken in this area. The Central Bank is likely to re-consider this issue as part of the next full Code review, which is expected to commence in 2019.

The Central Bank has also decided against implementing, at this time, its proposal that an intermediary may not recommend a product as being the most suitable from a range where there are different levels of inducement offered for the range of products involved. However, it plans to re-evaluate this measure as part of the planned full review of the CPC, to determine whether further action is warranted in this area.

This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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