In one corner, a low-cost funds provider who doesn’t pay financial advisers to distribute its products and a Government pensions adviser. And in the other, insurance companies and financial advisers eager to maintain the status quo and avoid the fate that befell many of their UK colleagues when commission payments on financial advice were banned in 2012.
But who will the Central Bank side with? And where does the consumer fit into all of this?
On Tuesday the regulator published a number of responses to its discussion paper on commission payments from financial product providers to brokers and financial advisers. Responses to the review are overwhelmingly in favour of commission. Motor, health and life insurers as well as financial advisers are in favour of retaining the current model, whereby product providers pay brokers a fee for selling their products to consumers.
While the UK banned financial advisers receiving commission via its Retail Distribution Review (RDR) in 2012, brokers remain opposed to such a move in Ireland.
“We believe that a ban on commission would be negative for Irish consumers as it would reduce the availability of advice, reduce levels of insurance and pension coverage, and is likely to increase overall costs to most consumers,” Insurance Ireland said.
‘Fit for purpose’
Harvest Financial Services says the current system “works well” and is a “simpler” method of remuneration for consumers; Sherry FitzGerald Financial services says the current model, whereby mortgage brokers earn a typical 1 per cent commission on mortgages they arrange, creates a “win, win, win relationship”. In a survey of its customers, it found that just 4 per cent of clients said they would prefer to pay a fee directly to a financial adviser.
The Association of Expert Mortgage Advisors argues that the current regime is “fit for purpose” and warns that banning commissions may result in a two-tiered advisory position, where only those who can pay a fee for advice “receive best advice”.
Brokers Ireland, which represents more than 90 per cent of full-time brokers in Ireland, says the regime “is consistent with responsible business conduct”, noting that commission levels have come down by “well over 50 per cent over the last 20 years”.
Many brokers say banning commission in the UK has led to a reduction in the number of financial advisers, as consumers can no longer afford to engage an adviser. Aviva, for example, points out that an hour of financial advice post-RDR costs about £120 (€140).
Higher yield
One of the few dissenters to the review is the Pensions Council, which argues that “however commission is paid, it is, of course, the consumer who pays it”.
The council is firm in its declaration that in almost all instances, consumers would be better off and will have a higher yield on their investment “if they pay upfront for independent advice, instead of paying commission”.
It cites the example of approved retirement funds (ARFs), which have become increasingly popular with retirees. It notes that intermediary commission is likely to account for 52 to 70 per cent of the total charges borne by the consumer. The council also says that advice only matters when it’s good, and “the level of commission would appear to be independent of the quality of advice or the level of service”.
For the Pensions Council, consumers are not considered in current arrangements.
“Commission rates are effectively decided between the insurer and intermediary, with little or no possibility of input from the consumers,” it says.
Similarly Vanguard, a US low-cost funds provider, argues that when advisers earn commission, they “will feel they have to recommend a product even if it is not in the investor’s best interests”. The funds company does not pay intermediaries commission for distributing funds itself.
Other brokers suggest that the Central Bank should row back on allowing certain types of commission, such as trail commission, which means that advisers can continue to earn an annual fee on products such as pensions and life assurance.
Insurance Ireland, however, asserts that it benefits consumers, as the fee can be used by the adviser “to provide ongoing administration, advice and support to the consumer”.
Trustee Decisions argues that “campaigns” for enhanced commission, as well as “over-ride” commission, which is paid to advisers for achieving pre-agreed sales volumes, can lead to conflicts of interest and as such, should be prohibited.
What’s next?
The Central Bank says the responses will help inform its policy position on the issue, and it will follow up this process with a consultation paper in the third quarter of the year.
This will address issues arising out of this review including: the acceptance and retention of commissions by intermediaries describing themselves as “independent”; ways to mitigate product and producer bias where commission is paid; and volume-based and over-ride commissions.
