The call for an independent financial services authority, by the Oireachtas Joint Committee and Public Finance report on the supervision and regulation of financial institutions, is the only bit of good news to come out of the recent allegations about mis-selling and churning of hundreds of life policy customers.
The report is the product of the hearings that went on after the revelations about National Irish Bank. The committee has found that the entire financial services industry has been ineptly regulated, by the existing regulators: the various departments, the Central Bank, Revenue Commissioners and Director of Consumer Affairs. It found that because of their structures to have failed to prevent the kind of banking malpractice that has gone on.
It recommended that a central regulator with responsibility for all financial institutions, including the insurance industry, be appointed to safeguard consumers' interests. The chairman of the committee noted that such regulators have been and were continuing to be adopted in other European jurisdictions including Britain "including our nearest neighbour" Britain the UK and so should be adopted here if public confidence in the financial services sector were to be renewed. The failure of self-regulation in the Irish insurance industry is best depicted in the churning case highlighted recently in the media. One of the most odious cases involved a couple persuaded by an independent broker to invest £20,000 in a single Irish Life investment policy, taken out in the early 1990s. This was subsequently churned by the same broker into four separate policies, each worth about £5,000 with Irish Life and Friends Provident (with which he also had an agency to sell its products) in order that he could collect four new sets of commission. When all the other associated setting-up charges were taken into account, this couple's £20,000 fund became virtually worthless. The salesperson was an independent broker and not a direct employee of the company, so Irish Life said the broker legally represented the client in the transaction. The broker didn't belong to the self-regulatory body, the Irish Broker's Association, so he did not come under any sanctions it claims it enforces when members are involved in malpractice. The insurance industry does not allow its own Ombudsman to deal with cases involving brokers to whom they have granted sales agencies, so that office could not investigate the case.
The broker has since left the company he was working for and the only recourse this couple ever had was to take a civil action against him, something they could not afford.
The Oireachtas committee has finally, publicly called for the setting up of a central regulator, to whom this couple and undoubtedly thousands more, will be able to turn to for assistance.
In Britain, the Personal Investment Authority (PIA) has jurisdiction over cases like these and not only is its role to investigate malpractice, but it also has an important role in making sure that: selling and marketing standards are met; proper fact-finding is done before customers are sold policies or investments; and that individual companies have proper compliance standards in place to discourage mis-selling.
Companies which collude, in any way, or overlook such practices also answer to the PIA, and are regularly fined or otherwise sanctioned by the agency. In the Republic consumers are at the mercy of bad practices which have become acceptable in some companies. Direct sales forces, which have never been under the watchful glare of an independent regulator, hardly worry about internal compliance officers, we have been told.
"Knuckles get rapped all the time, but it doesn't usually go much further than that," one sales manager said, referring to customer complaints. "There is an attitude that customers don't know what they are talking about."
Codes of practice and standards are almost entirely voluntary and have been adapted to suit individual company circumstances and corporate cultures. Any statutory guidelines there are, tend to be non-contentious and have been introduced reluctantly on foot of EU directives. The 15-day cooling-off notice that life assurance purchasers are supposed to receive is one example: insurance companies regularly insist that this is a sturdy defence for the customer against being sold something they don't want or need. However, many customers are encouraged to ignore the cooling-off notices.
The downside of policies is rarely emphasised by salespeople, eager to secure a signature at the bottom of a contract.
It would be heartening to think that the Oireachtas committee's recommendation for a financial services regulator will be heeded and one set up soon. But judging by how long it has taken for the introduction of a Ministerial order to require full transparency of all life assurance commissions at point of sale about three years and still waiting no one should count on an independent financial regulator being set up too soon.
A complicating factor for consumers, however, is that the life companies are no longer working under the 1989 Commissions Agreement (which was violating EU and Irish competition law) and so can pay salesman any amount of commission they wish while being under no obligation to reveal the size of payments to the customers.
Consumers need to protect themselves. Ideally, they should do this by refusing to purchase any high front-loaded investment-type policies from direct sales agents who solicit business door-to-door or via group employment schemes.
Commission-driven brokers are equally suspect since their first interest is achieving a sale. You should certainly not deal with any broker who refuses to reveal all the charges and commissions associated with the product and the investment impact of those charges on your fund for each year of its existence.
Though it is no guarantee against mis-selling or malpractice, you should try only to deal with a financial adviser or broker who charges a flat fee, relative to the amount of time and effort involved in arranging the transaction and of course, his own reputation and expertise. Many reputable commission brokers will recommend products in which the commission and other charges are spread out over a period of years this lessens the initial blow to the investment fund and encourages persistency of the policy: it is against the brokers' interests for you to cash it in early since they will not get future commission payments.
Meanwhile, fee-based brokers are more liable to recommend the products of companies with low initial charges and high fund allocations (where no commission is paid) because they know they will earn their fee directly from you.
There is a huge misconception in the broker community that Irish consumers will not pay a fee for a financial product if they can get it "free". No one who buys a conventional life assurance savings policy is getting it "free". Every month for at least a year the monthly contribution is taken by the salesman and company as the price for taking out that policy. Given the opportunity, many customers would prefer to pay a fair, one-off fee to buy the policy, especially, if as many fee-based brokers contend, the fee is usually a fraction of the conventional charges.
Finally, any Family Money readers who have bought life-assurance-based products in the last decade and are concerned that they may have been adjusted in any way on the advice of the salesperson for example, if the size of the premium was reduced or the policy encashed and another one taken out should ask the companies concerned to review their cases if they are in any way uneasy about those changes.
If you suspect you were mis-sold a policy or you are the victim of churning you will need to begin a long complaints procedure that will begin with the company concerned, but which under our current system, may only be settled in the civil courts. The spokesman for the Irish Insurance Federation told Family Money last week that "in principle", it supported the idea of a regulator for the financial services industry. It has even been "actively pursuing" the brokers to consider joining the Ombudsman's scheme or setting up its own. Both these admissions are a far cry from previous declarations that the existing self-regulatory system had served the companies and their customers very well. The next step if restoring credibility and confidence is also on its agenda is to call for the immediate setting up of the regulator.
