Regulator to clamp down on brokers' override fees

The new financial regulator is to clamp down on the paying of override commissions to brokers. The chief executive of the Irish Financial Services Regulatory Authority (IFSRA) has signalled that the authority is to work with industry to enhance the level of regulation and improve standards.

Mr Liam O'Reilly said it was clear that current regulations had not put an end to practices that raised questions about the quality of advice being offered to clients.

Speaking last week at an insurance seminar, Mr O'Reilly said the Central Bank's supervision of brokers had revealed that less-than-transparent practices such as the payment of overrides persisted.

Brokers' independence should not be compromised by "inappropriate incentives" offered by insurance companies, Mr O'Reilly warned. "If consumers fully appreciated the meaning of overrides, for example, how would that affect their confidence in the intermediary and indeed in the insurance company?" he asked.

Overrides are agreements where brokers receive additional commission from an insurance company on top of the usual percentage of the client's funds that he or she keeps. Override commissions are paid directly by the insurance company to the broker and are not generally taken out of the funds invested in the product.

Brokers justify overrides on the basis that they don't come out of the pocket of the consumer, but regulators believe the practice encourages brokers to place higher volumes of business with particular companies than they normally would. As a result, consumers could end up investing money in products that might not be the most suitable for them.

At the speech to a seminar organised by consultancy company Life Strategies, Mr O'Reilly said that transparency of products would be a priority for IFSRA, once it is formally established in mid-2003.

"The public expects to understand the products they buy and what those products cost. Any other approach is not defensible," he said.

However, intermediaries contend that the payment of override commissions, once they are transparent, can be of some benefit to consumers.

Mr Liam Ferguson, of mortgage and pensions intermediary Ferguson & Associates, says override commissions have allowed brokers to offer nil-commission pensions to consumers on a fee basis, then use the override payment from the insurance company to refund the fee.

Some brokers who sell products on a reduced commission basis secure their own income through payment of an override.

"Personally, I have no problem with overrides on the grounds that override commissions must be included in the disclosure of commissions at the point of sale," Mr Ferguson says. Clients should read point-of-sale literature and study it carefully, he adds.

Mr Ferguson says he understands concerns that overrides encourage brokers to place their business unevenly. "If a broker wants to be disingenuous about the products he is selling, there is scope there to be unethical and sell the products of a particular life assurance company, because that life assurance company is paying an override."

However, brokers are required to report the proportion of their business that goes to each company, Mr Ferguson notes. "It would be very, very risky for any particular broker to give a disproportionate level of business to one company just because they are going to get an override from that company."

The broker would run the risk of being shut down by the Central Bank, and later IFSRA, he says.

Mr Diarmuid Kelly, chief executive of the Professional Insurance Brokers Association (PIBA), says the practice of paying overrides has come about since the rejection of the commission agreement between companies and intermediaries as anti-competitive, and was now being used as a stick with which to beat brokers.

He says he believes one broker has gone to all the insurance companies that deal with brokers and requested a standard override payment. In this way, the broker cannot be accused of channelling too much business in one direction.

However, Mr Kelly says he is not in favour of the practice whereby companies agree to pay an override in exchange for the broker bringing a target number of customers their way.

"I guess the best position would be that companies would agree a standard structure that would encourage quality and efficiency, but wouldn't distort the market," he says.