Brokers Ireland Member Meetings Central Banks consultation on

Brokers Ireland Member Meetings Central Banks consultation on Intermediary Inducements Enhanced Consumer Protection Measures CP 116 February 2018 1

Agenda • Welcome: • Overview of CP 116 proposals & Brokers Ireland planned response: Diarmuid Kelly • Explaining Mifidisation: Paul Carty, Brokers Ireland Board Member • Member discussion • Timelines & closing remarks: Diarmuid Kelly 2

Overview of CP 116 proposals & Brokers Ireland Planned Response Diarmuid Kelly, Brokers Ireland Chief Executive 3

Background: Overview of CP 116 proposals & planned response • CP 116: Intermediary Inducements Enhanced Consumer Protection Measures was published on the 22 nd of Nov 2017. • Submissions due by the 22 nd of March 2018. • Consultation paper follows on from the 2016 discussion paper on the payment of commission to Intermediaries. 4

Background: Overview of CP 116 proposals & Brokers Ireland planned response • The 2016 discussion paper focused on the risks & benefits to the consumer of the payment of commission to Intermediaries. • Brokers Ireland made a joint submission – 13 in total received by the Central Bank (no submissions received from consumer bodies/individual consumers) 5

Background: Overview of CP 116 proposals & Brokers Ireland planned response • February 2017 – feedback statement published on Discussion paper. • Central Bank indicated they were going to focus on: Ø Use of the word independent Ø Eliminating product provider bias Ø Volume based override payments 6

Content: Overview of CP 116 proposals & Brokers Ireland planned response • The Consultation Paper contains 31 questions and invites responses on some or all of the issues addressed. Key Points • Change in terminology • “Mifidisation” of the market • Enhanced Quality of Service • Use of the term Independent • Transparency • Conflicts of interest • Proposals in relation to restricting payment of commissions 7

Overview of CP 116 proposals & Brokers Ireland planned response • Change in terminology: Proposed use of the term Inducement as a substitute for the term commission. • No legal basis for this proposal – Brokers Ireland completely rejects this change in terminology. 8

Overview of CP 116 proposals & Brokers Ireland planned response • “Mifidisation” of the market Proposing to apply standards of MIFID across all financial products, i. e. . from pet insurance to complex investment products. This approach was rejected by EU legislators – Decision was made to draft 3 distinct pieces of Legislation i. e. MIFID II, IDD and MCD. 9

Overview of CP 116 proposals & Brokers Ireland planned response • Enhanced Quality of Service - A MIFID Concept In order for “inducements” to be acceptable, they must: Ø be designed to enhance the quality of the relevant service to the consumer; Ø not have the potential to impair the intermediary’s obligation to act honestly, fairly and professionally in accordance with the best interests of the consumer; and Ø not have the potential to impair the intermediary’s obligation to satisfy the suitability requirements set out in Chapter 5 of the Code. 10

Overview of CP 116 proposals & Brokers Ireland planned response • Brokers Ireland rejects this proposal in it’s entirety. • It needs to be recognized by the Central Bank that the nature of MIFID products differ greatly from the nature and complexity of products which fall under the IDD and MCD. • Commission payments fundamentality differ between MIFID and IDD/MCD firms. 11

Overview of CP 116 proposals & Brokers Ireland planned response • Use of the term Independent: It is proposed that firms would no longer be permitted to describe themselves and their regulated activities as ‘independent’ where they accept and retain “inducements”. • Brokers Ireland rejects this proposal. • A deliberate decision was taken by European Parliament when drafting the IDD/MCD not to impose a ban on commissions for independent advice. 12

Overview of CP 116 proposals & Brokers Ireland planned response • Current provisions of the code should continue to apply. • Proposed change will mean that choice is taken away from the consumer. • Importance of the concept of independent advice 13

Overview of CP 116 proposals & Brokers Ireland planned response • Proposal that inducements linked to size of mortgage loan be prohibited. Brokers Ireland rejects this proposal. Lending is subject to strict Central Bank criteria in relation to loan to value ratios and affordability. Current market practice where commission rates are linked to the loan amount works well and reflects the additional work and complexities of larger cases. 14

Overview of CP 116 proposals & Brokers Ireland planned response • Concern lenders will select a lower remuneration amount regardless of the complexity of the case. • Brokers forced to charge the consumer a top-up-fee to pay for their services or stop providing advice in this area. • Consumers may be forced to deal directly with lenders – lack of choice/advice. 15

Overview of CP 116 proposals & Brokers Ireland planned response • An intermediary may not recommend a product to a consumer as being the most suitable product from a range where there are different levels of inducement offered for the range of products involved. Brokers Ireland rejects this proposal - could ultimately mean that Brokers would have to refuse to recommend particular products to consumers. 16

Overview of CP 116 proposals & Brokers Ireland planned response Competition Law argument. CB have indicated broker could either put in place measures to eliminate the bias i. e. set a fee for this range of products and charge/refund monies to the client as appropriate; or the broker could outline a range of products to the client at the point of sale via the statement of suitability and the client select which product they want from the range. 17

Overview of CP 116 proposals & Brokers Ireland planned response • Also proposals that certain inducements are deemed to give rise to a conflict of interest and, therefore, must be avoided. These are: Ø inducements linked to targets that do not consider the consumer’s best interests (e. g. , Ø targets linked to volume, profit or business retention); and Ø soft commission arrangements; 18

Overview of CP 116 proposals & Brokers Ireland planned response Brokers Ireland argue that the existence of these override payments can provide benefits to consumers. It can drive the costs down and enable more consumer choice through a variety of annually renewable insurance products. 19

Overview of CP 116 proposals & Brokers Ireland planned response • Greater Transparency Intermediaries must publish on their websites and display in their public offices a comprehensive summary of the details of the inducement arrangements they have with any product producers with which they have an appointment or from which they receive inducements for arranging products. Summary document also to be brought to the attention of the consumer 20

Overview of CP 116 proposals & Brokers Ireland planned response Intermediaries are already subject to a comprehensive disclosure regime. We don’t believe there is any benefit to the consumer of this proposal and ultimately the only benefit would be to competitors in order to compare commission levels between the providers. Impossible to keep such comprehensive details up to date and accurate 21

Overview of CP 116 proposals & Brokers Ireland planned response • Conflicts of Interest There are proposals for enhanced policies and procedure to acknowledge and manage such conflicts both by the intermediary and the product producer. Firms will be required to retain records to demonstrate: how conflicts of interest arising from inducements have been avoided for each transaction; 22

Overview of CP 116 proposals & Brokers Ireland planned response how the requirement that a firm must not make any recommendation if there are different levels of inducement offered for the range of products involved has been met; and that the inducement arrangements summary document was brought to the attention of the consumer before concluding a contract for a financial product. 23

Overview of CP 116 proposals & Brokers Ireland planned response Brokers Ireland consider these proposals as completely unworkable overall and in particular for volume business. Consumers already overwhelmed with the volume of paperwork received. It would mean additional cost, more paperwork with no tangible benefit to the consumer. 24

Central Bank Meeting Feedback: Clear that the CB are fundamentally seeking through the proposals contained in the consultation paper to: • Eliminate/remove product provider bias and address conflicts of interest that are in place and • Achieve the highest standards across the board – i. e. . Mifidise 25

Department of Finance Meeting Feedback: • Advised that for the transposition of the IDD it is their intention to stick very closely to the wording of the Directive. • Term Independent - The Dept. of Finance advised that the decision has been made in relation to Insurance Based Investment Products and the Minister has signed off on it. 26

Overview of CP 116 proposals & Brokers Ireland planned response • Brokers Ireland submission currently in draft submission • Welcome any member feedback – compliance@brokersireland. i. e. 27

Brokers Ireland activities • Consultation paper - Key priority • Brokers Ireland Board Meetings • Brokers Ireland meetings with both the Central Bank and Department of Finance in relation to the Consultation paper. • Meeting public representatives on the matter. • Member meetings 28

Explaining Mifidisation Paul Carty, Brokers Ireland Board Member 29

Central Hypotheses of CP 116 is: CBI see’s commission as creating conflict of interest/bias. Result - the Central Bank sees the higher standard of MIFID II (MIFIDISE) as an appropriate response, for example: • Ban commission for “Independent advice”. (MIFID) (Not IDD) • Fee, commission is designed to “enhance” rather than “not have a detrimental impact” on the quality of the service. (MIFID v IDD). ALL WRAPPED IN THE CONSUMER INTEREST 30

We have to do the following: 1. Undermine the assumptions in CP 116, flawed research, failure to differentiate between products in terms of consumer profile and exposure, failure to understand intermediation, failure to produce evidence of bias. 2. Demonstrate that it is contrary to consumer interests. Whilst adopting language and explanations that are as simple as the circumstance dictate or permit that resonate with the audience. 31

TO R INS ER TY LIA BIL ITY OP PR MO E HO M EL UNIT TRUSTS HEDGE FUNDS P’S IBI S ION PE NS A PR S TER U M SER R IOU ANCE S IL NC LN OM ESS E P RO TEC TIO N 1 AV TR PE T INVESTMENTS PRODUCT MAP

TO R INS ER TY LIA BIL ITY OP PR MO E HO M EL €€ UNIT TRUSTS HEDGE FUNDS P’S IBI S PROTECTION PE NS A PR S TER U M SER R IOU ANCE S IL NC LN OM ESS E P RO TEC TIO N 2 AV TR PE T INVESTMENTS PRODUCT TYPE INVESTMENT €€€€€€

TO R INS ER TY LIA BIL ITY OP PR MO E HO M EL + IBIP Regs. Chapter 8 UNIT TRUSTS HEDGE FUNDS 2619 P’S €€ IBI S PROTECTION PE NS A PR S TER U M SER R IOU ANCE S IL NC LN OM ESS E P RO TEC TIO N 3 AV TR PE T INVESTMENTS REGULATION INVESTMENT €€€€€€ 88

TO R INS ER TY LIA BIL ITY OP PR MO E HO M EL + IBIP Regs. Chapter 8 UNIT TRUSTS HEDGE FUNDS 2619 P’S €€ IBI S PROTECTION PE NS A PR S TER U M SER R IOU ANCE S IL NC LN OM ESS E P RO TEC TIO N 4 AV TR PE T SERIOUS INVESTMENTS NEGLIGIBLE CONSUMER RISK PROFILE INVESTMENT €€€€€€ 88

TO R INS ER TY LIA BIL ITY OP PR MO E HO M EL + IBIP Regs. Chapter 8 UNIT TRUSTS HEDGE FUNDS 2619 P’S €€ IBI S PROTECTION PE NS A PR S TER U M SER R IOU ANCE S IL NC LN OM ESS E P RO TEC TIO N 3 AV TR PE T INVESTMENTS REGULATION INVESTMENT €€€€€€ 88

TO R INS ER TY LIA BIL ITY OP PR MO E HO M EL RISK TRANSFER SERIOUS INVESTMENTS PREMIUM + IBIP Regs. Chapter 8 UNIT TRUSTS HEDGE FUNDS 2619 P’S €€ IBI S PROTECTION PE NS A PR S TER U M SER R IOU ANCE S IL NC LN OM ESS E P RO TEC TIO N 5 AV TR PE T NEGLIGIBLE CONSUMER RISK PROFILE INVESTMENT €€€€€€ 88

REGULATORY EQUIVALENCE IDD CBI Mi. FID CONSUMER IMPACT: 1. INCREASED UNNECESSARY COSTS 2. REDUCED CONSUMER CHOICE 3. DEGRADED MARKET 6

Member Discussion 39

Timelines & Closing remarks • Submission closing date 22 nd of March • Brokers Ireland to continue to lobby Central Bank & Department of Finance and public representatives • Central Bank have indicated that output from consultation will be published towards end of 2018 • Review of CPC 2019 to incorporate any changes 40