Distinction between Authorised Advisor and Multi Agency Intermediary to be scrapped?

[Brendan Burgess]

consultation paper on the Review of the Handbook of Prudential Requirements for Intermediaries

Press Release 30 August 2013

The Central Bank of Ireland today (30 August 2013) publishes a [broken link removed](CP72) on the Review of the Handbook of Prudential Requirements for Authorised Advisors and Restricted Intermediaries.
The Central Bank of Ireland is seeking to update the current handbook, which applies to investment intermediaries authorised under the 1995 Investment Intermediaries Act (IIA), to reflect the significant regulatory changes that have occurred in the retail intermediary sector, to provide better protection to consumers and a clearer framework for firms to operate in. The current handbook has been in force since 2001 and was last revised in 2006.



The consultation paper sets out a series of proposed amendments to existing prudential rules and also some clarifications in relation to industry practice, including:

• Minimum regulatory capital requirement – it is proposed to remove the minimum requirement of €10,000 for Authorised Advisors. All Investment Product Intermediaries (IPIs) (other than intermediaries acting as Product Producers which are required to hold a minimum capital of €50,000) must maintain a positive capital balance.
• Solvency – it is proposed that IPIs must, at all times, be in a position to meet their obligations in full as they fall due and must maintain a positive net asset position.
• Professional Indemnity Insurance (PII) – it is proposed that a requirement will be introduced whereby all IPIs must hold PII at the same level as currently applies to Insurance Intermediaries registered under the Insurance Mediation Regulations (an annual limit of €1.25m per claim and €1.85m in aggregate).

The consultation paper also seeks views on:

• Reclassification of Authorised Advisors and Restricted Intermediaries including MAIs as IPIs;
• The treatment of Goodwill and Other Intangibles;
• The use of Perpetual Subordinated Loans; and
• The obligation to file Annual Online Returns.

Submissions are invited from all interested parties by Friday 29 November 2013. Submissions should be made to handbookipi@centralbank.ie
A copy of the Consultation Paper is available [broken link removed].

 

[Brendan Burgess]

I am very confused by this consultation.

This is a consultation on the prudential requirements.

But is this the place for "Reclassification of Authorised Advisors and Restricted Intermediaries including MAIs as IPIs;"

I would have thought that prudential factors would be only a small part of this distinction. I would have thought that the needs of the customer were far more important for deciding whether such a distinction was justified or not.

It may be that the different prudential requirements for them should be harmonised, but that is a separate, and minor, issue.

5. Reclassification
Currently all investment intermediaries authorised under the IIA are categorised as either Authorised Advisers (AAs) or Multi-Agency Intermediaries (MAIs). AAs are required to provide broad-based investment advice whereby they must provide the consumer with the most suitable investment advice on retail investment instruments without the necessity of holding a letter of appointment from a product producer. MAIs are required to provide the most suitable investment advice from the range of product producers from which they have appointments.

The terms MAI and AA were created specifically for insurance intermediaries following discussions with industry representative bodies in 2001. During 2008, a Working Group comprised of the then Financial Regulator and members of the industry representative bodies was set up to consider, inter alia, intermediary categorisation. The Working Group recommended that the terms MAI and AA should be discontinued.

Consumer research at the time indicated that the term most commonly used and understood by consumers is ‘broker’ and that consumers are not familiar with the different categorisations in use, such as MAI and AA. The recommendations of the Working Group regarding the criteria for the use of the term ‘broker’ have been implemented through the Consumer Protection Code 2012 and, therefore, the terms MAI and AA are now essentially redundant. In addition, these terms have no basis in legislation. We propose, therefore, that intermediaries authorised under the IIA will be categorised as ‘investment product intermediaries’, as set out in Section 25 of the IIA.

Q 1: Do you agree with the proposed reclassification of AAs and Restricted Intermediaries including MAIs to IPIs?

I have searched the [broken link removed]and have not found the term "broker"

 

[Steven Barrett]

This in only good news. All advisers will then have to give advice on what is available in the market and not just companies they have agencies with. Advisers may also realise that if may have to recommend products in companies they have no agency with (although how many AA's do that now?), then they may move to a fee based model as opposed to having to sell something to get paid.

The industry needs to move away from selling products to providing good advice.

 

[MrEarl]

....The industry needs to move away from selling products to providing good advice.

Hello,

While that is true, questions arise such as:

- how will a consumer know they are getting good advice, genuinely independent advice etc (i.e. how will the consumer know the product being recommended is genuinely the most appropraite for them from all options on the marketplace) ?

- if the intermediary business moves to an entirely fee based service and hence becomes "independent", how does the consumer see sufficient evidence that the previously paid commissions which were factored into the overall price of a service (by, say a general insurance provider) has now been deducted in full & hence, the price of the service made cheaper (before the fee for professional advice is paid) ? ... I would have grave concerns that the providers would not reduce (in part or all) the cost of the services, to exclude the current commissions paid.

 

[backothehill]

What kind of fees would one expat for fee based advice? Ballpark?.. Is it hundreds or thousands?Do they charge like an Irish dentist or an Irish mechanic?

 

[backothehill]

Sorry "expect"

 

[Steven Barrett]

Hello,

While that is true, questions arise such as:

- how will a consumer know they are getting good advice, genuinely independent advice etc (i.e. how will the consumer know the product being recommended is genuinely the most appropraite for them from all options on the marketplace) ?

- if the intermediary business moves to an entirely fee based service and hence becomes "independent", how does the consumer see sufficient evidence that the previously paid commissions which were factored into the overall price of a service (by, say a general insurance provider) has now been deducted in full & hence, the price of the service made cheaper (before the fee for professional advice is paid) ? ... I would have grave concerns that the providers would not reduce (in part or all) the cost of the services, to exclude the current commissions paid.

Isn't that the same with any trade or profession? Look them up, talk to them, see if they have any recommendations.

If you want to see proof from your adviser that he isn't lying to you, you have a broken relationship and you should seek out someone you do trust.

 

[Steven Barrett]

What kind of fees would one expat for fee based advice? Ballpark?.. Is it hundreds or thousands?Do they charge like an Irish dentist or an Irish mechanic?

My first two meetings are at my own cost, giving both client and myself the chance to see if we can be of benefit to each other. A fee is then agreed, dependent on what work is required.

 

[Monksfield]

Yes the distinction between the two is lost on the average consumer, who understandably sees both as 'brokers'.

The key word is 'independent' and who is allowed to use it.There is currently a minimum number of agencies required before someone can use the word 'independent' - it is either 4 or 5 AFAIK.

This is a more critical definition IMO.

 

[Steven Barrett]

Taken directly from the CPC code:

The term ‘independent’ may only be used by an intermediary in its legal
name, trading name or any other description of the firm where:
a) the principal regulated activities of the intermediary are provided on the
basis of a fair analysis of the market; and
b) the intermediary allows the consumer the option to pay in full for its
services by means of a fee.

Clarification of fair analysis:

A "fair analysis of the market‟ entails providing advice on the basis of a sufficiently large number of contracts and providers available on the particular market to enable the broker to make a recommendation, in accordance with professional criteria, regarding which contract would be adequate to meet the customer‟s needs.

 

[MrEarl]

Isn't that the same with any trade or profession? Look them up, talk to them, see if they have any recommendations.

If you want to see proof from your adviser that he isn't lying to you, you have a broken relationship and you should seek out someone you do trust.

Please, don't feel the need to go on the defensive with the points I've raised but instead, offer your suggestions for how the matters raised could be independently tested.

In the early days of such a change, there would be no precident to check the reputation or fees being charged by an independent advisor (unless they are already AAs), while equally how would one confirm that the product providers have reduced their overall charges to exclude the commissions previously paid ?

 

[Steven Barrett]

Sorry, I have never been asked to prove that I have done what I said I would do.

In almost all cases, the removal of commission would require a new contract because the life companies computer systems can't handle a change of terms.

Could you clarify what you mean by "unless they are already AA's"?

AA's are not necessarily independent under the CPC if they don't offer to do it for a fee. A MAI can meet the definition of independent if they can do a fair analysis of the market, which can be met in most cases.

As to whether you know you are getting good advice, you have to listen to what is being said to you and make a judgement on it. I have very defined processes that I go through before making a recommendation on anything. It took me a lot of time and money to produce these but I am confident that my clients get better advice as a result, don't get any shocks and what I advise meets their expectations (or if it can't meet their expectations, they know it won't). Some other advisers will meet with you and try to get you to sign the proposal in the first meeting and have no rationale behind recommending a particular fund other than "it's doing well".

Look for people who's focus is on providing advice and not on trying to sell something.

 

[MrEarl]

Sorry, I have never been asked to prove that I have done what I said I would do.

In almost all cases, the removal of commission would require a new contract because the life companies computer systems can't handle a change of terms.

Could you clarify what you mean by "unless they are already AA's"?

AA's are not necessarily independent under the CPC if they don't offer to do it for a fee. A MAI can meet the definition of independent if they can do a fair analysis of the market, which can be met in most cases.

As to whether you know you are getting good advice, you have to listen to what is being said to you and make a judgement on it. I have very defined processes that I go through before making a recommendation on anything. It took me a lot of time and money to produce these but I am confident that my clients get better advice as a result, don't get any shocks and what I advise meets their expectations (or if it can't meet their expectations, they know it won't). Some other advisers will meet with you and try to get you to sign the proposal in the first meeting and have no rationale behind recommending a particular fund other than "it's doing well".

Look for people who's focus is on providing advice and not on trying to sell something.

Hello,

This was not in any way directed towards yourself & never intended to ask you personally to prove what you have done, but more so for those who may previously have been restricted intermediaries and might now evolve into "independent" fee based (rather than commission driven) advisors.

My understanding (right or wrong) is that:

An Authorised Advisor ("AA") can advise on all products in the market in order to deliver fair analysis (but must be authorised in writting, to "sell" a specific product). They can operate on a fee basis, hence offering independent advice in no way influenced by the possibilty of generating a commission. ....My previous reference to AAs ws in the context of these parties - where they would have established a track record and references can be sought.

While a Multi Agent Intermediary ("MIA") does not necessarily advise on all products in the market or conduct fair analysis, but instead only recommends from those products from providers who have given written authority to the MIA. They are paid by commission, via the products they sell, on behalf of those providers who have authorised the MIA.

As such, I am thinking about the current MIAs who might evolve into advisors, providing a fair analsis of the market for a fee, rather than commission when I put the questions above. Sorry if I have not been clear to date.

Obviously, the point raised about how consumers would verify that the product or service provider had reduced the cost of their product or service (having now excluded the commission, which is no longer paid) is an related question.

 

[Steven Barrett]

An Authorised Advisor ("AA") can advise on all products in the market in order to deliver fair analysis (but must be authorised in writting, to "sell" a specific product). They can operate on a fee basis, hence offering independent advice in no way influenced by the possibilty of generating a commission. ....My previous reference to AAs ws in the context of these parties - where they would have established a track record and references can be sought.

While a Multi Agent Intermediary ("MIA") does not necessarily advise on all products in the market or conduct fair analysis, but instead only recommends from those products from providers who have given written authority to the MIA. They are paid by commission, via the products they sell, on behalf of those providers who have authorised the MIA.

An AA can advise on all products in the market but can only get commission from those he holds an agency with. They can charge a fee if they wish.

A MAI can only advise on companies they hold an agency with. They can also charge a fee if they wish.

Independent advice is based on fair analysis of the market and being willing to do it for a fee instead of commission. An MAI may have agencies with all the major players in town, so as long as they consider all of them before giving advice, it complies with the Central Bank's definition of independent advice.

In practice, the vast majority of AA's only provide advice on providers that they have an agency with and get a commission from. I have worked in AA firms for years and in practice, there is very little difference between the two.