Friday 23 August 2019

Time will tell if Central Bank right not to ban broker commissions

The Central Bank has decided against banning investment brokers from commission on sales
The Central Bank has decided against banning investment brokers from commission on sales
Richard Curran

Richard Curran

The Central Bank has decided not to take the nuclear option when it comes to how much commission investment brokers selling various products receive from the banks, insurance companies or investment firms behind the products.

That would have seen Ireland follow countries such as Finland, Denmark, the Netherlands and the UK in banning these commissions altogether.

The system where brokers receive commissions of around 3pc to 6pc on policies and investments has been wide open to abuse or mis-selling, mainly through conflicts of interest.

The easiest way to deal with it would have been to abolish commissions and simply let the broker collect other fees, usually payable over the lifetime of the product.

In theory at least it would have ensured the broker was working for the customer and not himself when selling particular products.

But there is a downside to abolishing commissions altogether.

Firstly, it can shift greater fees on to the customer. Secondly, it could result in less independent advice, not more.

In the UK, it is said that it resulted in an "advice gap", where only those who can afford to pay for advice get independent recommendations.

If you do not want to pay for independent advice, you will end up getting sometimes dodgy advice from friends, neighbours or other sources online.

The best model is to ensure that brokers are as transparent as possible and not incentivised to push certain products over others simply because they are being rewarded with higher commissions on them based on how many they sell or the value of the product sold.

It would certainly be a lot cleaner to just abolish commissions but the Central Bank is proposing in its consultation paper a more nuanced approach. Bear in mind the abolition of commissions would reduce the number of brokers, thereby reducing competition and hiking up other fees.

The Central Bank is proposing that brokers will have to be upfront on the commissions they get from investment firms, banks and pension providers. Intermediaries will have to inform clients how they are paid whilst the Central Bank will also introduce restrictions on intermediaries describing themselves as independent.

In order to avoid conflicts of interest, the Central Bank also suggests banning financial advisers from getting a larger commission based on selling a larger loan, or get paid more for hitting certain sales targets.

Overall the proposals are a step forward but are they a step far enough? By seeking out a middle way on this issue, the Central Bank is looking to put together what it sees as a more sensible, nuanced approach. But ultimately, better outcomes will depend on enforcement.

It will be much more difficult to regulate a more subtle model for commissions than if they were simply banned altogether. If it can be regulated effectively, then it appears to try and keep the best of both worlds - genuinely independent advice at an accessible cost.

As Goodbody Stockbrokers pointed out during the week, revisiting fee structures will present an opportunity to drive down commissions particularly if brokers are less incentivised to drive volumes.

"On balance, this may negatively impact the banks that have been more reliant on intermediaries for volume (PTSB, Ulster and KBC)."

The broker industry has welcomed the initiative which suggests they are breathing a big sigh of relief that the Central Bank has not gone for the sledgehammer approach.

We shall have to wait and see if it is the best solution.

UK move shows corporate tax battles are just getting started

British Chancellor Phillip Hammond announced a new way of taxing tech companies in his Budget. He plans to introduce a measure to tax them on sales generated in the UK, rather than simply paying tax in the country where the company making the profits is resident. UK-based legal experts were quick to describe the initiative as a "game-changer" for how large digital firms are structured.

It isn't the first measure the British have introduced in this area but it does signal a further tightening of the screw on the use of low-tax jurisdictions, like Ireland, to reduce the overall tax paid.

But before Apple, Google or Facebook start rushing for Dublin Airport to leave the country and set up somewhere else, it is worth looking at the tax take the UK expects to get from this "radical" new measure.

The chancellor pencilled in an extra £800m over the next five years. Not an insignificant amount, but not the tightest screw imaginable either.

The new measure is due to kick in after the UK leaves the EU in 2019. But who believes that will happen? After Brexit the UK will want to do everything it can to attract foreign direct investment to the country, so it doesn't want to alienate these digital companies too much.

The measure sounds broadly similar to that advocated by the French which would involve a turnover tax on digital revenues in the country in which the service is bought. Ireland has been fighting a rearguard action and vetoing that particular proposal.

Tax experts say that France, Germany or Italy could go ahead and introduce a measure like that anyway, but it might put them outside existing tax treaties with countries like Ireland.

Corporate taxes could be a whole new economic battle ground between the UK and the EU (including Ireland) after Brexit.

Financial Times writer Matthew C Klein, had a real pop this week at the part played by countries like Ireland in hoovering up American assets but not necessarily real direct investment.

He said that since 1982 American businesses have spent $5.1trn accumulating direct investment abroad. About $2trn of that has come from re-investing profits in seven small countries known for helping multinationals avoid tax: Bermuda, the UK Caribbean Islands, Luxembourg, the Netherlands, Singapore, Switzerland and, of course, Ireland.

In fact, just over half of America's foreign direct investment assets are now held in these seven countries - up from a fifth in the mid-1990s. Yet, since 1982, 29pc of America's outbound direct investment went to the UK. Mr Klein goes on to claim that none of the direct investment assets owned by American companies in Ireland or the Cayman Islands were acquired through traditional outflows.

"The seemingly large stock of direct investment assets in those two tiny countries is simply due to the need to 'reinvest' profits 'earned' there to avoid paying tax."

His argument is interesting but it doesn't explain how there are literally tens of thousands of people working for these companies in Ireland and they aren't all just tax accountants.

Either way, it looks like the global corporate tax battles are only just beginning.

Ballsbridge hotel that just keeps on giving despite plans for site

The former Jurys Hotel in Ballsbridge just keeps on going. It is now 12 years since developer Sean Dunne bought it with a view to levelling it - and the rest is history.

In recent years it has been run by the Dalata Hotel Group under lease from current owners, Chartered Land. The site has planning permission for a mix of apartments, a hotel and other mixed use but it isn't ready to go. So Dalata is extending its short-term lease to operate the hotel possibly until 2019 - 14 years after the original site deal.

Dalata has operated the hotel under lease since January 2012 and should be happy to continue the arrangement. A short-term lease rules out any major refurbishment spend, while the demand for hotel rooms in Dublin continues to boom.

The extension will allow Dalata to keep its Dublin hotel room count up until proposed new builds elsewhere in the city come on stream.

Dalata chief executive Pat McCann has made many shrewd moves since floating the company but Ballsbridge is the hotel-turned-property-play, turned hotel again, that just keeps on giving.

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