Business Personal Finance

Wednesday 21 August 2019

Radical shake-up of way financial brokers are paid on the cards

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Charlie Weston Personal Finance Editor

Regulators have proposed a radical shake-up in the way financial brokers are paid.

Brokers will have to be upfront on the commissions they get from investment firms, banks and pensions providers when they are proposing certain products, under the proposals put forward by the Central Bank.

The new rules, if they are implemented, would also apply to banks that are trying to sell their customers financial products, such as insurance, investments and pensions.

Also suggested is that financial advisers be banned from getting a larger commission based on selling a larger loan, or get paid more for hitting certain sales targets.

The idea is that advisers avoid conflicts of interest.

If the proposals are implemented in their current form it would mean an end to so-called over-ride commission. This is where brokers get a bonus for hitting certain sales targets.

And there would no longer be what is called a claw-back, where financial advisers get funds upfront from product providers, but they only get to keep it if they reach certain targets.

Brokers would also be banned from recommending one product over another when there are a range of different products, as they are getting higher commission for selling that product.

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This is known as product bias.

Central Bank executives are proposing that the new rules apply to motor and home insurance products, mortgages, investments, pensions and life insurance and income and mortgage protection products.

This is a wider range of products to be covered by commission-limiting rules than in other countries.

Although a radical change in the rules around commission, the new proposals stop short of the outright ban on commissions that exists for certain listed products in the UK.

That has led to what has been labelled an advice gap, where only those who can afford to pay for advice get independent recommendations. Others end up getting questionable advice online or from friends.

It is understood that Central Bank consumer protection executives are wary of unintended consequences like this, so they pulled back from an outright ban on commissions.

The proposals are expected to prompt a fierce backlash from insurance and investment firms that use different commission arrangements to promote sales.

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