I will begin by introducing the members of the delegation representing the Professional Insurance Brokers Association. My name is Elizabeth Smith and I am compliance manager. I am joined by Michael Hoare, PIBA chairman, Diarmuid Kelly, chief executive, Anne Hession, chairperson of the legislation sub-committee, and Jack Fitzpatrick, member of the legislation sub-committee. We are grateful to the joint committee for this opportunity to address it on the role of PIBA and the current issues which are important to the broker industry.
The Professional Insurance Brokers Association was established in 1995 as a non-profit association wholly owned by its members. It has quickly grown to become the largest representative body for small to medium-sized insurance and mortgage intermediaries in Ireland. PIBA has more than 900 member firms which provide a valuable service to consumers. Up to 35% of our members are located in the greater Dublin area, with the remaining 65% spread throughout the country. PIBA has a voluntary executive committee, as well as several voluntary sub-committees covering such issues as legislation, mortgages, life assurance and general insurance. The legislation sub-committee has seven voluntary members and meets on a monthly basis to highlight and discuss issues facing the broker community, as well as compliance and legislative matters at both an Irish and European level. The existence of this sub-committee enables PIBA to draw on the expertise of practising brokers and helps to sustain an objective and dynamic approach to the issues affecting the industry.
Since our inception, the area of legislation and regulation has been a key priority for PIBA. A primary objective is to collate all applicable legislative requirements to provide brokers with guidelines to assist them in deciding how best to comply with all legislative obligations in their day-to-day business. To achieve this objective, PIBA has two full-time staff working in the legislation and compliance section, with other members of staff also devoting time to this area. We provide members with a comprehensive on-line compliance manual which is continuously updated and contains all relevant information, template documents and guidelines to ensure compliance with current rules and regulations in a practical manner. Another function of the compliance unit is to respond to legislative changes. We are committed to assisting and providing practical guidance to our members on how to respond to and implement the changes. PIBA also monitors industry publications and findings of the Financial Services Ombudsman and drafts appropriate guidelines to assist members in, for example, best practice when conducting sales to elderly persons. We also assist our members with individual compliance queries they may have.
On a macro level, PIBA lobbies on behalf of members and brings relevant matters to their attention which may affect their business. PIBA has developed an active co-operative relationship with the Financial Regulator, the Department of Finance and other Government bodies. It is vital for us to have an interactive relationship with such bodies in order positively to influence impending legislation and regulation and to ensure it does not place an unrealistic or disproportionate burden on independent brokers in the conduct of their day-to-day business.
Our members support balanced and proportionate regulation. Such regulation is essential to protect consumers, protect honest companies and uphold the integrity of the financial services industry. We have consistently sought to achieve a level playing field between all providers of financial services. However, to date, a heavy handed and over-the-top approach has been applied to small and medium-sized brokers in comparison with the light touch applied to banks, which has since been shown to have been a naive approach. It seems the Financial Regulator has, to date, only regulated the smaller entities in the financial services industry while neglecting the larger entities, which has ultimately led to the financial crisis in which Ireland now finds itself. To be clear, PIBA is in favour of regulation that is robust, fair and proportionate. However, it must be applied with equal vigour to all sectors and must be proportionate, that is, proportionate to the level of risk posed to consumers.
From 1 April 2001, insurance intermediaries were subject to the extensive supervisory powers of the Central Bank. Intermediaries were required to be authorised and were also subject to the requirements of the various code of conduct handbooks. The creation of the Financial Regulator in May 2003 as a single regulatory authority represented a substantial change in the scope and focus of the regulatory infrastructure. Its remit was to include wide-ranging protection powers and to monitor the financial soundness of individual institutions. The Financial Regulator, when imposing requirements on brokers, has been detached from how the latter run their businesses in practice. An example of this is when the terms "authorised adviser" and "restricted activity investment product intermediary" were imposed on brokers. These terms were utterly confusing for consumers and did not achieve the goal of differentiating between the range of products provided by different intermediaries.
PIBA has voiced its opposition to these terms for some time and has been working to have the term "broker" reintroduced. We want clearly defined rules on what the term "broker" means and in what circumstances it can be used. The working group on the review of the intermediary market, on which PIBA was represented and which reported last year, supports the reintroduction of the term "broker" to the industry. This unanimous desire for a return to the pre-2001 term clearly illustrates the need for the Financial Regulator to listen to the industry when making changes to the regulatory environment to avoid the introduction of ineffective changes with no benefit to the consumer.
The consumer protection code was published in August 2006. Its primary aim was to ensure that the same level of protection was offered to consumers, regardless of the type of firm with which they choose to deal. However, basic banking products, defined to include current accounts, overdrafts and deposit accounts with a maturity of one year or less, were exempted from the key consumer protections of fact-finding and reasons. This was done on the basis that they were deemed to be generic products. This means there is no obligation on the banks to check the requirements of the customer, recommend a suitable product to meet that requirement or explain in writing the reasons for recommendations made. Therefore, as set out in the Central Bank's updated monthly statistics of last August, more than €94 billion in personal consumer deposits are outside the regulatory loop.
The fact that a product is deemed to be generic is irrelevant for the purposes of giving advice. The point should be whether the product is suitable to meet the needs of the customer. Banks should have an obligation to check the customer's need for liquidity and their risk preference, explain financial markets and recommend an appropriate split of investments for the needs of the customer. At the very least, the exemption for basic banking products should be capped at €10,000.
The consumer protection code is a principles-based code but it was not a principles-based code for the broker. Requirements suitable for large stockbroking firms were imposed on small to medium-sized brokers which were excessive to the nature of the business they conduct. There has clearly been disconnection to date between the Financial Regulator's understanding of how brokers operate and the reality of the broker business. Brokers by their nature represent low risk. They generally do not handle client moneys or premia, except in certain specified limited circumstances where the relevant insurer is responsible for the moneys.
The delay in the implementation of the revised insurance mediation directive regulations, IMD2, is of great concern to PIBA. This delay has meant that many insurance intermediaries are subject to both the Investment Intermediaries Act 1995 and the insurance mediation directive regulations. We have been assured by the Department of Finance on numerous occasions that the revised insurance mediation directive is imminent, but draft regulations have not yet issued.
I will outline just one of the issues outstanding as a result of the delay in implementation. Accountants are regulated by their own professional bodies when carrying out investment business services or providing investment advice on what is termed an "incidental basis". At present, the benchmark for incidental basis is 20% of turnover. This benchmark for calculating incidental business is arbitrary and unfair in circumstances where it is availed of by large accountancy firms whose income from insurance mediation would be greater than that of a traditional broker. It is clear that a regulatory gap exists, as accountants may advise on investment and insurance products without being subject to consumer protection frameworks such as the consumer protection code, minimum competency requirements and right of complaint to the Financial Services Ombudsman. This puts the clients of such accountants at a considerable disadvantage.
Self-regulation for some categories of persons providing investment business services on a professional basis is incompatible with the concept of a single regulatory role. It is inappropriate to have a dual regulation system in place whereby consumers are disadvantaged at the outset when dealing with these firms. It is essential that consumers are entitled to the same level of professional service in regard to financial products. There should be no regulatory difference whether a consumer approaches an accountant or an insurance broker. There should not be different sets of rules for persons providing exactly the same services to consumers. The "incidental" option, which we understand is likely to continue under the forthcoming revised regulations, facilitates part-timers whose core focus is not the financial and insurance sector. The complexity of that sector and its associated products demands full-time participation in the market. An individual operating in the market on a part-time basis is at considerable risk of providing inappropriate advice.
An issue of significant importance being debated within the industry is broker commissions. It has been widely reported that the UK's Financial Regulatory Authority has proposed under the retail distribution review to in effect ban commissions. However, it will be permissible for adviser charges to be paid from the policy to the broker. It will force net pricing by product providers to which adviser charges agreed between the broker and the customer will be added. It is clear this will represent an important structural change to the nature of commission. Will it help consumers? We believe these issues must be carefully considered in order that they do not lead to unintended consequences.
Brokers in Ireland are currently remunerated in three ways — commission only, fee only or a combination of both. In the past product providers who had large market share demonstrated poor investment performance. It is important to bear in mind that commissions paid to brokers are a source of competition among product providers as they compete for broker business. This ultimately benefits the consumer in product innovation and lower charges and this is exactly what happened in Ireland in recent decades.
It is clear that the Financial Regulator's primary concern is product bias by advisers. This is a legitimate concern. However, in practice, customers only choose fees where this leads to a substantial saving on their overall advice cost. This is reflected in the fact that significant fees are generally confined to the upper end of the market. Brokers are required under the consumer protection code to make full disclosure to clients of all commissions-fees received by them at all times. The issue of commission was also examined by the intermediary working group last year. One of its recommendations is that for brokers to use the word "independent" they would have to offer a fee-based option to consumers. PIBA will continue to conduct research into the area of fee charging by brokers and provide guidance to members in the area.
This has been a challenging year for all sectors of the financial services industry. Brokers continue to play a decisive role in helping consumers manage their personal finances and reassess their financial goals. For example, brokers are playing a pivotal role between clients and banks negotiating new terms for making repayments where clients are experiencing difficulty in meeting mortgage loan repayments. PIBA will continue to support fair and proportionate regulation and we will continue to advocate that the new regulatory environment is based on the reality of the marketplace. I thank the committee for its time. We are pleased to take questions from members.
