Chief ombudsman Walter Merricks has raised concerns commission disclosure market practices are 'fundamentally flawed' and are at odds with basic legal principles.
Speaking at the financial services research forum, Merricks says agents in all non-financial industries are obliged to disclose any commission they receive, but even under the insurance conduct of business rules (ICOB) the requirement is for intermediaries to disclose commission to commercial, not retail, customers and only when they ask about it.
He states: “This ought to engender some cause for thought as to why the basic legal principles about the boundaries of responsibilities have had to be distorted so substantially in our field. Are these legal principles out of date? Or are the market practices themselves fundamentally flawed?”
Merricks says lawyers such as himself are astonished by the fact intermediaries can claim to be acting as agent for the provider and the consumer at the same time and have responsibilities to both.
He states: “In no other field of agency law is this permissible. And one struggles to see whether intermediaries get anything from their clients that can amount to consideration in law, given that intermediaries are generally remunerated by sometimes undisclosed commission from providers.”
Moreover, Merricks says the use of the term ‘distribution’ by the FSA in its discussion paper on the responsibilities of providers and distributors suggests a common objective of shifting products to passive end-users, rather than an environment in which professional advisers only select the products they think are good.
He believes the analysis of the “flaws” in the market by Clive Briault, chief executive of the FSA, reaches the same conclusion, stating: “He asks why financial intermediaries are not seen as other professionals, such as solicitors, accountants and surveyors, to whom consumers seem willing to pay significant fees.”
Merricks suggests the answer lies in the clearer fiduciary duties solicitors and accountants have, which are to act exclusively in their clients’ best interests and to deal more openly with situations where conflicts arise.
He adds: “And so it is not surprising that commission is on his hit list of priorities for attention.”
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