Key Post Central Bank launching a review of the Consumer Protection Code today

[Brendan Burgess]

The Central Bank is launching a major review of the CPC today.

The discussion paper will be on their website at 12 noon.

It's a very general open discussion for about 6 months, following which they will publish a draft revised code and then have a formal public consultation on the draft with a view to publishing the final version in 2024.

Brendan

 

[Brendan Burgess]

I attended a briefing on it this morning.

My main concern was that they are focusing on Choice and Information.

I argued that if they applied that to heroin, the Central Bank would say it was ok for firms to sell heroin as long as the customer was issued with a 28 page information booklet showing the harm it could do. Because, the Central Bank argues, choice is very important.

They allow cash back because the customer has choice, although it's bad for the customer specifically and all customers generally.

They allow the BCP Bond because the customer is informed although any customer who understood the documenation would not take out the bond.

Brendan

 

[Brendan Burgess]

But they do have a section on the pricing of products so it might be possible to get them to see that fair treatment of customers would require the banning of discrimination between new and existing customers.

Brendan

 

[Duke of Marmalade]

The Central Bank should get on with doing their job of ensuring that firms regulated by them are following the existing MiFID regulations. These are the law of the land. There is no need for a further Code or Dear CEO letter, full of empty platitudes which will be ignored.

Regulation 32 deals with consumer protection.

Regulation 32(1) states that an investment firm should ensure that financial instruments are designed to meet the needs of an identified target market of end clients, that the distribution strategy is compatible with the identified target market and that the firm takes reasonable steps to ensure that the financial instruments are distributed to the target market.

Regulation 32(2) requires an investment firm to understand the instruments it offers or recommends, to assess the compatibility of the financial instruments with the needs of the clients and to ensure that financial instruments are only offered or recommended when it is the client’s interest.

Regulation 32(3) requires an investment firm to ensure that all marketing information to clients or potential clients is fair, clear, and not misleading.

Regulations 32(4) to 32(10) require investment firms to provide appropriate information, guidance, and warnings on the risks involved, in such a manner that clients or potential clients are reasonably able to understand the risks involved and, consequently, to take investment decisions on an informed basis.

A recent structured product which involved very significant risk to capital presented 1,304 overlapping back-tests without a single instance of capital loss. They included this warning presumably to appease the Central Bank who appear to think that all ills can be corrected by a Warning.

Limited Usefulness of Past Performance and Back Testing

Past Performance and Back Testing are useful for information purposes only. The analysis of the past performance of any investment asset(s) or the back testing of any investment product is purely academic and has no bearing on, or provides limited benefit in, the assessment of the future performance potential of the investment asset(s) or the investment product in question. The future performance of any investment asset(s) or investment product depends solely on future events and circumstances that cannot be known in advance and that are not necessarily informed by or influenced by what has happened in the past, more recently or otherwise.

Who could argue with that? So why present these totally misleading figures in a marketing brochure? Is that "fair, clear and not misleading"?

 

[Brendan Burgess]

They included this warning presumably to appease the Central Bank who appear to think that all ills can be corrected by a Warning.

This is the overall point I was making. Information and warnings are not enough.

Make sure that you make a submission on the consultation. I have been a lone voice on the "Information is not enough" campaign.

Brendan

 

[Colm Fagan]

The Central Bank hasn't a clue how to regulate so-called Retail Structured Products, which are selling like hot cakes.
In 2019, Derville Rowland said: "Binary options have no place in the investment plans of retail investors. They are no more investment than betting on a horse." See here. So it banned them.
Yet Brian Woods and I have been begging the Bank for months - no, for years - not to ban so-called Retail Structured Products (RSPs), but to force providers to warn prospective investors of the stark choice they often face between (a) getting a 100% return of capital and (b) getting back less than half their capital (before interest). One might even call it a binary option: 100% or less than 50% of capital back. Millions of Euros of RSPs have been sold to unsuspecting ARF holders, credit unions, religious orders, all under the ever-watchful eye of the Central Bank, which of course hates binary options.
Presumably providers have been able to convince the Bank that there is a genuine MiFID consumer need for such products, like the one we looked at recently , which either pays 5% a year and money back, typically after three or four years, or returns less than half the investor's initial capital after ten years. I can imagine people knocking doors down, eager to risk more than half their capital for a measly extra interest rate.
Presumably providers have also been able to convince the Bank that it's ok to show thousands of apparently successful back-tests in brochures, despite the fact that those same back-tests typically utilise indices which were artificially created after the start date of many of the wonderful back-tests which rely on them (I swear, your Honour, that the indices weren't designed purely to suit the back-tests).
The Central Bank has apparently also allowed providers to skate over the typically one in six risk that investors will metaphorically blow their financial brains out with such Russian Roulette products, in direct contravention of the MiFID rule that ALL marketing literature should be fair, clear and not misleading. Ah, sure, it's OK, so long as they throw in the standard warning that the past is not a reliable guide to the future. Of course, innocent investors would never be fooled into believing that thousands of successful back-tests with zero failures, all based on a weird and wonderful specially created index, could have any significance for the future.
The Central Bank apparently thinks that retail investors, who turn to such products to earn a bit more interest, have enough cop-on to avoid being fooled by made-up indices and thousands of back-tests on those same made-up indices, in much the same way as it was happy that the hot-shots who thought they knew all about binary options didn't need to be protected from their folly.
Quis custodiet ipsos custodes?

 

[Brendan Burgess]

Derville Rowland said: "Binary options have no place in the investment plans of retail investors. They are no more investment than betting on a horse."

It is just part of a long-standing woke trend in the Central Bank. They prefer non-binary options.

Brendan

 

[Duke of Marmalade]

I think the Central Bank take the view that these products are only sold by regulated professional advisors and that these would be adopting the following ESMA "good practice":

18. It is good practice for distributors to ensure they are aware and understand the results of such tests* as well as the simulations of performance scenarios undertaken by the manufacturer. This implies that distributors at a minimum adopt adequate arrangements to examine critically those results and scenarios and, if needed, employ an independent third-party with the relevant expertise. It is therefore good practice for manufacturers to make the results of those tests and the scenarios available to the distributors.

* this is referring to forward looking tests or simulations not back-tests
But does the Central Bank check that this is actually happening? It is hard to believe that some of these products would survive the above scrutiny. This recommendation from ESMA together with some other very helpful points was published in 2014. Why, oh why did the Central Bank not take the opportunity in its recent Dear CEO letter to insist that ESMA good practice is in fact mandatory for firms under its regulatory watch? Where is the need for another self indulgent navel gazing consultation when the law of the land and the recommendations from the EU are more than adequate to put manners on this space if only the Central Bank would enforce them? So Boss I will not be participating in this futile exercise.

 

[Steven Barrett]

The first three General Principles of the 2012 Consumer Protection Code. If this was adhered to, there wouldn't be a need to have a new one.

For a while, it looked like the market was turning and moving a lot more towards a fee basis. But I have also seen a lot of younger advisors taken advantage of the high commission structures still on offer and make a fortune from it. The easiest thing to do is ban commissions but I can't see the Central Bank doing that.


Steven
www.bluewaterfp.ie

 

[Brendan Burgess]

The Central Bank of Ireland is delighted to announce today the launch of a Discussion Paper on Consumer Protection, which is the first stage of the review of the Consumer Protection Code.



Central Bank Consumer Protection Discussion Paper



As the Governor of the Central Bank said earlier today, “the Consumer Protection Code is a cornerstone of consumer protection in financial services in Ireland, and has served consumers well. It has established a set of rules and expectations for how firms should treat their customers and has allowed the Central Bank to intervene to protect consumers. The Central Bank is now undertaking this review to ensure that the Code remains fit for purpose and future-ready, and that consumers remain well-protected.”



The Discussion Paper has been launched to stimulate feedback to the Central Bank on key topics, and we will engage widely with stakeholders on these important topics, which include:

• availability and choice of financial products

• firms acting in consumers’ best interests

• innovation and disruption

• digitalisation

• vulnerability

• financial literacy.



We want people to have their say on these issues and we encourage you to do that by visiting our website for further information and completing our online survey. We will also be reaching out to many of our stakeholders to offer the opportunity to meet with us to discuss the issues outlined in the paper.



As Derville Rowland, Deputy Governor – Consumer and Investor Protection has said, “looking to the longer-term, it is essential to evaluate fully the complex consumer issues that are emerging from significant societal and technological change. Changes to the Code must be informed by the experiences and insights of those whom it seeks to protect – as well as those it regulates.”



The Discussion Paper will be open for feedback until the end of March 2023, and the feedback received will inform the Central Bank’s decision-making on proposed revisions to the Code. Those proposed revisions will in turn be the subject of a formal public consultation.



Further details on how to respond to the Discussion Paper, and the timelines for the next stages of the Code review, are available on our website https://www.centralbank.ie/regulati...s-regulations/consumer-protection-code-review.



If you have any queries, please contact us at: [email protected].

 

[Brendan Burgess]

Theme 4: Pricing Matters

An effectively functioning market, with an appropriate level of choice and competition, and where firms act in consumers’ best interests, facilitates fair price formation.

Under Broad Theme A: Availability and Choice, we outlined the key features
of an effectively functioning market. Under Broad Theme B: Firms Acting in Consumers’ Best Interests, we considered the requirement for firms to treat customers fairly in how they disclose information. Both factors are key to fair price formation.

When We Intervene
Ireland has an open, market-based economy operating within the EU Single Market, with free movement of goods, services, capital and people. In general, prices are set by the market, determined by supply and demand, without state or regulatory interventions. A well-functioning competitive market should facilitate the formation of fair and reasonable prices without intervention. The Central Bank does not have a role in setting prices.57 In line with market intervention limitations outlined in Section 1, we only intervene on pricing matters where there is a legal basis to do so and where we see firms engaging in unfair, hidden or discriminatory practices which seek to take advantage of customer vulnerabilities. As noted by the OECD, price discrimination, while valid in certain limited circumstances (e.g. discounts for volume), can be a concern where for example it has ‘exploitative, distortionary or exclusionary effects’.58

Firms cannot be permitted to implement ‘dark pricing’ practices59 to covertly manipulate or coerce consumers into choices that are not in their best interests or to exploit information asymmetries or behavioural vulnerabilities in order to misdirect their focus to products that are more expensive than valid alternatives, or that are ill-suited to their needs and/or risk appetite. Increasing product complexity or including features which increase the attractiveness of products can interfere with price transparency and the ability of consumers to compare products effectively.
The Central Bank has recently introduced regulations on pricing practices in the home and motor insurance market to prohibit the practice of price-walking in home and motor insurance by firms.60 The new regulations ban the practice of charging consumers higher premiums, relative to the expected cost for the insurer, simply due to the fact that they

are a renewing customer / have been with the insurer for a longer time. This reflects the view that such pricing practices take unfair and covert advantage of customer behaviours and are out of line with what customers could reasonably expect. Insurance providers can continue to provide new customer discounts as this is viewed to be beneficial to consumers so long as it is accompanied by strict rules on disclosure.

We have taken a similar approach in our thinking about mortgage cashback offers, where we believe that for customers’ interests to be served it is essential that there is high quality and effective disclosure as to the nature of the discount and the longer term implications. We have introduced requirements on firms to clearly explain the pros and cons of any mortgage incentives, such as cashback offers.

Disclosure and transparency is central to the formation of fair prices. Where consumers are provided with the information they need to compare products and services from a range of providers, they are empowered to select the most appropriate product for their needs which represents the best value for money for them. For this reason, regulated firms are subject to various requirements on the disclosure of prices – including how
prices must be displayed, how they are presented (e.g. for comparability) and notifications of price changes. Theme 5: Informing Effectively, explores effective disclosure further.

Summary and Questions
A well-functioning competitive market should facilitate the formation of fair and reasonable prices without intervention. This requires consumers to have access to clear and unbiased information. Firms should not exploit information asymmetries or behavioural vulnerabilities. While we do not have a role in setting or controlling prices, we will intervene where there is a legal basis to do so, and where we see firms applying unfair or discriminatory pricing practices to the detriment of consumers.

We want to hear your views on the following questions:


What can firms do to improve transparency of pricing for consumers?



In relation to pricing, are there examples of firms using unfair practices to take advantage of customer vulnerabilities?

 

[Colm Fagan]

The first three General Principles of the 2012 Consumer Protection Code. If this was adhered to, there wouldn't be a need to have a new one.

Steven
Ah, but you're forgetting that the Central Bank emphasised to Brian and me that RSPs are not covered by the CPC.
They're covered instead by MiFID, which, by the way, happens to require inter alia that financial instruments should be designed to meet the needs of an identified target market, that all information to clients and potential clients should be fair, clear and not misleading, that potential clients should be reasonably able to understand the risks and consequently take investment decisions on an informed basis, etc..
The Central Bank obviously thinks that thousands of successful back-tests for a product, which are derived from a cooked-up index that was specially constructed after the fact meets those requirements.

 

[Brendan Burgess]

the Central Bank emphasised to Brian and me that RSPs are not covered by the CPC.

Could well be the basis of a submission.

The fact that they are covered by Mifid should not be an issue. The high standards of the CPC should apply to them as well.

In the recent fine of Bank of Ireland, Bank of Ireland excluded a cohort who had drawn down their mortgages before the CPC came into force although they had exactly the same wording as a cohort who drew down their mortgages after the CPC came into force who received redress.

The Central Bank was very annoyed 1) at the fact that they did this and 2) at the fact that they did not inform the CB that they had excluded this cohort.

Brendan

 

[Duke of Marmalade]

Make sure that you make a submission on the consultation. I have been a lone voice on the "Information is not enough" campaign.

If I were to make a submission it would be a one-liner.
Enforce the MiFID regulations and make the ESMA Opinion on "good practice" mandatory.

 

[Steven Barrett]

Could well be the basis of a submission.

The fact that they are covered by Mifid should not be an issue. The high standards of the CPC should apply to them as well.

In the recent fine of Bank of Ireland, Bank of Ireland excluded a cohort who had drawn down their mortgages before the CPC came into force although they had exactly the same wording as a cohort who drew down their mortgages after the CPC came into force who received redress.

The Central Bank was very annoyed 1) at the fact that they did this and 2) at the fact that they did not inform the CB that they had excluded this cohort.

Brendan

It is the enforcement of the rules that is the issue. There are so many "advisors" that look at potential clients and think "how much money can I get out of these". If they started by banning commissions, that would be a start.

Or do an investigation on which advisors move their clients money to different providers all the time (known as 5&5 - 5 years for the early exit penalties to go, 5% commission). Instead they are focused on whether the correct box is ticked.

Steven
Ah, but you're forgetting that the Central Bank emphasised to Brian and me that RSPs are not covered by the CPC.
They're covered instead by MiFID, which, by the way, happens to require inter alia that financial instruments should be designed to meet the needs of an identified target market, that all information to clients and potential clients should be fair, clear and not misleading, that potential clients should be reasonably able to understand the risks and consequently take investment decisions on an informed basis, etc..
The Central Bank obviously thinks that thousands of successful back-tests for a product, which are derived from a cooked-up index that was specially constructed after the fact meets those requirements.

Did they say anything about the RSPs that are sold through pension funds? From what I have heard, the CB were completely stumped where there were unregulated products sold through self directed regulated products.

 

[Colm Fagan]

Did they say anything about the RSPs that are sold through pension funds? From what I have heard, the CB were completely stumped where there were unregulated products sold through self directed regulated products.

Steven, the quick answer is no. Distribution rules wouldn't be my or Brian's strong suit, so we didn't go near that aspect. We focused primarily on the use of overlapping back-tests, made- up indices, decrement indices, etc. to help sell the products.

 

[ClubMan]

The Central Bank should get on with doing their job of ensuring that firms regulated by them are following the existing MiFID regulations. These are the law of the land. There is no need for a further Code or Dear CEO letter, full of empty platitudes which will be ignored.

You really think that an average, or even informed, punter is going to understand MiFID?

MIFID Firms | Central Bank of Ireland

Introduction, Markets In Financial Instruments Directive, investment firm, MiFID, PRISM

www.centralbank.ie

 

[Duke of Marmalade]

You really think that an average, or even informed, punter is going to understand MiFID?

MIFID Firms | Central Bank of Ireland

Introduction, Markets In Financial Instruments Directive, investment firm, MiFID, PRISM

www.centralbank.ie

Don't know what point you are making. Anyone who is marketing financial products should know the law pertaining to that activity. It is really quite straightforward. For example where is the difficulty in understanding the requirement for all marketing material to be "fair, clear and not misleading"?
I repeat what is the point of a six months' consultation to be told in 2024 what this very simple requirement means?
Does anyone know of any instance where there has been enforcement by the Central Bank for producing brochures which breach this legal requirement?
If not, can we conclude that Central Bank regulation of the sector has been 100% effective in protecting prospective investors?

 

[Colm Fagan]

Anyone who is marketing financial products should know the law pertaining to that activity. It is really quite straightforward.

The Duke is right. Brian and I were put off initially by the CBI's references to "MiFID". We thought it was a fancy legal document, but when you look at it, the regulations are straightforward and need no "Dear CEO" letters or consultation. For example, SI375 of 2017 states (all in Regulation 32) that financial instruments should be designed to meet the needs of an identified target market of end clients. I would like to see some of the firms involved justifying why a product that either gives you money back plus interest or alternatively causes you to lose at least half your capital "meets the needs of an identified target market". The Duke has already referred to the requirement for ALL marketing material to be fair, clear and not misleading. That hardly needs extra clarification. Then there is a requirement to provide information so that clients or potential clients are reasonably able to understand the risks and consequently to take investment decisions on an informed basis. Shoving thousands of "back-tests" down their throats, showing zero failures, when the risk of falling over the precipice and losing more than half your capital is typically more than one in six, hardly qualifies as enabling potential clients to understand the risks and take decisions on an informed basis. As both the Duke and I have been saying ad nauseum, all that's required is for the CBI to enforce the regulations already there. No further consultation is required.

 

[Duke of Marmalade]

I attended a briefing on it this morning.

My main concern was that they are focusing on Choice and Information.

I argued that if they applied that to heroin, the Central Bank would say it was ok for firms to sell heroin as long as the customer was issued with a 28 page information booklet showing the harm it could do. Because, the Central Bank argues, choice is very important.

They allow cash back because the customer has choice, although it's bad for the customer specifically and all customers generally.

They allow the BCP Bond because the customer is informed although any customer who understood the documenation would not take out the bond.

Brendan

I agree that the CB seem to have Warnings as the only club in their bag.
But I am not sure the heroin analogy is appropriate.
Heroin is banned. But it is not missold. People know what they are buying.
Cigarettes are not banned. Neither are they missold. People do believe the warnings. People know what they are buying.
RSPs should not be banned - there should be Choice. But people should know what they buying. A warning does not negate in any substantive way the completely misleading impression given by thousands of risk free back tests. As you say, if people understood the true nature and risk of some of these products they wouldn’t buy.