One of the most commonly asked questions about the disclosure regulations was whether or not dollar disclosure of commission would be required. There was some obvious concern on the part of some advisers. On the other hand, a small number have been disclosing dollar commissions for a while, and for them the changes are procedural and technical, rather than fundamental.
There are several dimensions to this decision. The first focus should, as always, be the customer. Principles in the current Code of Conduct under standards one, two, and four, all lean heavily on commission disclosure. Clearly, this was an area considered to be of such importance that detailed regulation is required. Let’s look at the regulations next:
In the regulations, disclosure of commissions is required when the commission is such that “a reasonable client would expect (the commission) to, or to be likely to, materially influence the advice given by A (the adviser).”
Words in brackets above are my additions to the actual regulation extract in quotes, to improve clarity.
Then, detailed disclosure in relation to commissions must be given in two circumstances:
- when nature and scope of advice known
- when advice is given, to the extent that the disclosure has not already been completed under the previous step
The specific commission disclosure required in the regulation is stated to be
- “its amount or value (or how that would be determined)”
This implies that disclosure of the amount or value of commissions are not necessarily required to be completed, provided a clear explanation can be provided as to how the commission will be determined.
Some examples follow:
- When nature and scope of advice is known, disclosure is completed that commission will be payable on completion of the contract at the rate of x% of the first year’s premium (i.e. how it is determined), or a commission amount of $xxx (i.e. the amount or value of the commission)
- When advice is given, no further disclosure is required in the event that the disclosure already given remains unchanged
- When nature and scope of advice is known, disclosure is completed that commission will be payable on completion of the contract at the rate of x% of the first year’s premium (i.e. how it is determined)
- When advice is given, no further disclosure is required in the event that the disclosure already given remains unchanged, albeit the choice remains to additionally disclose the actual commission amount payable of $xxx, even while noting that the regulations do not explicitly require $ disclosure, unless “a reasonable client would expect (the $ commission, as opposed to information as to how it is determined) to, or to be likely to, materially influence the advice given by A.”
A share-broker can reasonably say they do not know the price (and therefore the fee or commission) in dollar terms until the trade is done – as prices can fluctuate a lot, and very frequently. It is common share-broking practice to disclose the actual fee or commission on the contract note issued for the completed transaction.
An insurance adviser generally knows what commission is most likely to be. If a case comes back from underwriting with an offer of terms the question is then whether financial advice is being given around the acceptance of the terms. Should you disclose a dollar rate on application and restate that for the offer of terms? Or should you only provide dollar disclosure when terms are known? Arguments could be deployed in support of either. I know that it is possible that every case could be issued at different terms to those quoted, but for most advisers, a solid majority of cases are issued at ordinary rates.