Referral commission not in the client’s interest

Most mortgage providers (banks and insurers) pay businesses and associations (referring parties) a referral commission for the introduction of new mortgage clients. The referring party passes on the consumer’s name, address and telephone number to the provider. If the consumer takes out a mortgage with the provider, the referring party receives a referral commission which can vary from a few hundred to thousands of euros.

In order to clarify this issue, the AFM wishes to explain why most referral commission arrangements are not in the client’s interest. It is not made clear to the consumer that the referring party receives a financial payment for the referral. Moreover, the payments that are made bear no relation to the costs and effort involved for the referring party.

The financial sector wishes to regain the confidence of the public. This will only happen if every large financial enterprise, and thus every mortgage provider, places a higher priority on the client’s interest. Referral commission arrangements must therefore not be detrimental to the client’s interest.

The consumer assumes that the referring party is giving him an honest recommendation regarding a mortgage provider, but he is not aware that the referring party has a direct financial interest in doing so. It is in the consumer’s interest that he is made aware of the fact that the referring party will receive a payment in return for passing on his details. The consumer must be informed regarding the amount and method of the payment, so that he can assess the recommendation in its true light. Non-financial payments should also be made transparent.

The mortgage providers have said that they wish to focus on the client’s interest. Maintaining this opaque system of payments for referrals is not in the client’s interest. The AFM expects providers to lay down, in their policy statement, the method whereby the consumer is informed about the commission that is received by the referring party. The information must be clear enough to enable the consumer to make a properly informed decision.

The way in which the payment for a referral is established varies for each mortgage provider. The referring party receives either a fixed payment, or a percentage of the mortgage principal. For a percentage of 0.5% and a mortgage of €300,000, the payment is €1,500. This is the payment received by a referring party for passing on a customer’s personal details. A payment of a percentage of the principal (regardless of the size of the principal) without additional conditions is not desirable in most cases.

Furthermore, fixed payments of for example €1,000 per referral probably bear no relation to the costs and effort involved for the referring party. In cases where the payment is for example €100 per referral it is easier to demonstrate that no undesirable situations can occur.

The AFM takes the view that most referral commission arrangements are inappropriate, because the payment bears no relation to the costs and effort involved for the referring party. This creates an incentive which can lead to actions that are not in the client’s best interest. The AFM considers it important that consumers are aware that referral commission arrangements can hinder their ability to negotiate with the mortgage provider. The AFM considers it likely that the payment of excessive referral commission will negatively affect the quality of the advice. The AFM will therefore conduct a review after 31 August 2010 to establish whether institutions paying excessive referral commission are more likely to provide unsuitable advice.

The AFM thus requests all mortgage providers to critically review their referral commission arrangements and amend them in accordance with the Guideline for appropriate commissions. We expect providers to have amended their arrangements by 31 August 2010, at the latest. The AFM will then discuss the problem with the Ministry of Finance.

Statutory obligation
The referring party must limit the information passed on to a provision of only the name and address details. If additional information is passed on or obtained, the referring party then becomes an intermediary within the meaning of the Dutch Financial Supervision Act [Wet op het financieel toezicht, or Wft], in which case they are obliged to obtain a licence. For the mortgage providers, this means that they must properly ensure that the referring parties are not acting as intermediaries. Collaboration with illegal parties is a breach of the Wft. The AFM will monitor this closely and take enforcement measures where necessary.

The AFM promotes fairness and transparency within financial markets. We are the independent supervisory authority for the savings, lending, investment and insurance markets. The AFM promotes the conscientious provision of financial services to consumers and supervises the honest and efficient operation of the capital markets. Our aim is to improve consumers’ and the business sector’s confidence in the financial markets, both in the Netherlands and abroad. In performing this task the AFM contributes to the prosperity and economic reputation of the Netherlands.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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