Broker registration system would boost public confidence

Consumers have few ways of checking on a broker or financial adviser, besides word of mouth and their employer's reputation, before hiring them to look after their money. Public faith in financial advisers, which has been rocked by numerous broker-related scandals over the years, may be greatly enhanced if the industry adopts confidence-building measures.

In the absence of a single financial regulator, stockbrokers, financial planners, insurance intermediaries and companies all have their own ways of nurturing accountability within their profession. Many now require basic competency exams and professional liability insurance. Consumers requiring more information on a broker's background and qualifications may be disappointed in the existing system.

Brokers may be held more publicly accountable for their actions if a broker registration system is adopted here. In the US, the Central Registration Depository (CRD) requires brokers to report their 10-year employment history including customer complaints, pending arbitration and any legal action taken against them by regulators. The same is required of insurance agents who sell variable annuities or variable life policies.

This fact-finding system provides customers with the details they need when choosing someone to trust with their money and their future. Consumers are encouraged to use the CRD to check brokers' histories before they decide to hire them. It may also be used by whistleblowers to notify regulators about allegedly unprofessional or illegal practices by brokers.

The powerful National Association of Securities Dealers (NASD) has run the service since 1981. At the moment, consumers gain access to CRD-held information through state security commissioners but plans are under way to make the information available electronically. More than half a million brokers are listed by the service and in excess of 90 per cent of them are reported to have spotless records.

Consumers may receive free reports on the broker or their employer by sending in a CRD request by web, phone or mail. Written complaints from customers are supposed to go to the CRD within a month.

One big drawback to the system is that it relies on brokers and their firms to tell the truth. Responsible salespeople and companies usually conform to the rules but mavericks may ignore the requirements.

Here, such a system may be a few years away but there is broad support for it from many in the industry.

Irish Insurance Federation chief executive, Mr Mike Kemp, says it's not a bad idea. At the moment, the IIF has a register which is tied into the competency testing requirement for life sales people. It does not work like the CRD but he thinks something similar may be designed a few years from now.

"In an ideal world, this is something that should be done by the regulator and probably will be done by the regulator," says Mr Kemp. The industry is expecting stricter regulation of salespeople down the line.

Until a new system develops, the IIF encourages people to check with their existing register. However, "because of the Data Protection Regulations the person would have to get written permission from the person they're looking into to access their record", says Mr Kemp. There are no restrictions on checking whether or not the intermediary is a member of the IBA or other professional bodies.

"Under existing legislation, each insurance company must maintain a register of all of their appointed intermediaries and it has to be available for public inspection," says Mr Kemp. Consumers are entitled to go directly to the company to find out if the person is actually associated with the insurer. If you haven't had previous dealings with the individual, it is a good idea to check what you're told to ensure that they are what they're representing, says Mr Kemp.

The Irish Brokers' Association's Mr Billy Redmond thinks a broker register makes a lot of sense. However, there may be practical issues to explore before something of this nature is implemented.

The Irish Stock Exchange's head of regulation, Mr Brian Healy agrees that there are few ways for Irish consumers to check on a broker before they hand over their money. However, the exchange has a very structured system for dealing with stockbroker accountability and customer complaints.

Two levels of control exist. "There's a rigorous application procedure at a firm and at an individual level. There are also continuing obligations under the rules of the stock exchange relating to conduct of business of any stockbroker."

Any member-firm or employee in breach of these rules faces public sanction, fines or an order for restitution from the stock exchange. These facilities have been used, but it's not a frequent occurrence, says Mr Kemp.

If a customer is unhappy with the conduct of a firm or individual stockbroker, they should exhaust the firm's internal procedures first. If they are still unsatisfied they may approach the stock exchange by phone, letter or e-mail. They will talk to a regulation executive who takes the details of the complaint and an investigation process gets under way immediately.

"The stock exchange has clear powers of discovery. A decision made by the stock exchange is not binding on an investor but usually binding on the broker and broker firm although both can appeal the decision," says Mr Kemp. The appeal must occur within two weeks and is heard before an independent complaints adjudication committee.

Each year, the stock exchange receives a reasonable, although not huge, number of complaints. Mr Healy believes more than 98 per cent of those complaints are dealt with to the absolute satisfaction of the investor. "The exchange is keenly aware of the importance of investor confidence in the market as private investors are becoming more and more a part of it," he said.

Mr Healy says he wouldn't rule out a broker registration system. "We're constantly striving to make the system more friendly to consumers," he said. However, he believes that there are quite a number of legal issues in relation to a registration system. "It's not something that would be developed in a number of weeks or months, it's a long-term issue," he said.