The European Union has reportedly u-turned on its plans to ban asset managers and insurers from paying financial advisers for recommending their investment products, according to the Financial Times.
The media report said that the EU is going to bow to intense lobbying after it received backlash from industry figures such as Efpa chairman Emanuele Maria Carluccio.
An analysis by the European Commission last year concluded that an EU-wide full ban on incentive payments made by investment product manufacturers to financial advisers would be the most effective way to remove conflicts of interest and improve results for end-investors.
But according to the FT, the EU has now retreated from this position and will limit the ban on inducement payments to “execution-only” sales of investment products where no financial advice is delivered.
The European Commission said in a document seen by the FT: “A full ban on inducements would entail significant and sudden impacts on existing distribution systems, with consequences that are hard to predict.”
The media report said that the finalised version of the EU’s retail investment strategy will be published on May 24 but alterations to the plans appear unlikely at this late stage.
International Adviser has contacted the EU and EC for comment but there was no reply in time for publication.
Industry reaction
The financial advice world did not think highly of the ban prior to the u-turn.
In February 2023, the CFA Institute issued a survey that found 34% of investment professionals based in the EU think that inducement payments should be banned. It also found most respondents think a ban is unlikely to prevent mis-selling of investment products and cited concerns that the ban could negatively impact on the variety of products offered to clients.
IA spoke with a number of firms involved in the European advice industry to discuss the potential u-turn on commissions.
David Vacani, principal at Beacon Global Wealth Management, said: “I think that this shows the power and strength of the banks and insurers in the EU and let us hope that no advice gap does develop. As we have said for a long time, let us hope that we at least see a progression to greater transparency and clarity for clients.
“Clients are increasingly sophisticated with complex cross border issues and needs and it is only right that they receive sound long-term financial planning solutions at a proper price and with transparency on what they are paying by way of fees or commission.”
Alex Ingrim, senior investment analyst at Chase Buchanan, said: “The existing distribution network for investment products and advice in Europe only serves to strengthen the position of the largest banks and financial institutions. The backtracking by the EU on inducement payments will continue to benefit banks at the expense of consumers looking for independent advice.
“Many consumers throughout the EU are unaware of how their advisers, be it independent advisers or advisers at banks, are paid, and they do not understand the misaligned incentives that exist. Furthermore, many investors are not receiving whole of market advice, and are only being advised on in-house products that pay advisers and brokers inducements. This ruling by the EU will put Europe even further behind the US and UK in promoting fair outcomes for investors.”
John Westwood, chairman at Blacktower, added: “We believe in and fully support transparency on showing fees, whether that be a fixed sum or a percentage. We also fully support a highly regulated approach. The one question remaining is whether any proposed changes to the present distribution system in Europe has been tested appropriately to ensure they are in the best interests of investors, and not simply a reaction to pressure from consumer groups or industry lobbying.”
Andy Oliver, chief executive of Private Client Consultancy, said: “I think this is a sensible move by the Commission to review the changes to the distribution model in the EU. A wholesale change would have disrupted a tried and tested process. While there is an absolute need for transparency, this could be enforced by the regulators to show 100% disclosure regarding the total expense ratio of the investment product chosen and any other wrapper used would at least allow the consumer to make an informed decision to either accept the proposition based on fees or not.”
Education
Within the CFA Institute survey, there was another idea mooted which could help change the advice world.
As opposed to an outright ban, investment professionals in the EU favoured increasing efforts on financial literacy and investor education (59%) and mandating clear disclosure of all commission payments received by distributors before investments are made (55%) as more effective methods of preventing mis-selling.
The European Federation of Financial Advisers and Intermediaries (Fecif) has not been in favour of a widespread ban on commissions. It believes that the decision made by the Commission is “correct and very significant”.
Vania Franceschelli, Fecif chairperson, said: “European consumers need advice that guarantees transparency and clarity. But they also need access to that advice. The present structure of the industry enables accessibility for all citizens. A general ban on commissions would destabilise the current distribution channels of savings products, hamper the provision of investment advice where it is most needed, and potentially bring the EU capital market to a halt, by limiting consumers’ choice.”
However, the Federation believes that it will be very important to also work to improve financial education, through a European-level plan too, if possible.
Franceschelli added: “We believe the decision to eliminate commissions on execution-only transactions is correct. Thankfully, the number of these operations has decreased since the introduction of Mifid, but further consumer protection in this regard is sensible.
“The changes that will be introduced by the European Commission could be a starting point for making the market even more efficient, including the improvement of business models of intermediaries, which may evolve in the coming years.”
