A move by the European Union (EU) aimed at banning commissions for the sale of financial products is attracting criticism from member states and industry bodies.
EU financial services chief Mairead McGuinness is set to unveil her ‘retail investment strategy’ to attract more retail investors into capital markets.
But according to Reuters, the strategy will include a potential ban on commissions for financial advisers distributing banks’ and insurers’ products.
McGuinness believes this would lead to cheaper products for customers, citing the examples of the UK and the Netherlands, where commissions are banned. She explained that products where commission is paid are, on average, 35% more expensive than those without commission.
But Markus Faber, a senior member of the European Parliament, told the financial services chief that the move could cause a fundamental shift in the banking business models since most retail customers in the bloc access financial advice mostly via banks and insurance companies.
The “inducements” paid for the sale of financial products also fund the widespread non-independent advice model in several of the member states.
Distribution
Germany echoed this, with finance minister Christian Lindner stating the move would create a “serious setback” for the EU’s capital markets and it would actually limit choice for consumers.
He added that, in Germany, commission-based selling is the predominant system when accessing financial advice and that a ban would work against that model and inhibit access for consumers.
Lindner continued that the current EU regulation on inducements is already “well balanced and forces investment firms to act in the best interest of their clients”.
Several banking and insurance industry bodies sided with Lindner on the move.
David Vacani, principal at Beacon Global Wealth Management, told International Adviser: “The main issue is that there are major institutions in Germany, as in France for example, where big banks and insurance companies largely control the distribution of financial planning products.
“I would suggest there is significant vested interest in commission-paying products to the banks and insurers. That is very much the case in France.
“Clearly the EU’s direction of travel is ideally towards adviser fee and a clarity of charges for investments and financial planning rather than just a product sale, but some of these big institutions will fight to maintain their commission-paying products I expect.
“In the UK post-RDR there has been a significant improvement in the costings of investment products and this has given significant benefits for clients with clarity of fees and advice.”
Affordability
Chris Lean, director and financial planner at Aisa International, told IA: “While we operate on an adviser charging fee basis in the same way as the UK, most people in the EU rely on banks and insurance companies to provide advice on insurance and savings.
“I would agree with Christian Lindner as it would restrict access to advice for many that are not used to paying fees in the same way as they would for other professional services. For me, the issue is not the commission payments themselves, it is more about transparency and investors being able to understand and agree to the amount of incentive and whether it is reasonable given the sums invested, the advice given, and the work involved.
“In places like the UK, where commission was banned some time ago, there is an ever-increasing ‘advice gap’ developing between those that are willing and able to pay fees separately and the rest. While the ban has resulted in better priced products, this is only really benefitting those that can afford the advice.”
