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Afbeelding Regulatory watch november

EU-wide ban on Inducements back on the table of the European Commission

At EU level strong voices are again shouting for an EU-wide ban on Inducements.

Insurance Europe has published on January 11, 2023 a letter and a position paper (Link) sent to the European Commission arguing why an outright EU-wide ban on inducements would limit consumer’s access to financial advice.

In its position paper, Insurance Europe refers to the diversity of the EU markets that goes against a one size fits all approach. Several markets in the EU already have restrictions and transparency requirements in place, others have introduced a mandatory advice, and in again other markets digital innovation has led to more online sales.

Consumers regulary indicate that they make investment decisions based on the expertise provided by their advisors

In any case, the commission system is seen as an integral part of the distribution system for retail investment products. Ensuring access to financial markets and widely available advice is key to avoiding poverty in old age, which is a huge societal problem.

There is a misconception, defends Insurance Europe the current system, that payment of commissions will always lead to a conflict of interest and, therefore, is inherently bad. Commissions are on the contrary a mechanism for the financing of high-quality advice, making it available to consumers regardless of their financial status or literacy level. Commissions support those consumers who are in most need of financial advice but who cannot afford it.

Insurance Europe also refers to several studies that highlighted the drawbacks of commissions bans imposed over the last years. Impacts referred to are:

  • A shift towards execution only and online platforms (direct payment for advice remained minimal)
  • Unwillingness / inability to pay the cost of advice at the time of receiving advice (study KPMG in Germany and study on lessons learned in the Netherlands).
  • In MiFID II a full ban on inducements in independent advice has led to a shift to non-independent advice and/or execution only.
  • In the UK, there was a direct link between payment for advice and advice gaps, and access to advice for consumers became much more restricted
  • A collapse of the financial advice industry in Australia where a ban was introduced (study of 2021)
  • Unavailability of independent advice for less fortunate consumers (study on lessons learned in the Netherlands)

Insurance Europe instead promotes a combination of measures promoting transparency, value for money principles in product design and financial education that could deliver more tangible benefits to consumers.

Mairead McGuinness, European commissioner for financial stability, financial services and the capital markets union considers a ban on inducements as a key part of its Retail Investment Strategy as the commissioner is convinced that inducements paid to financial advisers by product manufacturers are leading to poor outcomes for retail investors in the EU.

The commission’s Retail Investment Strategy is expected to be published in April. We will keep monitoring further evolutions in this respect. If an EU wide inducement ban were to be introduced, the impact is likely to vary across markets depending on their existing distribution model, but expected to have far-reaching consequences on the distribution landscape in Belgium.

Nothing is carved in stone yet, and although the soup is never eaten as hot as it is cooked, some voices are saying that this time the ban in here to stay.

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