March 4. 2024. 9:18

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Germany, Austria lobby EU not to ban inducement-based financial advice

German Minister of Finance Christian Lindner and the Austrian Minister of Finance Magnus Brunner are pushing European Commissioner Mairead McGuinness not to ban inducement-based financial advice in the EU Commission’s upcoming Retail Investment Strategy.

The practice of financial advisors who provide their services for free to customers but get their pay through commissions they receive from the companies offering the financial products has long been subject to criticism.

The worry is that in such a compensation model, financial advisors are not necessarily incentivised to provide retail investors with the best and most cost-effective financial products but with the products that companies are willing to pay the highest commissions for.

These products, in turn, are often products with high management fees, which get rolled over to the retail investor.

That is why the Netherlands and the United Kingdom have banned this commission-based model of financial advice, and the EU Commission is considering whether it should do the same across the EU.

In early May, the EU Commission is expected to come forward with a retail investment strategy, which might include a ban on commission-based financial advice.

Pressure from Germany and Austria

However, lobbying pressure against such a ban on financial inducements is high as such a ban would shake up the business model of financial advisors like banks and independent financial advisors, as well as the business model of investment funds that currently sell their products via these advisors.

And the pressure comes from high up.

On 28 December 2022, Lindner sent a letter to McGuinness, saying he was “very much concerned about the discussion to possibly foresee as part of the strategy a general ban of inducements.”

In the letter, seen by EURACTIV, he argues that “the current framework makes it possible to offer different types of financial advice while leaving the decision regarding the advice taken and the form of its remuneration to the retail investor.”

“I am strongly concerned that a general ban would inhibit the provision of investment advice in cases where it is mostly needed.”

On 31 January this year, Brunner doubled down on this argument, also in a letter to McGuinness, saying that “a high number of retail investors would lose access to investment advice” if inducements were banned.

Markus Ferber, a German member of the European Parliament for the centre-right EPP, also sent letters to McGuinness in which he warned that a ban on inducements could cut off retail investors from professional investment advice.

McGuinness’ reply

EURACTIV also got hold of one of the letters sent out by Commissioner McGuinness on 21 December 2022, in which she explained the Commission’s reasoning to Ferber.

“Our evidence indicates that under the inducement-based model, retail investors will often be sold products which are more costly than other cheaper alternatives available on the market,” the letter reads before providing the numbers:

“Products on which inducements are paid are – on average – about 35% more expensive than investment products on which no inducements are paid.”

McGuinness also argues that product costs have fallen in the Netherlands and the UK, which have introduced a ban on inducement-based financial advice.

“While there has been a shift from advised services to execution-only services and portfolio management, the inducement ban has not generally led to a reduction in retail investing,” McGuinness wrote.

To the argument that retail investors would need a way to access professional financial advice cheaply or for free, McGuinness wrote, “in fact, retail investors already now do pay for advice as a part of the integrated product costs, however, they may not realise it.”

Subsidising banks

Ferber also warned that banks currently were “in a tight spot” and that revenues from inducements constituted an important share of banks’ revenues, which is used to keep up extensive branch networks, which should not be endangered.

To this, McGuinness responded that “the costs for the maintenance of branch networks should not be borne by retail investors who, as you indicate, would be subsidising bank branches.”

It is not yet sure whether the EU Commission will propose a ban on inducement-based financial advice after the pressure put up by banks and the German and Austrian finance ministries.

In her letter to Ferber at the end of December 2022, Commissioner McGuinness said, “maintaining the inducement-based system may not deliver the best outcome, especially in the case of small-scale investors.”

In a speech in front of the EU Parliament’s economic committee on 24 January 2023, she maintained that she wanted “consumers to have access to financial advice, but biased advice doesn’t serve them either.”

Mentioning the letters she had received from MEP Ferber, she said, “there are good arguments on both sides.”

“But I think it’s good to grasp this nettle and to make change for the better.”