Defying its own impact assessment, the European Commission refrained from proposing a full ban on sales commissions for financial advice in its Retail Investment Strategy (RIS), proposing instead a limited ban of inducements on advice-free sales and more cost transparency.

On Wednesday (24 May), the Commission proposed new rules to protect retail investors from bad financial advice and make it more attractive for them to invest in capital markets.

EU households are much less likely to invest their money in shares and other securities than their US counterparts, which the Commission has long argued was a problem for the development of a European capital market.

“People do not always get the best deals available or appropriate value for money,” the Commission Executive Vice-President Valdis Dombrovskis told a press conference, arguing this was discouraging participation in capital markets.

“Some investment products have unjustifiably high costs,” he said.

The problem lies in the way many investment products are distributed in the EU. Financial advisers, for example retail banks, often do not get paid by the retail investors they purportedly advise, but through sales commissions, so-called inducements, from the suppliers of financial products.

This system creates a bias for financial advisers to sell the products for which they get the largest inducements instead of selling products that are most suitable for retail investors.

‘Too disruptive’

Some countries, like the Netherlands, have banned such inducements to better align the interests of the advisors with the interests of the retail investors. The same option was also considered by the Commission, as evidenced by the Commission’s own impact assessment, which considered a ban on inducements the best policy option.

In the end, however, this policy option was dismissed as “too disruptive” for the Commission.

“At this stage, we have made the assessment very carefully that it will be too disruptive to have a ban overnight,” Commissioner Mairead McGuinness said.

“However, we are banning inducements for execution-only sales where no advice is involved,” she added.

Moreover, the Commission proposed introducing stricter requirements on when inducements can be paid and on the type of information that has to be made available to retail investors. Additionally, the Commission wants stricter rules for people who offer financial advice over social media, so-called finfluencers.

Heavy lobbying efforts

In the run-up to this proposal, banks and insurance companies heavily lobbied against the inducement ban, arguing that it would endanger their business model and the wide network of regional bank branches that are sustained by it. They also warned of an “advice gap” for retail investors who could not afford to pay for financial advice.

The German and Austrian finance ministers had also intervened with Commissioner McGuinness to lobby against a ban on inducements.

Justifying the decision to refrain from an inducement ban despite the Commission’s own impact assemssment, Dombrovskis argued that it was the result of the public consultation. “We have to listen to all stakeholders who are responding to our public consultation,” he said.

Consumer groups, meanwhile, are unhappy about the result, warning that biased financial advice led consumers to lose thousands of euros, for example in their pension plans, due to underperformance and excessive cost of the retail investment products.

“The Commission agrees with our diagnosis but leaves the patient in the waiting room without offering much help because of very heavy lobby pressure from the industry,” Monique Goyens, director general of the European consumers organisation BEUC said in a statement.

The b-word remains on the table

The European Banking Federation (EBF) was unhappy with the result for another reason. While it said to be “appreciative” of the decision not to implement a full inducement ban, and EBF spokesperson still warned that the changes proposed by the Commission could “produce significantly disruptive impacts for the European financial sector.”

Judging by the Commission’s assessment and choice of words, however, a certain amount of disruption is the goal of the proposal.

“It’s very clear that the status quo is not acceptable,” Commissioner McGuinness told the press conference, saying the industry would not get a “get out of jail card”.

She also announced that the Commission would closely follow the progress of the rules to check whether they had the intended effect. According to the proposal, the rules would be reviewed three years after the adoption.

“Therefore, the industry should start working now,” McGuinness said.

And then, “the b-word, the ban on inducements, remains on the table,” she added.

In a next step, both the European Parliament and the EU Council representing the member states will have to form their opinions on the proposed changes.

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