Commission-based
investment advice
EU Financial Markets Commissioner Mairead McGuinness unveiled proposals for a directive to implement the EU retail investment strategy. While she has refrained from a full ban on provisions for the time being, the idea of a ban has not yet been taken off the table. As a first step, commissions in non-advisory sales are to be banned. However, a BVI paper shows that the EU Commission would undermine its retail investor strategy with a ban.
Discussions about a ban on commission for investment advisory services have flared up time and time again. At the end of 2022, EU Financial Markets Commissioner Mairead McGuinness again put commission-based investment advice under scrutiny. She complained that commission-based advice often leads to retail investors being sold expensive or unsuitable products. And the disclosure of costs for financial products regulated in MiFID II has not led to a shift from commission-based to fee-based advice.
On 24 May 2023, Mairead McGuinness unveiled proposals for a directive to implement the EU retail investment strategy. A ban on commission-based advice is not included for the time being. However, commissions in sales without advice are to be prohibited. Furthermore, the proposals contain additional requirements for advice and new transparency obligations, especially regarding costs.
The Commission wants to reduce product costs with the ban. It expects that this will increase the return on investors' financial assets (portfolio return). However, a BVI paper, which analyses public data from the European Central Bank and the UK’s Office for National Statistics, shows that this assumption is not correct: A ban on inducements does not lead to higher returns for private investors and even prevents them from participating more in capital markets.
In the UK and the Netherlands, portfolio returns have not changed due to the ban introduced there about ten years ago. Obviously, other effects have compensated for the lower costs of commission-free products. For example, distribution costs are typically not reduced by a ban of inducements, but only paid separately. In addition, an advisory gap could lead to private households participating less in capital markets, for example with funds. This would mean that they would miss out on return opportunities.
The BVI paper shows that private investors in the UK and in the Netherlands actually have been saving less in funds due to the ban. The BVI estimates the resulting decline at an average of nearly EUR 340 per capita per year. In the case of funds, bans – not commission-based advice – are what prevent private investors from participating more in capital markets. This contradicts everything the EU wants to achieve.
