The UK’s Financial Services Authority has called on the European Union to follow its lead and adopt a Europe-wide ban on inducements for all advisers.
The FSA is one of several influential parties requesting that the European Parliament impose a blanket ban on inducements.
Current proposals set out by the European Commission as part of its Mifid II consultation exercise recommend that inducements are outlawed only for independent advice.
The push for a total ban comes in a response to a consultation by the Parliament’s Committee on Economic and Monetary Affairs (Econ). The FSA says a ban on inducements for independent advisers alone does not go far enough.
“Many financial advisers may simply discard the label independent in order to continue receiving inducements from product providers,” the FSA says.
“To avoid such distortion, and tackle the risk of bias and conflicts of interest, a possible solution could be to ban the receipt of third-party payments to all firms that give investment advice.”
The FSA is not alone in its idea of a blanket ban, which will be imposed in the UK from the beginning of 2013 as part of the retail distribution review (RDR).
Vanguard, a US fund management group, says a ban on inducements just for independent advisers would fail to protect investors who buy funds via non-independent advisers.
Vanguard has called on the Commission to seize the current opportunity “to ban all retrocessions to distributors and platforms”.
A total ban would ensure that investment firms are not influenced at all during their product selection, says the FSA.
But the UK regulator recognises its own model of regulation will not be easily transferable, pointing to national differences within the European Union retail market.
“While we need to ensure that commission payments do not bias advice, different member states’ regulators are likely to need some margin of flexibility under the regulations to deal with these conflicts in different ways,” it says.
In the UK, the FSA adds that it has been able to ban inducements “partly because investors can arrange for fees to be deducted from their investments if they do not wish, or are unable, to pay for them separately”.
These proposals are unlikely to satisfy fund industry trade bodies and groups, which have voiced diverging views on how European institutions should tackle the question of inducements.
The UK’s Investment Management Association admits there have been failures in the mass retail marketplace, with many investors “unaware that such payments are made at all”. Yet it still opposes the ban.
One of the points it makes is that tied advice can also be affected by mis-selling and product bias.
“Financial inducements of many kinds, including volume override, target bonuses and rewards related to specific product sales, are prevalent in the non-independent advice sector,” says the IMA.
The French fund association (AFG) believes a partial ban is a “pro-rich” approach because retail investors are unwilling or unable to pay for advice.
According to several other fund associations, a ban on inducements for independent advisers would simply result in less advice for small investors as well as less competition.
Efama, the European fund association, says a ban would weaken the economic viability of small independent financial advisers, while the IMA believes advisers would shift towards non-independent status.
Another concern is that under a blanket ban, banks might stop offering products from a range of fund managers and just sell in-house funds.
“Integrated distribution channels”, such as banks, would no longer have the incentive to sell funds other than in-house products, says the AFG.
Not all regulators agree that a blanket ban needs to be imposed. The Autorité des Marchés Financiers (AMF) in France, for example, says detailed disclosure of inducements could be more appropriate. It favours a disclosure regime in which information on the commission received by the distributor is given to clients in advance.
The AMF believes a disclosure regime would also help create a level playing field with other products, such as life insurance funds.
Baptiste Aboulian is associate editor at Ignites Europe, a Financial Times publication, where this article first appeared
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