The European Union is edging closer to introducing a ban on inducements that actively steer investors away from low-cost products such as ETFs, according to EU financial services chief Mairead McGuiness.
McGuiness, European Commissioner for financial services, financial stability and the Capital Markets Union, said retail investors are too often advised to buy costly and unsuitable investment products when inducements are involved.
Delivering a speech to the European Commission (EC) on 24 January, McGuiness said products where inducements are paid are on average 35% more expensive for retail investors than products where no inducement is present.
Inducements, often called retrocession fees, are a form of commission a financial adviser is given as a kick-back for selling their products such as funds.
They have long been seen as a hindrance to further uptake of ETFs on the continent as distributors focus on high-margin products and commissions.
McGuiness said her team’s impact assessment on the investment advice sector had found retail investors were often advised to buy expensive products where cheaper equivalents existed and products “which are not always the most suitable for their needs”.
“Inducements can lead to conflicts of interest that can have a negative effect on the quality of investment advice,” McGuiness said.
“Low-cost products, like exchange traded funds, are hardly ever recommended.”
She added her team continue to gather evidence and viewpoints on the “divisive” topic, but noted potential overcharging and poor advice are being given despite MiFID II and the Insurance Distribution Directive, which are designed to safeguard consumers against conflicts of interest.
Her comments led to growing calls for inducements to be banned altogether across the bloc.
Caroline Baron, head of ETF distribution EMEA at Franklin Templeton, said: “Inducement bans are fundamental to ensure ETFs are on a level playing field with other investment vehicles when it comes to retail investing.
“This is how we saw a boom in the ETF business in the US, where there is an equal split between retail and institutional users, versus less than 10% retail ETF uptake in Europe.”
Baron added younger investors are increasingly turning to ETF-based model portfolios, robo-advisers and savings plans amid growing scrutiny over the cost of investment products and advice.
A common argument against a ban on inducements is that they allow investors to access advice they might not otherwise be able to receive.
McGuiness noted where bans on inducements had been introduced in parts of Europe – such as the Netherlands – there had been improved outcomes for investors.
“In the Netherlands, this led to a shift towards less expensive and more diverse products, resulting in better value for money for retail investors,” she said.
“The Dutch inducement ban has not led to a reduction in retail investment – and in fact, there has been a slight increase. And the level of trust in financial advice has also increased.”
While admitting the Netherlands is not representative of the investment landscape across all 27 member states, McGuiness said small investors would benefit from independent advice and low-cost products “that they currently have less access to”.
“We need to ask ourselves whether commission-based models really work in the interest of retail investors. I want consumers to have access to financial advice, but biased advice does not serve them either,” she said.
“It is good to grab this nettle and to make change for the better.”
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