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The EU’s financial services chief has said an EU-wide ban on inducements could enable greater retail investment in exchange traded funds, leading to better returns for consumers.
Mairead McGuinness, European commissioner for financial stability, financial services and the capital markets union, said inducements paid to financial advisers by product manufacturers are leading to poor outcomes for retail investors in the EU.
The comments come as the European Commission considers a ban on inducements as part of its retail investment strategy, which is expected to be published in April.
“Retail investors are advised to buy more expensive products and/or products that are not always the most suitable for their needs,” she said.
This article was previously published by Ignites Europe, a title owned by the FT Group.
McGuinness, who was speaking at a meeting of the European parliament’s Committee on Economic and Monetary Affairs, said the payment of inducements meant retail investors were being steered away from investing in low-cost products that could bring them better returns.
“Low-cost products like exchange traded funds are hardly ever recommended and this impacts the net returns that consumers can expect,” she said.
Research by the commission shows that products for which inducements are paid are, on average, 35 per cent more expensive for retail investors than funds where no inducements have been paid.
An objective of the retail investment strategy is to give investors “the confidence to question the financial system in order to make the right decisions for themselves”, said McGuinness.
“It is hard to unpick the relative value of each product when someone is selling their preferred option,” she added. “So we are looking at measures to facilitate access to cost-efficient investment services and to increase retail investor engagement. It’s good to grasp this nettle and make change for the better.”
Opponents of an inducement ban often cite the experience of the UK’s Retail Distribution Review, which banned the payment of fees to advisers and then an advice gap emerged for consumers with lower levels of wealth.
But McGuinness said analysis of the Netherlands, which also banned the payment of inducements to advisers in 2014, showed “the Dutch ban has not led to a reduction in retail investment”.
Markus Ferber, a German MEP and an opponent of an inducement ban, said EU policymakers should be wary of taking too many lessons from the Dutch market.
Ferber, who also addressed the committee meeting, said the Netherlands had a well-developed pension system that was unlike those found in other EU member states, which meant citizens in the Netherlands were less likely to need access to financial advice.
However, Eero Heinäluoma, a Finnish MEP from the Progressive Alliance of Socialists and Democrats, said inducements “lead to biased financial advice”.
Heinäluoma argued inducements should be banned across the EU and replaced with “fee-based financial advice”.
*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.
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