The European Commission’s partial ban on inducements and retail investment strategy: What are the consequences for financial services providers and consumers?
EU Finance Commissioner Mairead McGuinness has conceded to pressure from lobbyists and halted plans for a complete ban on inducements for financial advisors. However, at the end of May, the Commission is expected to announce a ban on inducements for “execution-only” transactions as part of its retail investment strategy and a revision clause that allows for a complete ban on inducements in the future. These developments will have noticeable consequences for financial services providers and consumers. Partner Max Biesenbach and Senior Director Sonia King at the global strategy consultancy Simon-Kucher explain what those consequences are.
Brussels, May 9, 2023 – Plans to ban all trailer and acquisition commissions in securities and insurance have been halted according to comments from EU Commissioner for Financial Stability, Financial Services and the Capital Markets Union Mairead McGuinness at a recent press conference. This came in response to great pressure from lobbyists in the financial services industry and various governments, including the finance ministers of Germany, France, and Austria, who predicted that jobs would be lost and advisory services for small investors would be discontinued. As a result, the European Commission’s retail investment strategy, expected to be announced in late May, will rely on weaker measures, such as stricter transparency requirements.
Despite this concession, the EU finance chief made two remarks that signify noticeable consequences for financial services providers and investors: first, she spoke about an anticipated ban on inducements for financial services providers that simply execute an order without providing any advisory service. This will have a particularly large effect on the leading direct banks in the German online broker market and on neobrokers, which have enjoyed rapid growth recently. Depending on how broad the European Commission makes this ban on inducements for “execution-only” transactions, it may affect issuance commissions charged when buying a fund, annual trailer commissions for holding funds in a portfolio, and perhaps even commissions charged when buying ETFs, which are especially important to neobrokers’ revenue. If the ban affects both transactions with no advisory service and execution-only transactions, the neobrokers’ business model will be heavily impacted. To adapt to these regulatory changes, neobrokers may have to introduce monthly subscription fees (as recently seen with the low-cost broker BUX) or increase transaction fees.
But it’s not just direct banks and neobrokers that will be affected. Traditional brick-and-mortar banks could feel drastic impacts on their business model if the European Commission also applies this ban to transactions with no advisory service that are part of an advised securities portfolio. It’s currently common practice for investors to combine transactions with and without advisory services into a single portfolio. A ban on inducements for these transactions would cause them to be much more strictly separated and prices to be adjusted so that the traditional banks can secure their revenues.
With EU Finance Chief McGuinness announcing plans for a revision clause that allows for a complete ban on inducements in the future, the financial sector as a whole will need to look toward making strategic adjustments. Every institution in Europe that supports small investors in securities transactions now has to develop an alternative business model they can roll out as soon as the revision clause is invoked. The press conference made one thing clear: the industry is under pressure to adapt.
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Julia Griep (Senior Public Relations Manager)
Tel.: +49 221 36794 486
Email: julia.griep@simon-kucher.com
About Simon-Kucher
Simon-Kucher is a global consultancy with more than 2,000 employees in 30 countries. Our sole focus is on unlocking better growth that drives measurable revenue and profit for our clients. We achieve this by optimizing every lever of their commercial strategy – product, price, innovation, marketing, and sales – based on deep insights into what customers want and value. With 37 years of experience in monetization topics of all kinds, we are regarded as the world’s leading pricing and growth specialist.