Today, the European Securities and Markets Authority, or ESMA, had published its advice to the European Commission, or EC. This advice was in regards to inducements, as well as costs and charges disclosures mandated under the MiFID II.

Recommending To Abstain From Summary Inducement Ban

In the advice given, the European regulator urged the EC to conduct more analysis in regards to the topic of inducements as a whole, since it’s an essential facet of investor protection. Furthermore, ESMA had recommended changes to the regime as a whole, with the primary goal being to improve the clients’ understanding of what inducements are

ESMA cannot recommend at this time that the EC should outright ban all forms of inducements for every retail product spread across the Union.

The Benefits

Even so, two jurisdictions have already done so, namely those of the United Kingdom and of the Netherlands. They’ve banned inducements when it comes to retail investment products and have garnered a certain degree of success with it, as ESMA noted.

There is truth in the merits of banning inducements, according to the view of the AFM. With inducements banned, it encourages a broader distribution of cost-effective investment products the consumers can access, increases the competition between various product manufacturers, and reduces the possible conflict of interest when it comes to advisers. All of this stands to benefit the consumer as a whole.

The Drawbacks

However, ESMA was quick to point out the possible effects of enacting an inducement ban across the entire EU. The regulator speculated that the impact would vary depending on the Member State in particular, and the prevalence of the existing distribution model within it. Due to specific national market structures, the ban could cause consequences that no party wishes to occur. The reasoning is that the Member

States that have a distribution model centered around banks would lose the incentives to sell third-party products. This, in turn, could result in the banks increasing their closed-architecture models.

The Legal Workaround

Of course, firms could circumvent this inducement ban through a practice called “Vertical Integration Practices.” This could be done between asset managers and banking firms, and only group products could be offered to end-clients. With this, in particular, the bank will provide a service, the distribution of its products, to the management company. The management company, in turn, would pay the bank by way of dividend or capital reserve, instead of the usual fee rebate.