Saturday, November 10, 2012

ESMA Chair Supports Ban on Inducements for Investment Advisers as Part of MiFID Remuneration Reform

Noting that inducements provided to investment advisers are an important factor leading to unsuitable products being recommended to clients, Steven Maijoor, Chair of the European Securities and Markets Authority fully supports the ban on inducements in certain situations as included in the proposal by the European Commission for changes to the Markets in Financial Instruments Directive (MiFID).  In remarks at the British Bankers Association annual conference, he said that, at a minimum, inducements should be banned in the case of discretionary portfolio management and when an adviser wants to use the independent label.

The problem of loss of investor confidence due to unsuitable investment advice cannot be solved by more transparency alone, he posited, adding that tackling poor incentives only via corrective measures like internal controls and external supervision can add costs and will too often fail to achieve the desired outcome. Getting the incentives right for providing good and suitable investment advice to clients is a condition precedent to rebuilding investor trust.

While he is convinced that banning inducements will contribute to the development of a viable business model with a high level of investor trust, the ESMA Chair also called for efforts to improve financial awareness among investors.  He understands that it will take some adjustments, both on the industry side and the investor side, to move to a new business model without inducements.  Thus, allowing sufficient time to all stakeholders to adjust before a ban is introduced would be reasonable.

He acknowledged industry concerns that banning inducements might affect the competitive positions between banks and advisers or other intermediaries.  These competition concerns vary with the predominant distribution model, he noted. In some EU member states banks are the main distributers of financial products, he observed, while in other member states, like the UK, intermediaries and independent advisers are an important distribution channel of financial products.  But whatever the distribution model, the ESMA Chair endorsed a level playing field between the various distributors.

For their part, investment advisers and other financial intermediaries have raised concerns about how a ban on inducements may negatively affect their competitive positions. Banks can recommend products that they have originated and there are no explicit inducements involved. However, Chairman Maijoor pointed out that there could still be conflicts of interest in this situation.  When offering a range of products, advisers within a bank might be tempted to be  biased towards their in-house products or to those in-house products with a higher benefit to the bank.  In order to address this risk, regulators should not only look at inducements, but also look at the remuneration of advisers and sales staff in financial institutions.
During last decades  a number of scandals have affected retail investor across Europe.  In the Chair’s view, a key factor identified as a driver for the recommendation and selling of unsuitable products is the presence of  financial incentive schemes for financial intermediaries that do not take account of the clients’ best interests. The proposed remuneration guidelines for MiFID investment firms are key to ensuring that the pay and incentive structures do not create false incentives when selling financial products to retail investors.  The consistent application of ESMA’s remuneration guidelines will help strengthen investor protection and  achieve the same level of protection for Europe’s retail  investors no matter where they invest.