Saturday, February 02, 2013

Draft Legislation Moves Germany towards Fee-Based Investment Advice, Creating More Transparency for Investors


The German Government drafted legislation that would move Germany to a system of fee-based investment advice. The Promoting and Regulating Fee-Based Advice on Financial Instruments Act represents an additional building block in the new regulatory framework for financial markets and strengthens the rights of investors. Past experience has shown that providing investment advice on a commission basis can create the wrong incentives. Investors were often given poor advice in the past, with the risks of certain financial products being concealed. The legislation promotes investment advice that is independent and based exclusively on fees. Fee-based investment advisers are not allowed to take commission from the companies or third parties whose products they sell. 
The legislation is based on a 2011 European Commission proposal for amending the Markets in Financial Instruments Directive. The proposal pursues a similar approach regarding fee-based investment advice, which it terms “independent advice”.
With this draft legislation, Germany is taking a lead in Europe in terms of the regulation of fee-based investment advice. The professional designations “fee-based investment adviser” and “fee-based financial investment adviser” will be introduced into Germany’s Securities Trading Act and Trade Regulation Code respectively. This will make it clear to consumers whether investment advisers are being remunerated through commission from product providers or purely through client fees. Consumers can then decide for themselves which kind of investment advice they want to use. Investors will be able to obtain information about fee-based advisers from a publicly accessible register on the website of the Federal Financial Supervisory Authority. Securities professionals wishing to use the designation “fee-based financial investment adviser” will also be required to have a listing in the central registers maintained by the chambers of industry and commerce. 
Further, the legislation would place additional requirements on these advisers, who represent an alternative to the commission-based investment advice which has been predominant until now. In future, fee-based investment advisers will have to have a sufficient knowledge of the market when advising clients. Their services must also be paid for exclusively through client fees. For providers of investment services, commission-based and fee-based investment advice must be separate within the company’s organization.

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