Misleading marketing and the question: do financial advisors rip off their customers? For example, the EU Commission wants to protect them more with stricter transparency regulations. Is there a commission ban off the table?
More transparency, high demands on advisors and no misleading advertising: With new regulations for the sale of investment products, the EU Commission wants to better protect private investors and enable them to generate higher returns. According to the authority, there should be more rules for the sale of financial products on commission in addition to stricter transparency regulations, as can be seen from a small investment strategy presented in Brussels on Wednesday. What could change and why do the plans not go far enough for some? Questions and answers.
What is the goal of the retail investor strategy?
So far, European consumers are not getting the best deal when it comes to their investment decisions, says Commission Vice-President Valdis Dombrovskis. “That’s why today we’re raising the bar when it comes to providing expert, unbiased and straightforward investment product advice to help people get the best return on their money.”
The Commission wants the rules to “enable retail investors to make investment decisions that meet their needs and preferences”. It should be ensured that they are treated fairly and are adequately protected. The authority is critical, for example, when consultants collect commissions from the sale of financial products such as pension plans – and now wants to prohibit this in certain cases.
What are commissions?
Banks and insurers pay investment advisors a commission for the sale of fund units or life insurance, for example. The commission is financed from the investment sum or the income generated from it, so the customer pays indirectly. An alternative is fee-based advice. Here, the customer pays for the advisory service itself, for example according to the time spent or agreed as a flat rate – even if the investor ultimately decides against the advisor’s recommendation.
What is the Commission proposing?
According to the will of the Commission, financial advisors should no longer be allowed to collect commissions for certain purchases without advice. For the time being, however, the Commission is not planning a general ban on commissions, which had been discussed for a long time. Three years after the adoption of the proposals to protect small investors, however, she wants to review the success and, if necessary, propose alternative measures, “including a further extension of the ban on commissions,” says the draft law.
In addition, she would like to maintain high standards for the professional qualification of financial advisors. In addition, small investors should be protected from “misleading marketing”. This also applies to advertising on social media or with the help of celebrities and influencers.
How does the financial industry see the plans?
The German banking industry described it as an “important signal” that there should initially be no complete commission ban. However, the planned ban on commissions for “the advice-free business that is widespread in Germany” should be viewed critically, according to the merger of the five major banking associations. Overall, the draft law would not implement the Commission’s original objectives, such as simplified access for small investors to the capital market.
The General Association of the German Insurance Industry (GDV) evaluates the proposals cautiously. The good news is that a general ban on commissions is off the table for the time being – such a move would severely hamper the spread of private old-age provision. Overall, however, the rules for product design and for brokering investment products would become more rigid and complex. “The aim of the EU Commission, as part of the capital markets union, to bring broad sections of the population to the financial markets and make it easier for them to accumulate wealth, is made more difficult.”
What are consumer advocates asking for?
From the point of view of consumer advocates, on the other hand, commissions create a conflict of interest that can lead to the recommendation of expensive or unsuitable investments. The Federation of German Consumer Organizations (vzbv) therefore considers the Commission’s plans to be inadequate. “Only a ban on commission would get to the root of the problem. Instead, the EU Commission is planning that the total costs for financial products should not exceed a state-defined limit,” said Dorothea Mohn, head of the financial market team at vzbv. She welcomed the planned evaluation after three years: “Should this show that the harmful effects of commissions continue to exist, the EU must then immediately launch a comprehensive ban on commissions.”
The European consumer protection organization BEUC described the ban on commission for sales without advice as progress, but regretted the lack of a complete ban.
Is everything being implemented as the Commission envisages?
That is very unlikely. Once submitted, the Commission’s proposals will have to be discussed by both the European Parliament and the EU countries. Parliament must find a common position and the EU countries must also agree on a compromise. Parliament and the federal states then negotiate. Only when an agreement has been reached here can the new rules come into force. Experience has shown that this takes at least several months.
The economic policy spokesman for the Christian Democratic EPP group in the EU Parliament, Markus Ferber, complained that the proposals for the new set of rules failed to significantly reduce reporting and documentation requirements. “The biggest problem for retail investors is that they are literally drowning in paperwork when they want to buy a financial product.”
Source: Stern
