ESMA does not recommend complete ban on inducements for retail products across the EU

Maria Nikolova

The European Commission should first assess the impact the MiFID II inducements regime has had on the distribution of retail investment products across the Union, ESMA says.

The European Securities and Markets Authority (ESMA) today published its advice to the European Commission (EC) on inducements and costs and charges disclosures under MiFID II.

In the advice, ESMA encourages the Commission to conduct further analysis on the topic of inducements, which is key for the protection of investors, and proposes some changes to the regime mainly aimed at improving the clients’ understanding of inducements.

At this moment, ESMA does not recommend to the Commission to ban inducements completely for all retail products across the Union.

Two jurisdictions – the Netherlands and the United Kingdom, have already banned inducements in relation to retail investment products with a certain success, ESMA notes. Indeed, in accordance with the view of the AFM, the inducements ban encourages the distribution of more cost effective investment products to consumers, reduced conflicts of interest for advisers, while increasing competition between product manufacturers to the benefit of consumers.

However, if a Union-wide inducement ban were to be introduced, the impact would likely vary across Member States based on the prevalence of the existing distribution models. This is because such a ban may not have the desired consequences depending on the structure of specific national markets. In the case of Member States with bank-centric distribution models, there is a risk that, because of the loss of incentives to sell third party products, banks could react by increasing closed-architecture models.

Inducement bans could be circumvented by firms through “vertical integration practices” between banks and asset managers and only group products might be offered to end-clients. In this case, the bank would provide a service (the distribution of its products) to the management company which, instead of paying the bank through a fee rebate, would pay the bank by way of a dividend or a capital reserve at the level of the management company.

Furthermore, certain retail clients’ access to advice might be impaired.

Conversely, the inducement ban may lead to the growth of the fee-based independent advice sector across the Union. In the short term, banks might decide not to offer advisory services to retail clients and redirect them to execution-only services. In the view of the Dutch regulator, this may also lead to an uptick in portfolio management and robo-advice services.

ESMA is of the view that the Commission should first assess (i) the impact the MiFID II inducements regime has had on the distribution of retail investment products across the Union, (ii) the impact of such a ban depending on the different distribution models existing in the Union and (iii) what potential additional actions could be taken to counterbalance the risks of undesired consequences linked to a ban on inducements.

Also, banning inducements for MiFID products may create an uneven playing field with other types of products (for instance, insurance products) and inducements should thus be considered more globally and not just under MiFID II, ESMA notes.

Therefore, at this stage, ESMA recommends to the Commission to rely on alternative options to improve clients’ understanding of inducements and the functioning of the existing MiFID II regime.

Read this next

Digital Assets

GBTC share is trading at 36% below bitcoin spot price

Grayscale Bitcoin Trust share has widened its discount relative to the underlying cryptocurrency held in the fund, the highest margin ever since its debut in 2013. Digital Currency Group’s flagship GBTC shares traded at a discount of 35.8% to net asset value (NAV) today.

Digital Assets

Crypto lender Nexo investigated by 8 US state regulators

State securities regulators in New York, California, Kentucky, Maryland, Oklahoma, South Carolina, Washington and Vermont are investigating crypto lender Nexo for allegedly failing to register its Earn Interest Product.

Metaverse Gaming NFT

Astar Network’s ad features 329 top brands to support Web3 in Japan

Blockchain innovation hub Astar Network is making strides in promoting the Web3 adoption worldwide. In yet another milestone, the smart contracts platform has run a national newspaper ad in Japan that set a new global record with participation from 329 blue-chip firms.

Digital Assets

Pyth Network welcomes onchain data from crypto market maker Auros

“By sharing our high-frequency trading data with a truly onchain decentralized network, we aim to foster innovation that will lead to better financial solutions for all participants.”

Digital Assets

Tokeny integrates Ownera to boost liquidity of tokenized assets

“The adoption of FinP2P will result in higher liquidity and better access to capital and assets by providing regulated firms with one secure point of connection to multiple digital asset networks across the globe.”

Digital Assets

BingX launches subsidy vouchers to cover user losses in copy trading

“With the introduction of copy trade subsidy vouchers, new users can easily try out trading strategies without incurring losses.”

Digital Assets

Talos expands sales team: Frank van Zegveld, Matt Houston, Hillary Conley

“The extensive leadership and industry expertise of these new hires will enable us to build long-lasting relationships as we continue to build out our global presence in EMEA and beyond.”

Executive Moves

FX and CFD broker Emporium Capital hires industry veteran Robert Woolfe as COO

His past experience within the FX and CFD industry includes top roles at Capital Index, London Capital Group, GKFX, ETX Capital, and IG.  “I’m delighted to be part of the Emporium Capital team and spearheading the brokerages global expansion plans”, he said about the appointment.

Retail FX

Hantec Markets wins six categories at Global Retail Forex Awards 2022

Hantec Markets has recently rebranded with a new website and a renewed growth strategy that features the #TimeToStrike hashtag to signify a time of renewed growth for the broker.