Commission-based
investment advice
In May 2023, EU Financial Markets Commissioner Mairead McGuinness unveiled proposals for a directive to implement the EU retail investment strategy. Although she has refrained from a full ban on commission for the time being, she would like to ban commissions in non-advisory sales as a first step. In April 2024, the EU Parliament voted against any ban, including a partial one. A BVI paper shows that a ban on commission would harm retail investors.
Discussions about a ban on commission for investment advisory services have flared up time and time again. At the end of 2022, EU Financial Markets Commissioner Mairead McGuinness again put commission-based investment advice under scrutiny. She complained that commission-based advice often leads to retail investors being sold expensive or unsuitable products. And the disclosure of costs for financial products regulated in MiFID II has not led to a shift from commission-based to fee-based advice.
On 24 May 2023, Mairead McGuinness unveiled proposals for a directive to implement the EU retail investment strategy. A comprehensive ban on commission-based advice is not included for the time being. However, Mairead McGuinness wants to ban commissions in non-advisory sales. Furthermore, the proposals contain additional requirements for advice and new transparency obligations, especially regarding costs.
On 20 March 2024, the EU Parliament's Committee on Economic and Monetary Affairs (ECON) voted on the retail investment strategy. ECON followed the proposals of the rapporteur in the EU Parliament, Stéphanie Yon-Courtin, and voted against any ban on commission. ECON also decided in favour of the rapporteur's more practical proposal for the planned benchmarking in sales and thus rejected the one-sided fixation on costs. This fixation on costs would be at the expense of product quality and innovation. For savers, however, the expected return and the quality of a product are just as important as the fees. The EU Parliament approved the ECON proposals on 23 April 2024. However, there is still a long way to go before the law is finalised due to the upcoming EU elections.
With a commission ban, even a partial one, the Commission would not achieve its goals and would harm retail investors. For example, a ban on commission in non-advisory sales would result in services provided by distributors, such as order execution, being priced separately. However, this would disproportionately burden savers with small investment amounts.
Nevertheless, the Commission expects that a ban on commission would reduce product costs and thus increase the return on investors' financial assets (portfolio return). However, a BVI paper, which analyses public data from the European Central Bank and the UK’s Office for National Statistics, shows that this assumption is not correct: A ban on commission does not lead to higher returns for private investors and even prevents them from participating more in capital markets.
In the UK and the Netherlands, portfolio returns have not changed due to the ban introduced there about ten years ago. Obviously, other effects have compensated for the lower costs of commission-free products. For example, distribution costs are typically not reduced by a ban of commission, but only paid separately. In addition, an advisory gap could lead to private households participating less in capital markets, for example with funds. This would mean that they would miss out on return opportunities.
The BVI paper shows that private investors in the UK and in the Netherlands actually have been saving less in funds due to the ban. The BVI estimates the resulting decline at an average of nearly EUR 340 per capita per year. In the case of funds, bans – not commission-based advice – are what prevent private investors from participating more in capital markets. This contradicts everything the EU wants to achieve.
