What the European Commission’s retail investor strategy means for financial service providers and consumers

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Kleinanlegerstrategie der EU-Kommission

The EU Commission published the long-awaited retail investor strategy on May 24. EU Finance Commissioner Mairead McGuinness has conceded to lobby pressure and refrains from a complete ban on inducements for financial advisors. However, the inducement ban on non-advised transactions and the revision clause, which allows for a complete inducement ban three years after the introduction of the new regulation, will have drastic consequences for financial service providers and consumers.

The EU Commission recently published the long-awaited retail investor strategy. A complete ban on inducements in the securities and insurance business is off the table for the time being. The decision was made due to the intense pressure from lobbyists in the financial services industry and from various governments, including the finance ministers of Germany, France, and Austria, who predicted job cuts and the discontinuation of advisory services for retail investors.

Nevertheless, the new regulation will have far-reaching effects for financial service providers and investors. For example, the Retail Investor Strategy stipulates an inducement ban on the sale of investment products if no advice is given. Advice is defined as the provision of a personal recommendation by the financial service provider to the retail investor in which the financial service provider makes a personal assessment of the retail investor’s needs as well as a personal assessment of the investment products that meet those needs. Conversely, advice-free sales, i.e., non-advised or execution-only transactions, are defined as the mere execution of investment products without a personal recommendation. This means, if a retail investor contacts the bank and makes an investment after receiving a personal recommendation, the bank is allowed to collect inducements stemming from this transaction. If, however, the retail investor makes an investment via the bank’s website or app without having received a personal recommendation, the collection of inducements will no longer be permissible.

This legal tightening will greatly affect securities service providers in Europe, particularly online brokers. Monthly subscription fees will likely be introduced (as was recently the case with the low-cost broker BUX), and an increase in transaction fees are probable consequences. Traditional branch banks are also feeling the effects of this development, as it is widespread practice for investors to mix advised and non-advised transactions in one securities account. To avoid a severe drop in earnings, banks will need to separate offerings more clearly and further differentiate the prices of these transactions.

In addition, the EU Commission reserves the right to evaluate the newly introduced rules three years after the adoption of the package. It the Commission finds that consumers are consistently disadvantaged, it may consider applying even stricter rules, i.e., a complete inducement ban. This revision clause will force financial institutions to revise their monetisation strategies. Every institution in Europe that serves retail investors in the securities business will have to develop a plan B in order to roll out an adapted business model immediately if the revision clause takes effect. The industry is under great pressure to prepare and and adapt.

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