EU Retail Investment Strategy: S&Ds disappointed with absence of full inducement ban

Today, the European Commission is set to unveil the long-awaited EU Retail Investment Strategy. According to expectations, it will not include a proposal for a full ban on biased commissions to financial advisers, also known as inducements*. This is disappointing, say the Socialists and Democrats. The Group will continue to insist on a full inducement ban to ensure the protection of small investors when seeking financial advice to secure their life savings and put money aside for their retirement or for a rainy day.

Moreover, the S&Ds regret the fact that due to pressure from some EU member states and from some within the industry, the proposal comes too late. There will most likely be no deal by the end of this Commission’s mandate, although Mairead McGuinness – as commissioner candidate during her hearing in the European Parliament – pledged that she would put ordinary citizens at the heart of her priorities.

Eero Heinäluoma, MEP and S&D negotiator on the EU legislation on markets in financial instruments, said:

“This is a disappointment and a lost opportunity to ensure that financial markets work for the people. It is also incomprehensible, as the Commission acknowledges that there is a serious problem due to biased financial advice in the EU. Indeed, its own assessments clearly conclude that an EU-wide inducement ban would be the most effective measure to end potential conflicts of interests and protect small investors.

“Inducement payments distort the financial advice delivered to consumers, with higher-cost products recommended by financial advisers for the higher commission payments they generate. This biased system must be banned and replaced with a transparent and upfront fee-based advice model. Small investors should be able to save for their own pension, not for the pension of their financial adviser.”

Jonás Fernández, MEP and S&D spokesperson on economic and monetary affairs, added: 

“While disappointed with the absence of the full inducement ban, we welcome some small steps forward, such as the introduction of a ban in case of execution-only sales, which will ban the payment of inducements where no advice relationship exists between the investment firm and the consumer.  

“As part of its Retail Investment Strategy, the European Commission also proposed a new value for money framework for investment products. While not a substitute for an inducement ban, clearer rules around value for money could ensure that retail investors get a fairer deal when taking investment decisions, which is more important than ever in the current context of heightened inflation.”

*Note to editors:

Today, inducement-based financial advice is the most common way investment products are sold to consumers in most European countries. Fund managers and insurers pay commissions to financial advisers for recommending their products to clients, which can often lead to conflicted financial advice.

Studies show that financial advisers often recommend higher-cost investment products to consumers for the higher commission payments they receive. For instance, a 2022 study found that financial products sold with inducements were, on average, 25% more expensive than those without such fees. 

In countries where inducements have been banned, such as the UK or the Netherlands, the level of trust in financial advisers has improved and consumers have access to more diverse and low-cost investment products, delivering better value for money for small investors.

The European Commission’s retail distribution study from 2018 shows that retail investors in the Netherlands and the UK had access to the lowest cost investment funds in the European Union.

Civil society organisations, including BEUC and BETTER FINANCE, have long advocated for an EU-wide implementation of an inducement ban to improve the investment advice that is delivered to consumers.