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Conservatives and liberals join forces with far right against small investors, undermining the capital markets union

Date

21 Mar 2024

Sections

Trade & Society

The Socialists and Democrats deplore a harmful deal on the Retail Investment Strategy brokered by conservative and liberal forces in the European Parliament in collaboration with the far right. Yesterday, the European Parliament’s committee on economic affairs voted in favour of the compromise proposed by the liberal rapporteur Stéphanie Yon-Courtin, which will seriously harm small investors and undermine the capital markets union.

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

The S&Ds have been calling for a Retail Investment Strategy focused on people 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.

We were therefore disappointed by the lack of ambition in the proposal presented by the European Commission last May. The Commission did, however, propose a partial ban on the payment of inducements* in the case of non-advised sales, which would prohibit the payment of opaque inducements to brokers where no advice relationship exists between the investment firm and the consumer.

The proposal put forward to yesterday's vote by the rapporteur Yon-Courtin foresees no ban at all and includes several worrying parts, including weakened rules on value for money and other safeguards proposed by the Commission to protect small investors when they receive investment advice. For the progressives, this is unacceptable.

Eero Heinäluoma, S&D negotiator on the Retail Investment Strategy, said:

“In times of permacrisis, many Europeans cannot make ends meet. Those who are fortunate and can save should not then be ripped off by bankers charging opaque and excessive costs. The outcome of yesterday's vote exposes those in the European Parliament who stand with the people and those who work for the profits of the financial industry. We care about the savings and pensions of all Europeans. The conservatives and liberals make deals with the extreme right, benefitting only bankers and maintaining a damaging status quo.

“We have been calling for a full inducement ban as the most effective measure to end potential conflicts of interests, protect small investors and ensure that financial markets truly work for people. A partial ban on inducements, proposed last year by the Commission, would be a bare minimum to improve the current status quo. However, the rapporteur, supported by the conservatives and the far right, fully deleted this partial ban from the final text. We cannot accept this harmful deal.”

*Note to editors:

Today, inducement-based financial advice is the most common way of selling investment products to consumers in most European countries. Fund managers and insurers pay commission payments, which can differ between products, to financial advisers for recommending their products to clients. This can often lead to conflicted financial advice, with higher-cost products recommended for the higher commission payments they generate for financial advisers. This biased system should be banned and replaced with a transparent and upfront fee-based advice model. 

This is supported by several studies. For instance, a 2022 study(opens in a new tab) 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.

Furthermore, in the UK and the Netherlands, inducement payments to brokers in case of non-advised sales have long been prohibited, and investment firms are required to charge a transparent up-front fee for the cost of execution to clients. Up-front cost transparency has made it easier for small investors to compare execution costs charged between different brokers, and this has resulted in a reduction of the fees charged to Dutch and UK investors when using non-advised services.

The European Commission’s retail distribution study from 2018(opens in a new tab) shows that retail investors in the Netherlands and the UK have access to the lowest cost investment funds in Europe.

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

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