Finance Watch supports ESMA commitment to reduce conflicts of interest, increase choice for consumers seeking financial advice

Brussels, 23 July 2014 – Finance Watch, the public interest advocacy group working to make finance serve society, commented on ESMA’s proposed MiFID II technical guidance on sales inducements for investment advisors, especially relating to non-independent (“tied” or restricted) advisors.

In a competitive market, consumers need access to a range of financial products to exercise choice. An advisor whose business model is dependent on a single product supplier cannot give advice in the best interests of their clients. Indeed, such a situation challenges the concept of advice, as opposed to “sales”.

We therefore support the commitment behind ESMA’s draft provision (10.i) that the case where an investment advisor relies on a single source of fees or commissions to pay for ‘goods or services that are essential for the recipient firm in its ordinary course of business’ should not be considered as acting in consumers’ best interests. Please see below for more details.

In addition, we note that banking networks that offer investment advice might be able to circumvent the proposed guidance, which would distort competition. Finance Watch calls on ESMA to make all efforts within the limits of its mandate to address this possibility including, if necessary, recommending that the issue go back to the table of legislators at a later stage.

Benoît Lallemand, Acting Secretary General of Finance Watch, said:

“Conflicts of interests are rampant in the financial industry, as we are reminded weekly in the news. The compromise on investor protection that elected officials reached on MiFID II was a step forward for consumers, while very much taking into account the specificities of the financial advice landscape in continental Europe. Despite strong finance sector lobbying, ESMA is executing its mandate in translating that compromise into detailed rules and we fully support their commitment on inducements.”

In more detail:

Conflicts of interest are particularly evident in the relationships between investment advisors, their clients and the suppliers of financial products. Competing suppliers pay fees, commissions and non-monetary benefits to advisors to incentivize the sales of their products to consumers, instead of leaving advisors free to focus on what is best for the consumer and to take account of his or her risk profile and appetite. There was a consensus that MiFID I failed to address such conflicts of interest and co-legislators thus agreed last year on the new provisions in MiFID II.

For independent advisors, the situation is now straightforward: any fee or commission (with exceptions for minor non-monetary benefits) will be forbidden or must be passed on to the client.

For ‘all other investment services’, advisors can still rely on fees and commissions (i.e. inducements) paid by third parties, as long as they are ‘designed to enhance the quality of the relevant service to the client’ and do not impair honest, fair, professional advice ‘in accordance with the best interest’ of the client (MiFID II, Article 24 (9) (a) and (b)) – criteria that ESMA has been mandated to define.

Provision 10.i of ESMA’s draft technical advice (under section 2.15) is central in defining the quality enhancement criterion and has been the focus of much attention. During a public hearing in Paris on 8 July, ESMA recognised the need to review the letter of the advice (including the link between 10.i and 11) but reiterated its spirit: while the business model of the advisor can fully depend on inducements, one source of fees or commissions should not pay for ‘goods or services that are essential for the recipient firm in its ordinary course of business’ (e.g. to pay for the entire staff or IT infrastructure of the advisory firm). This would indeed put the advisor in a state of overdependence on one specific supplier.

ESMA’s proposal will de facto reduce conflicts of interest and increase consumer choice, as its definition of a ‘quality enhancement’ is tightly related to an offering of ‘a wider range of financial products’. Finance Watch fully supports this view.

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