The ban on commissions was introduced in the UK after a thorough review of the financial advice market in the RDR, which showed that merely disclosing conflicts of interests regarding the remuneration of financial advisers does not sufficiently protect investors. The reason for this is that most investors do not know to what degree the advice is influenced by these conflicts of interest, or even that the advice they get is not free but financed by the fees included in the price of the financial instrument.
The FAMR final report published in March 2016 shows that three years after its implementation the new regulatory structure for investment advice – unsurprisingly – does not yet work perfectly. According to the FAMR, the RDR reforms led to a higher quality of advice, and higher business standards in the financial services sector; however, the UK now faces an advice gap with many investors now finding investment advice unaffordable, and a significant number of banks advising high-income investors only. Though it might be argued that no advice is better than biased advice, in the face of the current low-interest phase and the April 2015 introduction of pension flexibility in the UK, a significant number of people will be exposed to the risk of making ruinous investment decisions.
The EU also considered a general ban on commissions during the MiFID revision process but, due to strong opposition by stakeholders from the financial sector, in the end MiFID II and its Level 2 and 3 measures only ban commissions when independent advice is provided. Although Article 24(9) MiFID II may at first glance look like a general commission ban, it effectively only stipulates a duty to disclose any payment or benefit to or from the financial service provider.
Even though MiFID II only applies from 3 January 2018 onwards, the German legislature implemented the new MiFID II rules for investment advice as early as 2013 by enacting the Act on Independent Investment Advice 2013 (Honoraranlageberatungsgesetz). The 2013 Act “gold-plates” the rules in MiFID II as it also prohibits independent advisers from accepting minor non-monetary benefits, which is permitted under European law under the conditions specified in Article 24(7)(b) MiFID II. However, like MiFID II it does not include a general ban on commissions for investment advice. In Germany, commission-based services are still the main form of investment advice: only very few advisers work independently and charge directly for their advice.
There are several pros and cons to a general ban on commissions, which were discussed intensively throughout the EU in the last years, not least in the UK and Germany. When discussing this question, it appears crucial to bear in mind that disclosing conflicts of interest is always the second-best option compared to preventing such conflicts in the first place. The European legislature made this very clear in both Article 18 MiFID and Article 23 MiFID II, which stipulate that investment firms must take all appropriate steps to identify, and prevent or manage conflicts of interest. Only where this is not possible does EU law allow financial service providers to merely disclose the nature and/or sources of the conflict to the client. A significant conflict of interest arises in those cases where the advice given is supposed to be in the sole interest of the client, but is mainly financed by commissions paid from the product providers to the adviser. This conflict, however, can and should be prevented by banning this system of remuneration.
Germany would be well advised to follow the example of the UK, the Netherlands and Australia, which have banned such commissions for investment advice – even if the EU has not gone down this road yet. In doing so, Germany must be careful not to fall into the advice gap that those countries that have banned commissions have. The major challenge here is to restructure the remuneration system of the advice market without creating an advice gap. The FAMR report identifies automation of advice, so called robo advice, as a promising way of lowering the cost of financial advice without impairing the quality and independence of the advice, which allows distributing investment advice to a larger group of investors. In their Report on automation in financial advice, the three European Supervisory Authorities (EBA, ESMA, and EIOPA) suggested that automated advice may be of higher quality than that of human advisers, as it is more consistent, based on the most up-to-date market information, and can be recorded more readily. On the other hand, there are several risks associated with the automation of advice. One key risk for consumers and financial institutions that was identified by the ESAs’ report is cybersecurity. Moreover, consumers might misunderstand the nature of the service provided, and be tempted to buy high-risk products by digital sales platforms masquerading as advisers. Thus, it is crucial that the German legislature as well as the German financial supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht promote new developments in the robo advice sector, while also creating clear and effective rules to protect consumers from the mis-selling of financial products on the internet. The EU intends to define a framework for regulatory actions by national supervisors: the Commission recently announced in a consultation document on FinTech that it is considering issuing guidelines on how certain FinTech business models fit under the current regulatory regime, and to harmonise the different regulatory approaches across member states.