The Parliament voted overwhelmingly to adopt a package of draft new EU financial services laws, known as MiFID II, last week. The text the Parliament approved contained a new clause that specifically bans IFAs from receiving commission payments when issuing investment advice or providing discretionary portfolio management services.
"Where the investment firm informs the client that investment advice is given on an independent basis, Member States shall ensure that the acceptance of any fees, commissions or non-monetary benefits in relation to investment advice or discretionary portfolio management is prohibited," the text adopted by the European Parliament states.
"This is a surprising development which seems to have come about at the 11th hour," said financial services expert John Salmon of Pinsent Masons, the law firm behind Out-Law.com. "It is striking that there is no mention of a ban on commission for independent advice in the recitals and it is not clear how it has come about."
"If this amendment stays in its current form it would have a major impact on the financial adviser market throughout Europe," he said.
Furthermore, member states can either ban or "further restrict" all advisers from receiving fees, commissions or non-monetary benefits in circumstances where they are offering "investment advice or discretionary portfolio management".
The effect of this amendment, if introduced, would be to allow regulators to ban all forms of advisers, and not just IFAs, from receiving such payments when providing these investment advice or discretionary portfolio management services.
The European Parliament-adopted text may still be subject to change during further negotiations with EU member states represented through the Council of Ministers. However, the text as currently drafted would allow the Financial Services Authority (FSA) to place a general ban on commission payments to all advisers, as it intends to do from the end of this year, and dampen claims that such rules are barred under EU law.
The European Parliament-adopted draft MiFID II text does contain a more general rule that applies to businesses providing "an investment service or ancillary service". Generally businesses offering such services are banned from obtaining fees, commission or other benefits from "any party except the client". However, there are exceptions to the rule.
One such exception permits such businesses to be paid via fees, commission or benefits if the arrangements are "designed to enhance the quality of the relevant service to the client and does not impair compliance with the firm's duty to act honestly, fairly and professionally in accordance with the best interest of its clients" as long as the "existence, nature and amount" is "clearly disclosed to the client, in a manner that is comprehensive, prior to the provision of the relevant service".
However, a further carve out from the general position means that the exception can be further tailored by individual member states to only make it legitimate for businesses to receive such payments under those circumstances if "the value of the fee, commission or non-monetary benefit is transferred to the client".
As part of major reforms to the regulation of the retail investment market, the FSA has set out new rules on how financial adviser firms can be paid.
Under the Retail Distribution Review (RDR) rules firms advising on retail investment products must clearly describe their services as either "independent" or "restricted". This declaration must be provided to client investors in writing in good time before they provide advice services.
Both independent and restricted advisers are generally prohibited from receiving payment for those services by anyone other than their clients. The FSA has introduced these adviser charging rules after taking issue with the often complex nature of the payment models that exist in the retail investment market.
It wants the arrangements for the payment of services to be easier for consumers to understand and said that it wants to eliminate bias in the market which it said can exist where, for example, advisers are paid commission by financial product providers in circumstances where they recommend that their client invest in a particular product.
Generally, IFAs will be required to consider all available products and providers in the market before making a personal unbiased and unrestricted recommendation to clients on what to invest in. Restricted advisers will legitimately be able to offer advice based on a smaller list of products or providers, such as from a single source, providing they are up front about this with clients.
However, both IFA and restricted advisers will be bound by the adviser charging rules other than in cases where restricted advisers can be said to be offering "basic advice". In those circumstances restricted advisers could legitimately obtain fees, commission or other benefits from product providers or others.
One particular payment model that the FSA is prohibiting is the payment of cash rebates to investors that use platform services. A 'platform' is an online service that allows financial advisers to manage their clients' investment portfolios. Some platforms can be used by customers directly.
Currently some platforms receive payments from financial product providers or fund managers in order to feature those products or services, whilst they also charge consumers, or their financial advisers, to use their platform. However, when the consumers, or their advisers on their behalf, choose to invest in particular products or services through a platform, the product providers and fund managers sometimes issue rebates to customers' cash accounts with the platform. Such rebates are often used to offset what advisers charge clients for their advice.
The FSA has sought to ban cash rebates after raising concern that platforms were more prominently displaying products from providers that paid large rebates. Such arrangements make it difficult for consumers to "easily make price comparisons between different platforms and between the products that are available on those platforms," the regulator has said.
However, in a response to the FSA's consultation on the issue the UK's Investment Management Association raised issue with the regulator's proposals. It suggested that the MiFID II text, as drafted at the time, may leave the FSA open to legal challenge on the basis that the regulator's proposals to ban cash rebates appeared to go further than what the draft EU law was allowing for in terms of banning commission payments.
At the time the FSA said that it was confident its proposals would not conflict with EU law.