MiFID II, commission payments and what's best for the consumer

Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.

Eliminating commission leads to better consumer outcomes. That has been the view of the UK regulator and the driving force behind the regulatory reforms implementing the retail distribution review.

At EU level however it is not clear that resounding support for this view exists. The Financial Times this week reported on disenchantment amongst some asset managers over provisions of the proposed revision to the Markets in Financial Instruments Directive (MifID II) which seek to ban inducements for independent advisers.

The FT revealed that "Forty-nine per cent of professionals say commissions should not be outlawed" while some suggested that it was a "false promise to say that eliminating commissions leads to a better outcome for consumers." 

The most recent version of the draft MifID II provisions state that independent advisers "shall not accept and retain fees, commissions or any monetary and non-monetary benefits " other than "Minor non-monetary benefits that are capable of enhancing the quality of service ... and are of a scale and nature such that they could not be judged to impair compliance with the investment firm’s duty to act in the best interest of the client" which must be disclosed to the client.     

Since Thursday last week, the European Commission, Parliament and the Council of Ministers have been engaging in 'trialogue' discussions which will include a consideration of MifID II and the independent advice inducement provisions. In these discussions, those representing the UK will be able to facilitate the conclusions to be reached by pointing to experience gained since the implementation of the RDR in part on 1 January 2013.

How they choose to do so remains to be seen, but it seems clear that promoting transparency will continue to be a focus area.

Transparency is certainly a worthy goal but in much of the regulatory discussions thus far it is being treated as an end rather than a means to an end.  If pursuing transparency at all cost (1) undermines the ability of a large number of consumers to access the advice market perpetuating the 'advice gap', (2) means that those advisers who choose to continue to engage with investors with assets of less than €100,000 will become even less incentivised to do so and (3) increases the overall cost of advice, then surely there has to be a better way. Hopefully the UK's representatives at the negotiations will be prepared with data which sheds light on each of these possibilities highlighting the real life post-RDR experiences of the UK market.

The discussion should start with the end game in mind – what are the direct benefits to consumers that regulatory reform in this area can bring about? Then it should focus on the best way to get there.