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Advisers would stop calling themselves 'independent' if EU ban on commission to independent advisors enforced, says Government


If new EU laws only prohibit commission payments to independent financial advisers (IFAs) then it could lead IFAs to stop referring to themselves as 'independent', the Government has said.

The Government said that only prohibiting "inducements" from being paid to IFAs and not to other advisers would be the wrong approach. It made the comments in a response to a House of Lords committee report into the European Commission's proposed MiFID II package of reforms to financial services laws.

The Government's response (8-page / 130KB PDF) was published on 29 October, prior to the latest draft amendments to the MiFID II proposals which have been suggested by the EU's Council of Ministers.

In its report Sub-Committee A of the House of Lords EU Select Committee had called the Commission's plans to only impose a ban on inducements to IFAs "flawed" and "unworkable". It said that if the plans were implemented, advisers would "simply take steps to avoid being classified as independent". The Committee commended the new rules the UK's Financial Services Authority (FSA) has set out in its Retail Distribution Review (RDR) on the way advisers can be paid.

The Government said that it agreed with the Committee's conclusion.

"The Government agrees with the Committee that the Commission’s proposal to restrict the inducements ban to independent advisers is not the right way to improve investor protection across the EU," it said in its response document. "Applying the ban in this way is likely to distort the market in that firms may simply stop classifying themselves as independent."

"The payment of inducements for financial advice can lead to conflicts of interest. As the Committee observes, this issue has been addressed domestically in the UK by the FSA via the Retail Distribution Review. The Government supports rigorous standards of corporate governance but agrees with the Committee that some flexibility is required in the approach taken in the MiFID review and believes this issue is being addressed as negotiations progress," it added.

Under the FSA's RDR, 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.

Under the Council of Ministers' proposed amendments to the MiFID II draft legislation, though, it would be up to individual member states whether they wanted to ban all investment firms that provide investment advice from receiving commission payments from product providers. Generally, IFAs would only be able to be paid by their clients when providing investment advice, with fees, commission or most non-monetary benefit payments from providers to advisers prohibited.

However, under the Council's draft plans "minor" non-monetary benefits could be provided by product providers to IFAs that provide investment advice to clients as long as the arrangements are "clearly disclosed" and are "capable of enhancing the quality of service provided to a client 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."

A non-binding recital contained within the Council of Ministers' text provides an example of what a 'minor non-monetary benefit' may constitute. The recital said that a product provider giving IFAs "training on the features of the products” they are offering could be said to be providing an IFA will a minor non-monetary benefit. Further examples were not detailed.

Both the Council of Ministers and the European Parliament would have to agree on the terms of the MiFID II package before new EU laws in this area can be established.

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