Banning Inducements Unlikely to Prevent Mis-selling, Survey of Investment Professionals Finds

As the European Union considers a ban on inducement payments, a new survey released by CFA Institute, the global association of investment professionals, finds that a majority of investment professionals think a ban is unlikely to prevent mis-selling of investment products.

The survey, CFA Institute Global Survey on Inducements, which garnered responses from more than 1,000 investment professionals worldwide, sought to examine views concerning possible regulations to restrict the practice of inducement payments on the sale of certain investment products.

Just a third (34%) of investment professionals surveyed in the EU think that inducement payments should be banned, with respondents citing concerns that this could negatively impact on the variety of products offered to clients. This compares to almost half (48%) of respondents in the UK, where inducements are already banned.

As opposed to an outright ban, investment professionals in the EU instead favored increasing efforts on financial literacy and investor education (59%) and mandating clear disclosure of all commission payments received by distributors before investments are made (55%) as more effective methods of preventing mis-selling.

Josina Kamerling, Head of Regulatory Outreach for CFA Institute in EMEA, says:

“Policymakers in the EU are actively discussing whether to restrict the practice of inducements on the sale of specific investment products. This important debate is often caught between the risks inherent in the current system for biased, costly, and unsuitable investment advice on the one hand, and on the other, the concerns about a growing advice gap as a potential consequence of an inducements ban. However, diverging views amongst EU member states is likely to prevent a unified approach on the issue, and is reflective of the diversity of market structures which needs to be tackled before any ban. In our view, banning inducements is not the immediate solution, but addressing a number of key market structure issues is crucial.”

“There are measures that we believe regulators can take to tackle the underlying incentivization issues behind product mis-selling without resorting to an inducements ban, which carries risks of its own. Our survey finds that the most important regulatory reforms needed to combat mis-selling are to mandate clearer and full disclosures of commissions and fees paid, and to introduce clear standards for product information including cost structures. Such a move would help bring the standards at play in the practice of inducements into line with what is already in place for investment performance information.”

Other key findings from the survey include:

• Globally, just 33% of respondents believe commission payments to financial advisers in respect of retail financial products should be banned and 45% agree that a total ban could negatively impact on the variety of products offered to clients.
• Most respondents (65%) consider remuneration structures currently in place at distributors to be the main cause of mis-selling practices. This figure rises to 67% within the EU, and 73% in the UK.
• Most respondents agree that the most important reform needed to combat mis-selling would be to mandate disclosure of all commission payments received by distributors before investments are made (66%). This was felt most keenly in the UK, with 78% of respondents in favor. Further, 65% of respondents globally felt that improving disclosures of product key features, including full disclosure of all product costs would be an important mandate (UK 68%).
• Globally, 81% of respondents agree that a full disclosure requirement (with appropriate enforcement) on all commissions and fees paid could be helpful to combat the issues of mis-selling of financial products.
• Increasing efforts on financial literacy and investor education also ranked highly in most markets as an important reform (46%). (EU 59%, UK 55%)
• Globally, 45% of respondents believe product choice for customers would likely diminish if inducements are banned, with distributors no longer offering some products, such as those from third parties.
• Globally, 30% of respondents felt that an inducements ban may result in retail investors steering away from advisers and advice channels in favor of self-directed, execution-only, or retail brokerage investment platforms. (EU 33%, UK 36%)
• Most respondents (71%) agree that strengthening investor education before any regulatory moves associated with mis-selling is necessary for any new regulation to be a success.