A bloc-wide ban on inducements could steer retail investors towards exchange-traded funds and potentially better returns, the EU’s financial services chief has said.
The European commissioner for financial stability, financial services and capital markets union Mairead McGuinness said the current system of inducements being paid to advisers is resulting in retail investors falling short of what they may achieve.
The European Commission was already considering a ban on inducement payments from fund shops to advisers, but McGuinness – speaking at a meeting of the European Parliament’s Committee on Economic and Monetary Affairs – said retail investors could benefit from access to low-cost investment products.
At present, retail investors are steered towards “expensive products” that are not always “the most suitable for their needs,” she said. Low-cost products like ETFs are “hardly ever recommended, and this impacts the net returns that consumers can expect”, she said.
Research by the commission found that investments involving an inducement payment are, on average, 35% more expensive overall for retail investors.
“It is hard to unpick the relative value of each product when someone is selling their preferred option,” she added.
McGuinness’ comments come after several attempts to ban certain payments to advisers. In the UK, since 2013 the Retail Distribution Review has banned the payment of fees to advisers but had negative consequences, chiefly a broadening “advice gap” – meaning fewer people receiving financial advice as advisers dropped books of business.
But a similar move in the Netherlands was more positive, McGuinness said. “The Dutch ban has not led to a reduction in retail investment.”
The European Commission is considering a ban on inducement as part of its broader retail investment strategy, expected to be published in April.
The review will give investors “the confidence to question the financial system in order to make the right decisions for themselves”, said McGuinness.
“We are looking at measures to facilitate access to cost-efficient investment services and to increase retail investor engagement. It’s good to grasp this nettle and make change for the better,” she added.
The global ETF industry attracted inflows of $867 billion in 2022, data from BlackRock shows.
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