Chief Executive at FEIFA / FECIF Secretary General
Where now for commissions?
European regulators eventually “stood back from the brink” and within the agreed text of both MiFID 2 and the IDD (Insurance Distribution Directive) fell short of a complete commission ban – a ban that many thought might well happen as little as 12 months ago!
Of course, MiFID 2 does ban commissions (and any third party remuneration) for independent advisers but, quite significantly for most intermediaries across Europe, not for “non-independents”. And the IDD (which is effectively IMD 2) has drawn back from any commission ban at all. It is true that, under either Directive, the NCAs (National Competent Authorities – national regulators to you and I) can “gold plate” the terms; in other words the commission bans in countries such as the UK and the Netherlands can remain, but much of mainland Europe seems unlikely to do this, at least at this time.
So, what is the likely future of commission payments within our industry?
The fact that full commission bans did not materialise within the two Directives highlighted above is, to a certain degree, due to the lobbying activity of various trade bodies such as AILO and FECIF, but is also because the industries in general in some of the major European markets were seriously opposed to such an approach; Germany, France and Italy in particular show no real appetite for removing commission payments at this stage.
I think it is very important to realise that the financial services industries and, in particular, the advisory and/or intermediary sectors, are very different in each EU country – and are also at quite varied points in their respective development cycles. In other words, one size definitely does not fit all at this juncture. A commission ban – along with the significantly increased regulatory burden that these new or revised Directives will create – could simply have been too much for some of these sectors to cope with; and no politician wants to see mass unemployment created in our industry, not least at this fragile time as economies continue to try and climb out of the global crash of 2008 and beyond.
The advisory sector in the UK is arguably relatively robust and significant, and the industry is very mature compared to many other European countries – and yet even there a commission ban has had a substantial effect on adviser numbers. Many other countries could simply not have withstood that regulatory tsunami.
Against that backdrop, what does the future hold for remuneration models within our industry?
MiFID 2 and the IDD, along with PRIIPS and other countless Directives and increased regulations in general, represent the most widespread and extensive changes to financial regulatory frameworks and requirements ever seen within the EU. Given that fact, and although I accept that this is not the end of regulatory developments across Europe, I feel that the next wave of change will most likely be “tinkering” at most – basically adapting and amending MiFID 2 and the IDD once it is clear which aspects are not having quite the desired outcome.
A commission ban would represent far more than just “tinkering” and thus I don’t see that necessarily occurring in the next wave of EU regulatory adjustments. Therefore, MiFID 3 and IDD 2 (or whatever this tinkering is called) are unlikely, I believe, to represent further wholesale change.
In the longer term, my crystal ball is far cloudier. One of the major initiatives of the present round of regulatory upheaval is significantly increased transparency – predominantly as an attempt to result in greater advisory objectivity and the removal (or at least the reduction) of remuneration (commission) bias. In the UK this transparency first took place in the mid-1990s, with full commission disclosure. Although there is little evidence that commission or product bias existed after those changes it did not stop the regulator, the FSA at that time, from deciding that bias still existed and thus the only way to combat it was to remove commissions entirely – in its opinion.
Who knows what regulators think?
In other words, if a regulator decides that the present system is not working – whatever that system is – it may well change it; irrespective of whether it can back that up with hard and undeniable evidence. Hence my cloudy crystal ball….
I feel that a lot of European NCAs are not disposed towards commission bans at this time and many of them are also very keen to see how things play out in countries such as the UK and the Netherlands. I thus think that commission is with us for a few years at least, but beyond that……?
What now for business models?
For me the most important question is not really one about commission or fees, it is about the business practices, models and strategy of advisory firms going forwards. Transparency in itself is a “game-changer” – with or without a commission ban. It involves a need to “justify” any remuneration received and thus to show the added value of advice to the prospective client. If you can’t do that it doesn’t really matter whether you are supposed to be paid by the product provider or directly by the client, because you probably won’t transact any business and therefore won’t be paid by anyone!