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Financial advice: EU cancels commission ban – but wants to strengthen investor protection

The mood was charged. The finance and insurance industry, which lobbies strongly, banged on against a ban on commission-financed product sales. Consumer advocates, on the other hand, made a powerful case for this cut. But now it is clear that the ban plan is off the table for the time being. EU Finance Commissioner Mairead McGuinness announced at a finance conference on Thursday that a ban on commissions in the finance sector will not be pursued as a plan for the time being.

As might be expected, reactions are mixed. The Finanzwende movement, which represents consumer interests, was disappointed. “The EU Commission started out as a tiger and ended up as a bedside rug. Even before her plans are presented, she gives in to the financial lobby,” commented Britta Langenberg from the Finanzwende citizens’ movement. The financial industry, on the other hand, welcomed the signal. “It would be the right decision, supported by many good arguments,” said a statement from the Federal Association of Financial Services AfW.

The resistance from the financial industry, but also from some of the EU member states, was probably too great. Nevertheless, despite the absence of a commission ban, not everything will remain the same. On May 24, the EU Commission intends to present measures as part of a European retail investor strategy. McGuinness therefore immediately issued a warning to the financial industry: the financial industry should by no means take its compliance with the ban on commissions as a free pass. Stricter transparency obligations, more rules for the admissibility of remuneration incentives, more understandable cost descriptions and increasing control by the supervisory authorities are planned.

For years there has been a hard struggle about remuneration models in financial and insurance consulting. Critics see a clear conflict of interest in the currently still dominant commission model, in which the seller is paid indirectly by the product provider. Intermediaries would have no incentive to sell the best investment or pension product for the customer, but the most profitable one for them, i.e. the one with the highest commission. Investment scandals and unprofitable investments are seen as evidence of the excesses of this system.

As an alternative, many consider purely fee-based advice, in which the advice is paid for independently of the product sale and solely by the customer. However, there are different models that have different advantages and disadvantages. The advice can be paid purely on a time and material basis, for example by the number of hours of advice, or by the amount invested. And even fee-based advice alone does not guarantee high-quality advice. Above all, investment products with low costs, such as index funds (ETFs), have a much better chance of being presented as an option.

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It is clear that the pressure for lower costs in financial sales will remain high, even without a commission ban. Recently, supervisory authorities have been stricter against excessive costs. The German financial and insurance supervisory authority BaFin, for example, criticized the often high costs of unit-linked life insurance in an unusually clear way. “When life insurance costs too much” was the title of her attack on the insurance industry.

It is possible that there is no need for a ban to get things moving in financial and insurance sales. However, progress will now be much slower than consumer advocates would have liked.

Also read: Customers are left behind in the debate about a ban on commission in investment advice

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