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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: