Luxembourg’s permissive environment for inducements and an acceptance of non-independent investment advice will make a good test case for the EU’s upcoming retail investor strategy. A fight is brewing over “kickbacks” as the European Commission finalises its effort to encourage Europeans to increase the level of their assets placed in investments.
The European Commission has made clear it has an appetite for an argument, as evidenced by recent statements by leaders such as financial services commissioner Mairead McGuinness.
The dispute is centered on the role of “inducements” in investment schemes. These kickbacks are benefits or commissions allocated to financial advisors by a third party, usually the manufacturer of a financial product. McGuinness recently pointed to a comprehensive EU study saying that “products where inducements are paid are on average 35 percent more expensive for retail investors.”
Such inducements are banned in the Netherlands and the United Kingdom. They are subject to “significant limitations” in Finland. In other European countries, including Luxembourg and Belgium, they are common practice.
Alfi opposes ban
In 2022, Luxembourg investment funds industry group Alfi made proposals to adapt legislation such as MiFID to encourage retail investors. However, it took a strong stance against any ban on inducements. Alfi stated that a ban would “lead to advice on being available to those who can afford it and are willing to pay for it,” a view also shared by its EU counterpart Efama. The industry fears less competition and fewer products offered, with reduced quality of advice.
That prediction may come true, said Benjamin Accadia, an EY partner in business consulting. While the “distribution landscapes are not comparable, but experience, for example in the Netherlands, shows that many small retail investors have been redirected to execution-only services, where no advice is provided,” he said.
The drive to provide apparently free, inducement-subsidised investment advice is defended by the industry as an investor preference.
Luxembourg is among the EU countries analysed by an EU retail investor study where “the clear disclosure of inducements” is uncommon.
Not much independent advice
In the EU study, Luxembourg’s national supervisor the Commissariat aux Assurances (CAA) noted the disproportion between the country’s 7000 non-independent “agents” and only 117 independent brokers. The study identified Luxembourg as having a predominant model of non-independent advice.
The Commission this Spring will propose its retail investor strategy “to find the right balance between innovation in the industry sector and consumer protection, through clearer rules for fintechs or new rules in the area of inducements and disclosures,” said Luxembourg MEP Monica Semedo of the Renew Europe party, a liberal, pro-European political group.
“A European level playing field in terms of transparency and disclosure and well-functioning cross-border distribution are key to drive competition, which will ultimately benefit all retail investors across Europe,” said Pierre-Alexandre Coipeault, an EY associate director and regulatory and market knowledge leader.
‘Very political debate to have’
PwC partner and financial services market leader Olivier Carré argued that Luxembourg’s financial centre would be unaffected by an inducement ban. “All those fees just flow through to the distribution partners or to the asset managers, so we are not participating in any of those fee flows as a financial centre.”
Carré pointed out that the inducement debate started with the introduction of MiFID 1 in 2007. “Our view is that that is a very political debate to have. And there will probably only be a political decision to be taken on this.”
Resistance to an inducements ban reflects the interests of the organisation or the membership of the organisation speaking out on the issue, said Carré. Some corners of the financial community, he suggested, have become used to financing their operations in this way.
Luxembourgers have a very high proportion of their assets in cash deposits and a relatively low level of investment.
Cultural change required
Others, however, question the link between banning inducements and promoting retail investment. «The question of banning inducements has a moderate relevance when considering options to mobilise retail demand,” said EY’s Accadia. “Instead, a change in investment culture is required.”
Carré agreed that inducements are less important, referring to earlier PwC work on harmonised pension funds. “Most of the time, the actual real blocking point was the tax treatment,” he said. “So long as you don’t tackle the investment taxation and the investor taxation, it’s going to be fairly difficult to define a different dynamic around this.” He conceded however, that “there are different political statements around this.”