Parliament Protects Inducements

European lawmakers voted this week to protect the practice under which banks and other financial companies pay inducements to financial advisers for selling their products to retail investors.

They thereby overturned  expectations that they would in effect ban the inducements, which it is argued created a conflict of interest between a financial adviser and his or her customer. The practice is said to give advisers the incentive to sell the products on which they earn the most commission rather than those that best suit investors’ needs.

The economics committee of the European Parliament agreed in a last-minute amendment to financial legislation Wednesday that it would not ban such inducements. Up until the night before the vote, it looked as if the committee would effectively ban the practice by forcing banks pay the commissions to clients, rather than to the advisers.

“This would have been an incentive for financial advisers to recommend products in their clients’ interest and not simply on the basis of securing the highest commission,” said Sven Giegold, a German parliamentarian from the Green Party.

The legislation, called the Markets in Financial Instruments Directive, which was put forward by the European Commission last year, is expected to gain the support of the full parliament next week. Following the vote, the Parliament will then enter negotiations with the commission and the 27 member states before it becomes law.

The Commission, the EU’s executive, had proposed an outright ban against advisers receiving inducements from a financial product provider.

However, support in Parliament for barring the practice crumbled when the European Socialists and Democrats group backed away. The group put forward an amendment during the vote Wednesday that bankers would only be compelled to disclose the use of commissions. The extent of the expected disclosure is as yet unclear.

However, no politician from the group is willing to attach his name to the amendment, which is being presented as a party-wide initiative. Usually, legislators personally present such last-minute proposals.

Legislators and others familiar with events say the shift in support came because the group is led by politicians from Germany, Luxembourg and France, whose banks heavily rely on paying such inducements–which the the U.K. is already on track to ban.

“This is a dramatic setback for consumers,” said Monique Goyens, director general of The European Consumer Organisation. “Incomprehensibly, [members of the European Parliament] persist in supporting the inadequate system of disclosure of sales inducements which has done nothing to prevent intermediaries pushing their most self-serving products.”


Source: http://blogs.wsj.com/brussels/2012/09/28/parliament-protects-inducements/