Europe looks to clampdown on execution-only

The European Commission has proposed to tighten up Mifid rules surrounding execution-only services and has put forward the option of banning execution-only altogether.

In a recent consultation paper reviewing Mifid, the EC notes that Mifid rules permit execution-only services where they involve ‘non-complex financial instruments’.

The paper argues there is uncertainty over what constitutes a non-complex product. As a result the commission has put forward two alternatives.

The first is a tightening up of the definition of what products would be classified as non-complex, such as shares that embed a derivative, and how instruments such as bonds are categorised.

Under the new terms execution-only services would also be prevented where investors are taking out credit or a loan to finance the investment.

Within the improved definition there is also a proposal that could exclude some Ucits from being offered through execution-only services if they are subject to complex portfolio management techniques.

The second option would be to ban execution-only services altogether.

The EC says: “In support of this option it may be argued that retail clients – who are essentially concerned by the provision of execution only – should always expect a higher standard of service from intermediaries, including online brokerage which is the typical channel for this kind of services.”

Zurich UK Life principal of government and industry affairs Matthew Connell says there is a split among EU member states about whether execution-only services are beneficial or not.

He says: “It feels to me like the commission’s favoured option, and the one it has put most thought into, is the first option.

“It is almost like the commission is saying to would-be respondents ‘if you don’t want to meet us halfway and help us redefine non-complex products then we can ripple up some support for a ban from some member states’.”

Cicero Consulting associate Tim Gieles says: “In my view a complete ban would imply that retail investors that have done their homework properly, who know everything about the product they are investing in and who therefore do not need advice, have to bear unwanted extra costs as they will need to pay for the intermediary’s advice once execution-only is no longer available.”

The consultation closes on February 2, 2011.