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Lords: Widen Mifid II commission ban to all advisers

The European Commission’s proposal to ban commission for IFAs should be extended to all advisers to ensure a level playing field, according to a report from the House of Lords European scrutiny committee.

In October, the EC’s proposals for the Markets in Financial Instruments Directive II proposed banning commission for advisers operating on an independent basis. In March, the European parliament suggested amending this so all advisers simply have to disclose any commission. The EP was set to confirm this as its position in an Economic and monetary affairs committee vote this morning but it was delayed due to disagreements on the EP’s position on other proposals within the Commission’s original proposal.

The report says the Commission is right to look at boosting consumer protection but that the proposal to ban independent advisers taking commission is flawed. It says instead a ban on commission for all advisers along the lines of the retail distribution review would be preferable..

It says: “Restricting the ban on inducements to independent advisers will be unworkable, since advisers will simply take steps to avoid being called independent. A more consistent approach to consumer advice is needed to ensure consumers are adequately protected. One model for this is the approach adopted by the FSA in its retail distribution review, which deals with the status and remuneration of advisers generally and prohibits all payments in the form of commission.”

It also criticises the EC’s “deeply flawed” proposal to require non-EU firms wanting to offer most investment services within the EU to be based in a country with regulation that is equivalent to Mifid II, signed off by the Commission or the European Securities and Markets Authority. It says consideration should be given to the European parliament’s proposed amendment to introduce a transitional regime for existing firms while the Commission looks again at the need for equivalence

It says: “There is a risk that, if introduced, such provisions could lock third country firms out of the EU markets, which taking into account the risk of regulatory retaliation, would have an extremely damaging effect on European financial markets, and in particular the City of London. Given that global financial markets are independent of geography, we believe this to be wholly impractical.”


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There are 23 comments at the moment, we would love to hear your opinion too.

  1. Same old same old.
    Why not go the whole hog and ban all retail financial investment products.
    That way no consumer detriment has any chance of occuring.
    Might be better to leave the EU altogether and go our own way.

  2. They obviously have no idea how few complaints IFAs generate. How can you get much lower than 1%?

  3. Are they really so naive to think that banning commission will protect consumers? As far as the tied advisers are concerned, it’s not the inducement of commission that leads to mis-selling, it’s the punishment from not hitting targets. Remove the targets and the threats/humiliation that come off the back of them, and you might actually get advisers who are happy to do the right thing for their customers.

  4. To me, the key consideration is that there should be a level playing field for all advice models. At the moment any company giving advice post RDR will have to disclose fees in advance of work undertaken, whereas non advised companies in some areas of the market such as annuities will be able to continue their current business model.

    This provides a competitive advantage to the very companies whose business model provides less to the public, and in the majority of cases charges more. They have to be made to declare their charges up front in the same way as proper advisory companies.

  5. This is all boring now. RDR is coming in December, and nothing will change that. Most IFAs are close to QCF 4, and those that aren’t will be leaving. Providers are rolling out their AC systems, and many advisers have been using that system for years – e.g. Scottish Life pensions, Transact platform etc.

    As for which European countries follow us, who cares? It looks like Holland will be, some others may not. And let’s not forget, we’re only following Australia, which did its RDR some years ago.

    There’s not much more to say or do now except to get the QCF4 and make sure you know what your AC rates are (in many cases will be similar to what used to be paid as commission).

  6. Simple answer. Get rid of the Lords, this unelected antidemocratic institution…

  7. Robert Johnsey 10th July 2012 at 9:50 am

    The RDR does not ban all commission – far from it. It bans commission on investments – there is still opportunity for commission bias on protection products of all kinds – life insurance, buildings insurance etc.

  8. I have got to agree with IFA; RDR is coming, if you thought things would change with the new government you were wrong. If your not level 4 then your out; and it doesn’t matter what we say as no one listens or takes any notice. Financial advice will continue to be seen as a service to the affluent and we will all have to change our business models to cope with it. Sod it I think I will start a gardening round, at least I will not have MP’s who know nothing telling me how to run the business.

  9. The problem is here that the Lords and in fact most people outside the industry simply do dont understand how commission works, I include here the majority of the FSA. Investment bonds have been attacked in the press over the years and headlines such as “SCANDAL OF 9% COMMISSION ON BONDS” have appeared. If the press understood how commission works they would know that in fact it makes no difference to the client whether the commission is 3% or 15%, the more commission the life office pays the longer the contract has to stay on the books before the life company breaks even and then starts to make a profit, the commission is paid up front and the life company gets the money back over a period of years through the annual management charges. You can see why all the life companies are so in favour of RDR. The Commission ban will not benefit the the consumer or the adviser only the life offices who will see there profits rocket. I have quotations for post and pre RDR products from leading life offices which show that the consumer will be worse off come RDR. After 10 years the client is £4000 (at 6% growth) worse off with a post RDR contract with adviser taking 0% upfront and 0.5% adviser fee,compared to the current contract with the adviser taking 4.5% upfront and 0.5% per annum trail !!!! Would it not have been prudent for the FSA to look at these issues BEFORE deciding on a ban ???
    Footnote the average fund manager charges an AMC of 1.6%pa,can you see fund managers cutting their charges by 0.5% on 1/1/13. Im now taking bets!!

  10. Thomas its nothing to do with the government or MPs, in fact the TSC recommended RDR to be delayed and the FSA stuck two fingers up. Almost 100 MPs stayed behind in the commons till late at night debating RDR and were unanimously in favour of it not going ahead so its unfair to attack them. Exams were never the problem Thomas and IFA, it was always the commission ban and only Mifid II Can save it now.

  11. If ever the FSA needed proof that commission should be banned, Richard Wright has just provided it.

    I presume Mr Wright is an IFA? But he simply doesn’t understand how the commission is paid for…he infers it’s paid by the life office. Er, no. It’s paid THROUGH the life office, but is paid BY the client. If the commission is 3%, then that is added onto the cost of the product. If an IFA took 15% then that’s how much extra the client must pay.

    It’s true that IFA commission is hidden from clients on Investment Bonds, by way of allocation rates, “establishment charges” over 5 years and surrender penalties during that time etc. but I’m shocked at how some IFAs have apparently been tricked so well too.

  12. p.s Richard :

    Sorry to have a second repost at your comments, but I’m afraid Midid II cannot “save” commission. For a start, it won’t come in for several more years and secondly, it allows for individual countries to “gold plate” the legislation, meaning that countries such as Holland and the UK can ban commission in all forms, even if the minimum requirement across Europe doesn’t insist on that.

  13. IFA you are totally wrong. On a bond with Pru investing in prufund there is NO initial charge just a AMC of 1.75% per annum, those are all the charges. An Adviser can take up to 7% commission, if 7% is taken no trail is paid but the AMC is still 1.75% -forever!! if you want to see the quotes where it shows the client is £4000 worse off after RDR compared with a current contract which pays 4.5% plus 0.5% trail!! Please give your email address here and I will send them to you. ITS YOU IFA who does not understand commission on bonds, not me !!!I

  14. PS IFA
    Sorry to have a second post but I assume you are not an IFA whch maybe is why you are anomymous and are so pro.RDR!!!!

  15. IFA, I think your point depends on whether the internal cost of the product is fixed or variable, independent of how these costs are extracted and over what period.

    If the cost is fixed then Richard is correct. If the product is re-costed each time for different commission then you are correct (or what you are implying).

    It’s hardly a secret that life offices need a product to stay live for a certain period to break even. The more that is taken out up front the longer this period is. Post RDR the product will be cleanly priced which should mean the life office gets to break even quicker but the internal cost will stay the same, hence the result of the pre and post RDR comparison.

  16. Don’t want to get bogged down with arguments over Pru Bonds (or anyone else), but if two identical plans are set up on the same day, one through an IFA with 1% commission and another through an IFA who takes 7% commission, then the second client will get a 6% extra charge applied to their funds. It’s all costed, it’s often well hidden, but the charge is made to the client. Otherwise, why would anyone “rebate” part of the maximum commission if it didn’t improve terms?

  17. A bunch of out of touch, pontificating fat cats who have no idea what the man in the street wants.
    If he WANTS to pay by commission, let him pay by commission. What’s the problem? But then people with too much self importance usually think they know what’s best for the lower classes.

  18. Richard Wright 10th July 2012 at 4:02 pm

    IFA ,your talking about REBATING COMMISSION,im talking abot a pre RDR contract Vs a post RDR contract. Post RDR there will be no commission to rebate as commission will be banned so I dont really understand your argument. I also have quotes on my desk now comparing a Pre RDR quoute where all upfront commission is rebated (4.5%) and a post RDR quote where the adviser makes no upfront charge and charges just a 0.5% annual fee. The client at ten years is £10000 better off (6% Growth) with the commission available contract than the plan available post RDR.
    In effect you have agreed with me IFA, commission is better for clients as it can be rebated, post RDR you wont have that choice. Im suprised IFA that you have not asked to see these quotes they are here sitting on my desk and later this week th FSA will seeing them.

  19. Actually, I would be interested in that. I’m always keen to learn. Mind you – even if it turns out that Pru are jacking up their factory gates prices for RDR, it wouldn’t necessarily mean others are too.

  20. I’m sorry Richard but something’s amiss there. It makes no difference whether commission can be rebated or not – a clean contract is a clean contract.

    The only reason that pre-RDR contracts appear better is due to the enhanced allocation rates available. I agree that post-RDR the projections will appear slightly worse but at least the client will be able to clearly see the relevant elements of cost. You have to admit that a charging structure consisting of an enhanced allocation, AMC and establishment charge, sometimes along with a loyalty bonus is not the easiest to understand.

    I would love to have a look at these illustrations as in my experience, the Pru’s factory gate priced bond is a bit more expensive but not to the level you suggest.

    Feel free to email them to me at

  21. Pru’s bond with No Initial Charge has a higher AMC than their Initial Charge Bond – this is how they recoup the lack of IC being taken up front. As for factory gate priced or post RDR contracts – Pru’s charges are lower – it is the explicit nature of adviser charging that makes the factory gate priced or post RDR products look worse & lack of enhanced allocations as previously mentioned. As for life offices profits soring this is also unlikely – at present commission is a business expense = tax deductable post RDR = no business expense as the client is the one paying the “fee”

  22. Yes, and what a lot of these pre-RDR Investment Bonds do is have a “loyalty bonus” after 10 years. This has the effect of reducing the RIY figure on the 10th anniversary…which by happy co-incidence is the date on which the FSA insist the RIY is shown!

    Now, the average Investment Bond is held for just over 7 years, meaning that the majority of clients don’t get the “rebate” offered on the 10 year anniversary, and therefore pay rather more charges than the illustration might suggest at first glance.

    One thing that can’t be denied about RDR…it will clear all these poxy sharp practices out.

  23. Sadly the sharp practices meant that those guys with clean charging were always placed second. Plenty of times when I was a BDM IFA’s would say to me you’re more expensive over 10 years than this product when I knew they had the loyalty bonus in….

    Definitely looking forward to the change!

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