The European distribution landscape is undergoing dramatic changes. The UK and the Netherlands have, in different ways, prohibited advisers from being paid inducements by funds. Instead, investors must pay their advisers directly if they want advice.
MiFID II, which will come into effect in 2017, will ban inducements in some cases and expand the requirements to receive inducements in other cases.
Investment funds are an important investment tool for all investors. Therefore we are worried when we hear that an advice gap for small investors is emerging in the UK after the RDR and that the same seems to be happening in the Netherlands.
The typical retail investor still has a need for qualified advice. A Danish analysis from 2014 carried out among 2,200 private investors showed that about four out of five investors say they need advice and ask for it. The rest were ‘self-directed’ and needed no investment advice.
In short, the typical retail investor needs advice.
Several studies show that good advice is the direct way to better outcomes for investors and society as a whole.
How do we handle this possible conflict, where there is a need for advice on the one hand, but where there is regulatory pressure on inducements that may limit access to advice on the other hand?
How do we do this in the interest of the typical investor?
The Danish minister for business and growth has established a working group that discusses how MiFID II could be implemented in Denmark. The working group expects to publish a report in the summer of this year. The report will evaluate different distribution models.
The Danish Investment Fund Association (IFB) does not favor one distribution model over another. We can see advantages and disadvantages in solutions with and without inducements. But we must bear in mind two issues when we search for a proper solution.
First of all, we have an obligation to the large majority of investors who need and ask for advice.
From the typical investor’s point of view it is unwise to scrap an existing system that provides a safety net for the investor, as long as you do not have an alternative that can ensure access to advice.
UPDATING THE LEGISLATION
Secondly, Danish investors who do not need advice should have access to a variety of funds – both Danish and foreign.
Today, foreign funds only have a small market share in Denmark due to the complex Danish tax rules, which prevents import and export of investment funds on a larger scale. This is a pity. It means less competition and limits the fund range available for Danish private investors. It also limits the opportunities to export Danish investment funds to foreign investors.
Therefore, one of IFB’s key objectives is to enhance competition by changing and updating the Danish tax legislation.
The Danish Ministry of Taxation is preparing an analysis that could pave the way for larger export and import. The analysis has been postponed several times, but now the ministry has signalled that it will be published in the summer. We expect that the government will introduce a bill to parliament in late 2015.
The report will be important for the Danish investment fund industry, Danish investors and the foreign investment managers who want to enter the Danish market.
Jens Jorgen Holm Moller is managing director at the Danish Investment Fund Association (IFB)
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