Restrictions on commission payments would not be an appropriate regulatory tool in many financial services markets, as the negative consequences can significantly outweigh the initial goals sought by regulators, according to a new study by the independent economics consultancy, Oxera.
The study, commissioned by the German Insurance Association (GDV), explores the potential outcomes that banning commission payments could have for the provision of financial advice and the distribution of financial products. The question of commission payments has recently drawn public attention, with EU policymakers meeting later this month to discuss the final provisions of the Insurance Mediation Directive (IMD2)—a new set of rules for the European insurance sector.
Oxera’s study reveals that no European country has introduced a blanket ban on commission payments covering all financial products. The existing restrictions on commission payments, created in countries such as the UK and the Netherlands, are designed to address specific issues in their markets, such as avoiding product bias or tackling high-profile mis-selling of financial products. National regulators have taken a case-by-case approach, as there are pros and cons to paying financial intermediaries by way of commissions, depending on specific market conditions and product types.
The study finds that restrictions on commission payments could lead to increased prices for financial advice, and potentially deter customers from seeking advice and acquiring financial products. Furthermore, bans on commission payments could distort the competition among different types of distributors of financial products. Reinder van Dijk, Head of the Financial Services team at Oxera, said: ‘The main conclusion of Oxera’s analysis is that the regulation of commission payments needs to take account of specific market conditions. Wide-ranging blanket controls are unlikely to be effective, as different regulations are required to address different issues.’
The study sends the message to the European lawmakers that restrictions on commission payments could have negative implications for the insurance market, and retail consumers in particular. Commenting on the findings of the Oxera study, Frank von Fuerstenwerth, Chairman of the Executive Board of the GDV, said: ‘A general ban on commission payments fortunately does not exist. Even partial bans of commission payments in a few European countries can do more harm than good for insurance clients. Therefore, we ask the EU to refrain from introducing a ban on commission payments, even through the back door.’