Financial advisers face a ban on commissions for recommending clients invest in Undertakings for Collective Investment in Transferrable Securities (UCITS), if the UK’s government and finance watchdog have their way.
A UCITS is a public limited company which coordinates the distribution and management of unit trusts among European Union member states.
Now, the Financial Services Authority (FSA) and the Treasury are urging EU lawmakers to bring in the ban on commissions paid by fund managers across Europe.
That’s their response to call for views from the European Commission on their proposals on UCITS funds.
The UK says a ban would bring to an end the conflict of interest created by the payment of commissions by fund managers.
Flawed legislation
In their response, they said: “The UK believes that UCITS VI represents an opportunity to address the fundamental conflicts of interest which lie at the heart of intermediated sales.
“The UCITS brand represents a badge of quality and as such, it is necessary to restrict their ability to pay inducements to the advisors who recommend them.”
In their reasons for proposing a ban, the UK said the move would take away the opaque management fees and rebalance the relationship between the client and their intermediary.
The call for a ban comes after the European Parliament rejected such a move on commissions across Europe last October, but at the same time called for more clarity of how commissions were paid.
The rejection was part of the Markets in Financial Instruments Directive (MiFID), which is known as MiFID II, and which the UK’s House of Lords had already highlighted as having a number of flaws.
Unresolved issues
The Lords told the commission to take up the UK’s Retail Distribution Review which came into effect in January and which bans commissions and forces financial advisers to reveal how much they are paid.
MiFID II is aimed at tackling a range of issues which have been highlighted since the economic crisis began and they form part of the Market Abuse Directive (MAD), referred to as MAD II.
Among the aims for the legislation is an intention to improve investor protection, improve the transparency and to tighten the regulation of Europe’s financial markets, particularly for derivatives.
However, there are fears that the UK and German governments are increasingly at odds over the potential impact of MiFID and many commentators say the issues are taking too long to resolve.
The Germans now pressing ahead with their own rules on high-frequency trading and the EU is now facing the prospect of negotiating MiFID III unless the two countries can reach an agreement.