As FinansWatch reported last week, several banks are in the process of transferring their clients from portfolio management agreements to new investment products prior to a new EU ban on commission payments in relation to portfolio management agreements.
However, the two largest banks in Denmark have no such plans, even though this part of the EU's Mifid II complex means that the banks will have to either settle for a lower income from portfolio management, or send an increased bill to the clients.
"Our clients show us confidence by investing through a portfolio management solution, and by removing the agency commission, we eliminate the doubts that critics have expressed regarding investor protection. It also creates more transparency and security for clients," says Sune Worm Mortensen, Head of Wealth Offerings at Danske Bank, in an e-mail to FinansWatch.
Nordea likewise has no plans to transfer portfolio management clients to new investment products prior to the new legislations that take effect on July 1, says the bank's CPO, Stine Wind, to FinansWatch.
Financial Supervisory Authority warns banks
Jyske Bank and Sparekassen Kronjylland stated last week that they are in the process of transferring portfolio management clients to new investment products that are not supposed to be affected by the new law that forbids banks to receive commission payments from mutual funds in relation to portfolio management agreements.
This prompted Director General at the Danish Financial Supervisory Authority, Jesper Berg, to warn Danish banks against getting too creative when preparing for the new rules.
"Generally, I would like to emphasize to the banks that they need to think it through carefully before planning their business models around Mifid II. If a bank is unsure whether its new model is in accordance with the law, and it chooses to carry through anyway, then the bank risks having to redo the model," Berg write on Monday in an e-mail to FinansWatch.
Jyske Bank: Better solutions for our clients
Sparekassen Kronjylland and Jyske Bank have chosen to offer their clients new investment products where the client only invests in one general fund, in which the bank has invested in different underlying investment funds – and in Jyske Bank's case with the additional option to put individual investments as property bonds or individual stocks into the general fund.
The method of putting all investments under one general fund means that the client's investment agreement is not affected by the ban.
However, according to Jyske Bank, that is not the reason behind their choice to phone approx. 30,000 portfolio management clients to propose the new solution, which now goes under the name of "Investeringsforeningen Jyske Portefølje" (Mutual fund Jyske Portfolio).
"We have examined our clients' wants and needs in our quest to design a solution that will work under Mifid II. With our solution, clients pay for expenses within the mutual fund, and that is more convenient for the client when it comes to both VAT and taxes," says Erling Fløe Kristensen, Head of Private Banking at Jyske Bank.
Sorry about criticism
Kristensen regrets the criticism from professor Ken L. Bechmann from Copehnagen Business School, who said in a FinansWatch article on Friday that solutions with so-called "fund of funds" constructions are famous for enabling "doubling up on expenses".
"We only use fund of funds to an extent where it improves yields and risk conditions. Expenses are included as part of the investment decision, and if we receive agency commissions, they remain in the mutual fund," says Kristensen and emphasizes:
"We do believe that we have created a really good solution for our clients. Mifid II requires full transparency regarding expenses, we have to state exactly what the client is to pay in money terms, and that is what we do in our new products."
Director General at the Danish Financial Supervisory Authority, Jesper Berg, reminded the banks on Monday that the upcoming Mifid II rules also require banks to provide "quality-enhancing" services to clients, and that requirement also applies to investment counseling outside portfolio management agreements.
"Regarding the concept that has been described, where the client gets a single general fund, we have previously – in response to a past case in point – concluded that it is not necessarily portfolio management, but could fall under rules for investment counseling. Here, you still have to be aware that Mifid II states that commission payments in relation to investment counseling may only happen if the bank provides quality-enhancing service, and the size of commissions must be proportionate to the service that the bank provides to the client," Berg said to FinansWatch on Monday, and declared:
"We will supervise that."
"Quality-enhancing services" required
At Jyske Bank, Erling Fløe Kristensen explains how efforts have been made to ensure that the bank's new investment solution abides by the requirements from the Danish Financial Supervisory Authority. He says that the bank has perused the conclusion that Jesper Berg refers to. The conclusion is available to the public from the Danish Financial Supervisory Authority's website, and can be found here (in Danish).
Regarding the quality-enhancing services that Berg also refers to, Jyske Bank is preparing for that too, says Kristensen.
"We're aware that our solution results in having to provide quality-enhancing services to our clients in order to keep commissions from mutual funds," he says.
"So far it's challenging, because there's no final answer from authorities on what exactly it implies. We expect to have clarification within the next few weeks, and we fully expect that we'll be able to live up to the requirements that may come," he continues.
According to FinansWatch' sources, the sector expects authorities to publish official guidelines within two weeks concerning the exact implications of "quality-enhancing services" and whether the requirement to provide these services takes effect on July 1, along with the ban on commissions, or on Jan. 1, 2018, along with the Mifid II complex in its entirety.
English Edit: Marie Honoré