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Danish FSA introduces extensive ban on commissions from mutual funds

The Danish Financial Supervisory Authority has published an interpretation of new EU rules that prohibit banks from earning commissions directly on investment funds they select on behalf of customers. The legal interpretation involves an extensive ban on commission payments for advisory and distribution.

Photo: Lars Krabbe

After consultations with consumer organizations, banks, mutual funds, and lobbyists, the Danish Financial Supervisory Authority has now published the official interpretation of new EU legislation concerning what banks can receive from mutual funds for selling the funds' investment departments to bank clients.

Briefly stated, what they are allowed to receive is not much, at least in cases where a bank manages its clients' investments.

"The purpose of this rule is to remove the banks' incentive to act against clients' best interest by choosing certain investment products – such as those involving commission payments – over others for their portfolio management products. The rule is aimed at the bank (the distributor), and so the responsibility to comply with legislation lies with the bank," says the Danish Financial Supervisory Authority.

As FinansWatch has reported during the past two weeks, certain banks are in the process of transferring clients from portfolio management agreements to new products that are unaffected by the ban on commissions. The Danish Financial Supervisory Authority calls attention to this trend towards the end of its statement.

"The Danish Financial Supervisory Authority will monitor developments in the investment certificate sales market, including any potential shifts away from portfolio management products towards products that are not not covered by the ban on commissions," the financial supervisory authority writes.

An extensive ban on payments

The Financial Supervisory Authority declares that the basis is a general ban on commission payments to banks.

"The Danish Financial Supervisory Authority believes that banks are not allowed to receive and keep payments which actually depend on the bank's distribution performance (The supervisory authority's emphasis -ed.). As such, it is not enough that a payment is not formally remuneration in relation to the bank's selection of portfolio management products to clients," says the financial supervisory authority.

The Danish Financial Supervisory Authority emphasizes that this is not a total ban on payments to banks from mutual funds. Banks are allowed to charge mutual funds for administrative and practical services, but the crucial factor is that no hidden commission payments for sales and distribution are involved.

"This will always depend on a specific assessment of whether or not the bank is allowed to receive and keep a given payment, and the bank itself is responsible for handling the assessment," says the financial supervisory authority.

What the Danish Financial Supervisory Authority did not write, but the banks know very well, is that the financial supervisory authority will monitor whether or not banks actually attempt to circumvent the interpreted rules during future inspection visits.

"In cases of doubt, banks can consider whether or not they will receive less payment for a given task if they buy fewer investment products for their portfolio management clients. If that is the case, the bank is not allowed to receive and keep the payment in question," the financial supervisory authority emphasizes.

"The difference lies in whether the payment actually depends on the bank's distribution performance. This area has the biggest risk of conflicts of interest because commission payments may entice banks to buy products – on behalf of their clients – that are not in the best interest of their clients, says Birgitte Søgaard Holm, deputy director general at the Danish Financial Supervisory Authority, in a press release.

The ban on commission payments takes effect on July 1 this year, while the rest of the legislative complex takes effect on Jan. 1, 2018. The fact that Denmark is ahead has given rise to concerns that rules and conditions could end up being stricter in Denmark than in the rest of the EU, but the Danish Financial Supervisory Authority will monitor this, too, the press release states.

"The Danish Financial Supervisory Authority will closely monitor implementation of the same regulations in the rest of Europe. If interpretations emerge from ESMA in the for of Q&A's or similar, the Danish Financial Supervisory Authority will assess whether this gives cause for reevaluation of our interpretation," the financial supervisory authority writes.

English Edit: Marie Honoré

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