Danish Consumer Council fears reverse MiFID effect: Higher prices for customers

It was supposed to improve transparency and reduce costs. Less than three months before the ban on commission payments within discretionary portfolio management services comes into force in Denmark, the Danish Consumer Council fears that it will instead lead to higher prices for bank customers. Major banks are planning on collecting all of the lost commissions from customers.
Troels Holmberg, senior economist at the Danish Consumer Council.
Troels Holmberg, senior economist at the Danish Consumer Council.

Now with VAT. Danish private investors might end up paying even more for investment advice despite the opposite intention behind the new EU directive. At the Danish Consumer Council, senior economist Troels Holmberg fears that the prices will not drop as intended at all, and that customers instead get a still higher price due to VAT.

From July 1, banks will be prohibited from receiving commission payments – a so-called kick-back – from mutual funds for providing customers with investment advice. However, banks will still be able to collect the missing fee income from customers.

This move would mean that customers pay VAT in addition to the original price of the service, which increases the price by 25 percent – unless the bank chooses to reduce the price, and thus also its income from portfolio management.

"Contents are the same"

Denmark's two largest banks, Danske Bank and Nordea, have already stated that they do not intend to cut prices for their customers.

"The contents are the same, so our prices are staying the same. But we will, of course, keep within the law, and we have been working to improve transparency for our customers," says Sune Worm Mortensen, Head of Wealth Offerings at Danske Bank, to FW Asset Management.

"In fact, we are going a bit further that that, because we want our products to have a satisfactory declaration of contents that states exactly what you get and how much you pay for it," he adds.

Customers at Nordea will not be paying less either. Head of Savings & Wealth Offerings, Anne Buchardt, made this clear as early as February to Danish media Finans.

"We are not generally going to change the price of our advice and the services within the portfolio management services in response to the commission ban that comes with MiFID II. But in the future, it will be collected directly from the customer, and not via the services," says Buchardt.

Additional expenses for customers

The two banks' choice not to lower their prices as a consequence of MiFID II frustrates Troels Holmberg from the Danish Consumer Council.

"Given the fact that they want the same income, their customers will be subjected to VAT. It will result in higher prices for customers than before. The purpose was to reduce prices. But right now, it looks like an additional VAT bill for customers," he says to FWAM.

Danske Bank does expect to keep up the same level of income from portfolios:

"Danske Bank's income is going to stay the same after this. But we do not know what will happen with the market," says Worm Mortensen.

No reduced prices so far

Morningstar is following the price development in all Danish mutual funds, and nothing has indicated a drop in prices yet.

"We have seen no evidence to suggest a drop in prices over the past year. Expenses are still rising, so there is no indication that the preparatory work has had any effect yet," says Nikolaj Holdt Mikkelsen, senior analyst at Morningstar.

As FWAM has previously reported, Danish mutual funds are working to capacity on setting up asset classes from their existing mutual funds. Commission payments are not a part of the asset classes, and thus the plan is for banks to use the asset classes for portfolio management services.

These new asset classes without commission have not yet been added to Morningstar's statement, but they will be added as they are ready for July 1, when the new rules take effect.

"So it will probably be a few months before we can say anything concrete about what MiFID II will mean in terms of price," says Holdt Mikkelsen.

English Edit: Marie Honoré

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