Denmark to pre-empt Mifid II on inducements ban

Industry opposes 2017 implementation, which would "endanger" investor protection

Danish Industry associations oppose early implementation of Mifid II's inducements ban

Dealers and fund managers in Denmark are pushing back over a proposal that would bring elements of Europe's trading and transparency rules into effect in the country one year early.

The so-called inducement ban in the second Markets in Financial Instruments Directive (Mifid II) is slated to enter into force in Denmark on January 1, 2017. This is a year earlier than it would take effect across the European Union because a one-year delay to the regime is close to finalisation.

"We believe that if Mifid II intends better investor protection, then this process would endanger it. It creates serious problems for the investors, because we have so little time to implement this," says a regulatory expert at an industry association in Denmark.

The Mifid II inducement regime is designed to prevent investment firms that provide portfolio management services or advice on an independent basis from receiving or retaining fees, commissions, or any monetary benefits from anyone other than their clients. This is to protect retail investors from conflicts of interest that could arise if commission fees influence the distribution of specific investment products.

The Danish bill, which has not been translated into English, was proposed on March 30 and discussed for the first time in parliament on April 15. According to one partner at a Danish law firm, the biggest political parties said they were satisfied with the bill in its current form during the hearing, which means the final bill is unlikely to change substantially.

This is the first of three hearings, as Danish constitutional law requires a bill to be read three times in parliament before it can be passed. The next two hearings are unscheduled, so it is unclear when the bill will be passed officially, but lawyers suggest it will be in the next couple of months, as Danish parliament breaks for summer in June.

Four industry associations in the country have already called for a one-year delay, to bring the implementation of the law into line with the rest of Europe. Without a delay, transposing the law in the suggested timeframe will be impossible, adds the industry association's regulatory expert.

"We would have to get hold of all the investors to make them sign new agreements, but there's so little time for doing that – our experience shows that the investors have to be reminded several times. We have to implement the ban, then we have to give them new price structures and inform them about how this will be done. We are simply afraid that we will have investors without an agreement on January 1, 2017, and what will we do then? Then they will be on their own. And when we know the [EU] level two measures, we'll have to do this again – probably within a year. That's not very investor-friendly."

Inducements are a big deal here generally because of how the market works. There is a lot of focus about this in the media, so it's important for the politicians to show that we are taking action 
Emil Deleuran, Plesner

Denmark is seen as an outlier in terms of commission payments, as findings from the Danish Financial Services Authority (FSA), Finanstilsynet, show that banks are recommending products to retail investors almost exclusively from funds that have commission payment arrangements with banks, or that the bank has a commercial relationship with. As a result, the bill states it is too important to wait for the delay. Stricter requirements for investor protection should be implemented as soon as possible and come into force on January 1, 2017, regardless of the European Commission's (EC) proposals to postpone the date of application of Mifid II, the bill says.

"Inducements are a big deal here generally because of how the market works. There is a lot of focus about this in the media, so it's important for the politicians to show that we are taking action," says Emil Deleuran, a lawyer at Plesner in Copenhagen.

"In Denmark, almost all the retail investors go to their bank when they want to make an investment, and they ask their bank: ‘I want to make this investment, I have this much money, what do you recommend?' Findings by the working group on future Danish inducements rules show that many banks end up recommending their own products, for which they receive inducements. What is proposed isn't a total ban, but is almost completely in line with Mifid II: there is a ban for independent investment advisers and providers of portfolio management services to receive commission, with the additional stricter requirements from Mifid II that commission payments must enhance the quality of the service provided and that more information on the commission payments must be disclosed."

The publication of the bill in March follows on from a 172-page document produced by a working group, composed of five industry associations and run by the Danish FSA, in December 2015. It considered three alternative models: adopting the current Mifid II rules on commission payments;, a Mifid II-plus model; or a total ban on commission payments. The working group did not make any official recommendations, but the final bill from the Folketinget, the Danish parliament, opts for the first – a copy of the Mifid II inducement regime. The lack of goldplating is good news, says one head of regulation at a Danish bank, but he reiterates the tight timeframe.

"I think the sector is upset because it leaves the banks with almost no time for implementation. But the impact is almost as expected – luckily enough, they are just implementing the part of Mifid II's article 24 that relates to inducements. Otherwise it would have been even more difficult to comply with the law from next year."

The bill does not touch on the more controversial elements of the EU's inducement rules, which initially included plans to force asset managers to pay separately for research. The EC, however, proposed on April 7 to allow for commission sharing agreements in its first delegated act, which will enter into force after the European Parliament and Council scrutiny period. It is understood the Danish bill will mirror the EU's so-called level two measures as and when they are finalised – meaning the remainder of the Danish inducement regime will likely come into force before the rest of Europe, even if parts of the rules are not completed by January 1, 2017.

"The bill suggests in the preparatory statements that this will be handled as part of [EU] level two technical standards," says Jacob Høeg Madsen, a partner at Kromann Reumert. "It's a good question what will happen in the interim period because obviously, it's a matter of interpreting what inducement means once implemented into Danish law. I would think Danish regulators will not form any opinion on it, because that would be premature until they know what EU rules consider [as] investment analysis."