What Is Inducements? Inducements Against The Services Of Investment Portfolio Management

Posted in Markets Compliance on May 10, 2024
What Is Inducements?

What is inducements? The broker or investment company is not permitted to receive and, keep inducements against the services of investment portfolio management or investment advice. When providing investment advice, purchase, sale, or related investment services, the broker or investment company may give and, receive financial and, non-financial benefits to/from the third parties. Any such benefits received by the broker or investment company from or given to the third parties will be considered  Inducements.

What Is Inducements?

What Is Inducements?

Inducements. According to MiFID II’s Article 24(9), an investment firm may only pay or be paid an inducement (such as a fee, commission, or non-monetary benefit) in connection with the provision of an investment service or ancillary service if the relevant payment is a fee, commission, or non-monetary benefit.

Inducements can be financial and non-financial, including any payments and any other financial benefit or non-financial benefits such as valuable gifts, exclusive invitations, significant advantages, etc. Inducements cannot be payments or benefits, which are required for the provision of the respective investment advice or services, for example holding costs, fees for transaction settlements and conversion, statutory fees, fees for legal services, or other payments.

There are exceptions to the prohibition to receive inducements. Inducements received by the broker or investment company from the third parties may be kept if they:

  1. Do not worsen the situation, how the company adheres to its duty to act honestly, fairly, and professionally in the interest of the client;
  2. Have been intended to improve the quality of the respective service provided to the client;
  3. Have been clearly and understandably disclosed to the client before the provision of the service.

Broker Or Investment Company

The broker or investment company may receive and, keep also small or insignificant non-financial benefits that may improve the quality of services provided to the client and which, assessed according to amount and nature, do not hurt the duty of the company to act in the interest of the client. If an evaluation of the amount of the receivables, or payments before the provision of the respective service are not made, the investor shall be informed about the actual amount of the payment or benefit.

The amount of the inducements will be disclosed to the investor by the broker or investment company before providing the investment service. The investor shall be informed once a year of the total amount received or payments made if the broker or investment company has received the inducements. 

Final Thoughts

Investors require high-quality financial advice that is objective, fair, and prioritizes the client’s interests. Regulators and policymakers all over the world are aware of the need, and several countries have launched initiatives to improve investors’ access to such advice. These initiatives include efforts to increase financial advice industry transparency and to combat misselling.

Sales inducements, which can include payments, commissions, gifts, or kickbacks associated with the sale of investment products, have been the subject of some regulatory scrutiny. These inducements, which are frequently paid by distributors to advisers, can lead to misselling, with advisers prioritizing their own interests over the needs of their clients.