Introduction

This chapter looks at the MiFID rules on inducements. It argues that while the policy objectives underpinning the rules are valid and necessary, the instruments regulators have chosen for achieving those objectives are in need of fine-tuning, and especially clarification, if the objectives are to be met without inflicting collateral damage on the European fund industry.

Implementing the MiFID inducements rules

Regulating distribution models: the pros and the cons

The MiFID requirements on inducements, particularly around disclosure, represent a controversial and bold attempt to shed more light on the mechanics of the distribution channels through which savings products make their way from the product factory into client portfolios.

Broadly, there are three distribution channels through which savings products enter client portfolios: advised sales, unadvised sales (execution-only), and allocation of product to discretionary managed funds. The mix of product – whether homespun or sourced from a third party – that is channelled to client portfolios will depend on an investment firm's distribution architecture. These models range from a ‘closed-shop’, where a firm only distributes its own product, to a ‘guided architecture’ where the firm sources product from a select panel of providers, to a ‘whole of market’ proposition (also known as ‘open architecture’).

In the HNW client space, closed-shop models are a relict of the past. Set against the backdrop of the increasing competition in financial services that has accompanied the dismantling of national regulatory barriers to trade at the European level, investment firms are gradually shifting from pushing product to developing a product set that offers innovative solutions to clients and responds to a client ‘pull’.