Navigating Conflicts of Interest: A matter of Bias Mitigation and Transparency

In 2023, the European Commission introduced the Retail Investment Strategy, a directive aimed at improving the overall participation of retail investors in financing the economy. The RIS renewed several themes, including one on conflicts of interest in the distribution of savings products. But let us broaden the discussion about conflicts of interest in financial sector as a whole.

These are important issues that must be given thoughtful consideration. Conflicts of interest might arise each time a remuneration scheme is in place. They may stem from an employee simply wishing to please their manager or to reach their commercial targets. And it can happen any time you have a distribution agreement with an external or internal provider.

Thinking that we can prevent conflicts of interest from arising completely is futile. What we can – and must – do is to identify them, manage them, and implement procedures to contain and control them. In truth, strict rules around distribution policies and pricing processes are our best bet for limiting conflicts of interest of all kinds. For instance, in an open architecture framework, a bank should apply a similar fund selection process to its own funds and those of its competitors. Note that this doesn’t mean a distributor should never recommend their group’s own products, which may very well be appropriate at times and pass said selection process! 

Heated debates on conflicts of interest have also crystallized around the specific issue of inducements, with some calling for an outright ban. Yet evidence suggests that banning commissions would not achieve the ultimate goal behind these discussions, i.e. to ensure transparency and responsibility in financial product distribution.

In the financial sector, transactions take much more than a simple deal; they’re built on a relationship-driven process. Clients require tools, advisors, and personalized service, all of which come at a cost. Simply put: advisors, bankers, and brokers provide a useful, high-quality service, and must be compensated for it. The question is, then, whether commissions are an inappropriate type of compensation or if they  might give rise to biases in financial advice.

Research and experience have both shown that not to be the case.

The Eurobarometer conducted in 2022 found that the main reason Europeans do not invest in financial products is insufficient disposable income. Lack of trust in investment advice only accounts for 12% of decisions not to invest.

Even more striking: in the Netherlands, where retrocessions have been banned since 2014, this number rises to 15%.

What’s more, inducements actually bring important benefits to the table. By allowing for cost-sharing or mutualization, they ensure that even smaller retail clients can afford financial advice. This is a crucial consideration in a sector where intricate products and services require a high level of expertise.

Ultimately, what matters most when combating conflicts of interest, are the safeguards in place, both in terms of control and oversight.

And regarding commissions specifically, striking the right balance between incentivizing financial professionals and preventing undue conflicts of interest is where we should turn our attention. Instead of vilifying commissions, we should focus on transparency, responsibility, and accountability.

A smart way to do so might be to work towards simplifying financial language. In an increasingly complex financial landscape, where products can be as intricate as they are diverse, the need for clear and understandable communication is paramount. Simplifying financial language is an imperative for ensuring that the average investor can comprehend complex financial products without becoming lost in jargon. Transparency isn't just about revealing the inner workings of financial processes; it's also about making these workings accessible to everyone.

That is why BNP Paribas is focused on enhancing transparency and developing financial literacy. By doing so, we help our clients understand what they're paying for and what they can expect in return. We empower them to make informed decisions about their money – which is exactly what responsible financial advice is about.