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Aleksandr Davydov/123RF

Disclosure hasn’t worked as hoped, but the European Securities and Markets Authority (ESMA) is not yet prepared to recommend an outright ban on retail investment commissions.

The European Union’s (EU) securities regulator published a paper setting out its advice to the European Commission (EC) on remuneration and the disclosure of investment costs and charges under the EU’s rules, known as MiFID II.

In the paper, ESMA said that it does not recommend an outright ban on existing compensation structures, despite calls for a ban from consumer groups.

Among other things, consumer advocates told regulators that “the current disclosure regime was too opaque and complex” for retail investors, and that disclosure isn’t capable of adequately addressing conflicts of interest.

But ESMA isn’t ready to recommend a ban. Instead, it said that the EC should “conduct further analysis” in this area.

That analysis should include a study of the existing rules for the distribution of retail investment products, the likely impact of a ban on different distribution models and possible measures to counteract any unintended consequences from enacting an outright ban.

Among other things, ESMA said that a ban could create an uneven playing field with other types of products, such as insurance products.

ESMA also worried that a ban could encourage more vertical integration between product manufacturing and distribution, if incentives to sell third-party products are eliminated.

“Conversely, the inducement ban has the potential to result in the growth of the fee-based independent advice sector,” ESMA said.

“Such a stark market transformation, however, might take time,” ESMA allowed. “In the short term, banks might decide not to offer advisory services to retail clients and redirect them to execution-only services.”

In the meantime, ESMA said that policymakers should seek to improve clients’ understanding of industry compensation structures, noting that the existing “disclosure rules have not had the positive impact expected.”