Insurance brokers in fear for their own existence, consumer advocates oscillating between hope and disillusionment, industry lobbyists in full swing: Few financial market policy initiatives spark as much controversy as the retail investor strategy. Criticisms of the EU Commission's initiative show no signs of abating, even though the most contentious part – a ban on commissions for bank advisors – has been revised into a milder "light version."

The EU Commission has long been troubled by compensation through commissions from financial product providers to advisors, citing potential conflicts of interest. As part of the retail investor strategy, the EU agency now aims to ban remunerations for sales without advice, known as "execution-only" commissions or "XO" in industry terms. Consumer advocates implore the agency not to let this "once in a lifetime" opportunity pass. However, even this scaled-down version is facing resistance from the EU Parliament, the Council of Ministers, and especially the financial sector.

The EU Commission originally aimed to abolish commissions for the distribution of financial products altogether, a goal it has pursued for a long time. The Commission does not hide its belief that remunerations from product providers to financial product advisors often lead small investors toward more expensive and ultimately less successful investment products due to conflicts of interest. The Commission argues that this has "significant impacts on private investors' net capital returns".

Nevertheless, the EU Commission also knows that it challenges an established business model in many EU countries. A general prohibition of commissions would force banks and funds in those countries to completely overhaul their product conception, advice, and distribution systems. Such a proposal would face fierce opposition from major market players and governments.

This is why the EU Commission has changed its stance. "Given the potentially negative effects of introducing a complete ban," they have opted for a "gradual approach," as stated in the proposal for an EU directive on the protection of retail investors dated May 23. "Gradual" means that the ban on remunerations would be limited to "sales without advice," the so-called "execution-only" commissions, also known as "XO". Still, even this softer form is encountering resistance from co-legislators in the Council and the EU Parliament.

France opposes the partial ban, according to diplomatic circles. Although the downsides of an execution-only ban for French financial institutions and investment companies are manageable, the French government suspects that a ban on commissions for non-advisory business is a stepping stone toward a complete prohibition – which could have significant implications for the French financial industry.

The fear that the EU Commission might follow up once it has opened the door slightly with the execution-only ban is not unfounded. The Commission has already announced its intention to expand the ban afterward. It reserves the "right to review the effectiveness of the framework and propose alternative measures in line with better regulation rules, potentially including a complete ban on incentives".

Germany's position on this matter is not entirely clear. Although Finance Minister Christian Lindner has spoken against a partial ban, he still needs to coordinate with the Ministry of Economy and the Ministry of Consumer Protection in the government. Currently, progress on the retail investor package in the Council of Ministers is reportedly slow, as stated by a diplomat.

Interestingly, the reservations in the EU Parliament, which traditionally leans toward consumer and investor protection, are even more substantial than in the Council. This is primarily due to the position of the rapporteur, Stéphanie Yon-Courtin from France. She is a member of the "Renaissance" alliance in her home country, the successor organization to the movement "La République en Marche" initiated by President Emmanuel Macron. In the European Parliament, "Renaissance" belongs to the Renew Europe liberal party family, which includes Germany's FDP and "Freie Wähler".

Yon-Courtin, as per an initial draft of the Parliament's position, has not only "strongly opposed a complete ban on commissions," but she is also "concerned about the introduction of a partial ban on mere execution services, as this is not justified and does not seem to solve the problem of conflicts of interest." According to the rapporteur, it appears more like a first step toward a complete ban. Many consumers in the EU rely on the advice of financial advisors, Yon-Courtin argues. Therefore, it is necessary to complement the current framework with suitable instruments and improvements. She explicitly believes that transparency could address conflicts of interest.

Furthermore, she thinks that "the timing and content of the review clause are unsatisfactory." The review clause should not be so biased that it automatically leads to the introduction of a complete ban on incentives, Yon-Courtin urges. Hence, she suggests extending the deadline from three to five years from the end of the directive's implementation period to observe the actual market impacts.

Unsurprisingly, the rapporteur's stance has received significant praise from the fund industry and banking sector. Their associations have expressed similar reservations. Even a partial ban would have noticeable effects on distribution and advice. In the case of a complete ban, many financial service providers in Europe would have to extensively overhaul their business models, as confirmed by consulting firms like PwC, KPMG, or EY. Philipp Eckhardt, an economist from the CEP research center, has criticized the EU Commission's retail investor strategy as a whole, deeming it "failed."

The question now is whether Yon-Courtin can rally a majority for her position. Observers believe she will be supported by her own party family, the liberal Renew Europe. Large parts of the European People's Party (EPP), including Germany's CDU and CSU, are likely to be on her side, although perhaps not the conservative Northern Europeans. Additionally, the right-wing conservative political family ECR, which includes Poland's PiS, could support Yon-Courtin's draft.

Whether this will be enough for a majority depends, among other things, on the voting behavior of the far-right bloc in the EU Parliament, the Identity and Democracy political family. In theory, conservatives, liberals, right-conservatives, and far-right parties could achieve a majority. However, liberals and conservatives will ensure they are not reliant on far-right support.

Yon-Courtin cannot count on votes from the left-wing spectrum of the Parliament. René Repasi, SPD member of the European Parliament, accuses her of bowing to the financial industry. He argues that her report draft removes all consumer protection improvements from the legislative initiative in favor of the financial sector and calls it "a clear step backward." Repasi makes clear that his faction will more than ever advocate for a "consistent ban on commissions" and for optimizing the price-performance ratio for investors.

"Price-performance benchmarks" are also an idea from the EU Commission, which it intends to assign to the supervisory authority ESMA. However, this idea is contentious, and Yon-Courtin opposes it. Consequently, meeting the ambitious legislative timeline and reaching an agreement within this parliamentary term is expected to be difficult. Even if agreed upon, the changes are unlikely to take effect before 2026.