The Act on the Promotion and Regulation of Fee-Based Investment Advice regarding Financial Instruments (Act on Fee-Based Investment Advice), which introduces the new occupational image of fee-only advisors on 1 August 2014, is a further brick in the firewall of financial regulation. As seen in the past, the practice of an issuer paying commission for an advisor to recommend their product can lead to misdirected incentives in such a way that a client does not receive comprehensive investment advice. Furthermore, it is often not clear to the client that due to the paid commission the investment advisor could have self-interest in the brokerage of certain instruments. Thus, the German legislator has taken corrective action and has established new requirements which could have an impact on cross-border businesses of EU-investment firms as well.
The Act on Fee-based Investment Advice establishes new transparency requirements and encourages the provision of independent investment advice through the prohibition of third-party inducements of any kind. In general, the new regulation follows the concept of 'independent investment advice' as proposed by MiFID II and aligns its rules according to the EU framework.
In order to provide advice services the advisor is required to obtain a license from the competent authority, which also lists the advisor in a public register. In order to strengthen transparency the occupational titles "Fee-only Advisor" (Honorar-Anlageberater, Securities Trading Act) as well as "Fee-only Financial Advisor" (Honorar-Finanzanlagenberater, Trade Regulation Act) will be protected by law. The German legislator assumes that the scope of the Act on Fee-Based Investment Advice is not covered by MiFID II. Therefore EU investment firms conducting cross-border services in Germany are also subject to the licensing requirement, if these services are provided to clients seated in Germany. It must be carefully monitored in the future, whether this legal position becomes obsolete when MiFID II and the requirements for the provision of independent investment advice will be transposed into German law.
A Fee-only (Financial) Advisor is a person, who provides investment advice on a professional basis without being granted any third-party inducements or other contributions which could lead to conflicts of interest. This means they only work on the basis of the fee they receive from their client. They are prohibited to take remuneration from persons other than the client, unless the recommended financial instrument is only available through the payment of inducements. In that case, inducements of any kind must be transferred directly to the client. When giving investment advice to a client, the fee-based investment advisor is obliged to disclose whether the service is provided on a fee-based or a commission-based basis and if there are any relationships to the issuer of the recommended financial instrument.
If a Fee-only (Financial) Advisor works for an institution which also provides other kinds of investment advice, they must be separated organisationally and functionally. Advisors must be assigned to one task exclusively, either commission based advice or fee only advice because - as a result of the registration - it is prohibited to provide commission-based investment advice if an advisor works under the title of Fee-only Advisor or Fee-only Financial Advisor. It is likely that small companies will find this requirement challenging.
In the past, institutions did not carry transactions on account of the client, but on their own account to avoid transparency requirements. This transaction practice changes for fee-only investment advisors, thus, they are prohibited from carrying out fixed-price transactions (ie transactions when the client pays a single price for the investment without separate charges for commission or fees). This prohibition is not proposed by the revised MiFID legislation and it is therefore likely that this rule become irrelevant through the transposition of MiFID II.
Finally, the Act also considers sanctions. Violations of the above rules can result in fines of up to €100 000.