Firms providing fee-based investment advice in Germany must begin complying with a new set of regulations this month regarding conflicts of interest, commissions, products offered, and other requirements.

Germany’s Fee-Based Investment Advice Act, which took effect 1 August, marks the first time the country has applied specific regulations to fee-based advice. The Federal Financial Supervisory Authority, known as BaFin, said in a press release that the new requirements include provisions that the advisor only be remunerated by the client, must have access to “a sufficient range” of financial instruments, must be able to recommend issues from other providers besides their own firm or group, separate themselves organizationally from conventional investment advisers, join a register of fee-based investment advisers, and refrain from engaging in fixed-price transactions except for own issues.

Germany also enacted for the first time a legal definition of fee-based investment advice, which is incorporated now into its Securities Trading Act.

Officials said the goal of the new rules is to boost transparency regarding the fees or commissions advisers receive for investment advice.

“Clients should understand who pays for advice so that they can make an informed decision between commission-based investment advice and fee-based investment advice,” BaFin said in its press release, adding that the market in Germany predominantly consists of commission-based advising. “Although advisers are legally obliged to disclose to clients any inducements received, many clients remain unaware of this relationship.”

The new rules mandate that fee-based advisers receive payments only from clients, and only investment advice in the client’s interests should be given. In certain cases, an adviser can accept a commission as long as it is immediately passed on to the client to avoid any conflicts of interest, BaFin said. Non-monetary incentives, like trips, cannot be accepted by fee-based advisers.

Under new conduct of business requirements, fee-based advisers have to comply with rules on the range of financial instruments to which they have access. That range must be “sufficiently diversified” in terms of the providers or issuers of the financial instruments. Fee-based advisers cannot exclusively offer their own financial instruments, instruments from their group, or instruments from issuers to whom they are closely tied.

Advisers still can recommend their own financial instruments or those of their group or affiliates as long as the instrument in question is suitable for the client and the adviser has access to other choices. Overall, fee-based advisers should not have fewer financial instruments on offer than commission-based advisers, BaFin said. Another rule intended to prevent advisers from recommending a transaction in order to boost their firm’s margin profits places new restrictions on conducting transactions on a fixed-price basis. Those transactions are only allowed when a fee-based adviser is recommending a financial instrument issued by the adviser itself. BaFin said it decided against banning fixed-price transactions altogether because it would require involvement from a third party, which would not be expedient.

From an organizational standpoint, fee-based advice must be segregated from its conventional counterpart in staffing, functions, and organizations unless fee-based advice is the only model used by an adviser. BaFin said such separation would help ensure that fee-based advice is not influenced by commissions-based advice of the same firm. Also prohibited is the use of sales targets that could run counter to the interests of clients.

BaFin has created a register of fee-based investment advisers, which consists of advisers that have submitted an audit certificate as proof that they meet the requirements of the new regulations. Starting this month, investors can find the register on BaFin’s website. Those failing to comply with the requirements on an ongoing basis will be removed from the register and barred from carrying the legal designation of fee-based investment adviser. Advisers also must specify on their own websites which of their branches offer fee-based advice, which BaFin said will enable clients to specifically request fee-based advice.

Additional requirements are in the pipeline as Germany’s Federal Ministry of Finance is working on regulations covering when and how clients must be notified whether fee-based advice is offered, whether an adviser is recommending group or association issues, and whether the adviser will profit from a transaction. Those regulations are still in the draft phase, BaFin said.

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