Exclusive: New European Legislation Would Outlaw Banking Sales Commissions

The European Commission has drafted a major new bill to ban bankers from accepting fees and commissions on financial products they offer to customers. Investors suffered major losses in the financial crisis from risky investments that quietly earned banks

Banks in Germany and around Europe would be affected by the legislation (justinpickard)
Banks in Germany and around Europe would be affected by the legislation (justinpickard)
Markus Zydra

When a client goes to a bank, he or she should expect to be treated fairly. Yet personal bankers are under more and more pressure to sell, and increasingly recommend investments that will earn the bank particularly high commissions. According to information obtained by Süddeutsche Zeitung, the European Union wants that all to change. And the new initiative is not just about defending clients' rights.

Many people believe that financial advice from bank experts is free because – unlike consulting a tax advisor, for example – no bill is ever presented for services rendered. This is deceptive, however. Banks earn commissions when they sell financial products, a fact that large number of clients don't realize. So it is entirely possible that when a bank recommends its investment fund, it's thinking less of the good of the investor than of of meeting its own sales targets. A 2006 landmark ruling of the German Federal Supreme Court highlighted such reasoning.

Five years later, the European Commission wants the payment of commissions to banks and asset managers halted with no exceptions. The information was obtained by Süddeutsche Zeitung from an internal working document on the revision of the EU's Markets in Financial Instruments Directive (Mifid).

"Investment firms may not accept fees, commissions, or other monetary advantages for independent advice," the draft reads. The EU Commission is scheduled to announce their definitive position in Brussels on Thursday.

That this should be happening right now is no coincidence: the weakness of present advisory practices was brought to the fore by the financial crisis. Many investors suffered major losses from risky financial products that earned the banks high commissions. This was the case, for example, with Lehman Brothers products. Many banks were sued for damages, and some of the court cases are still on-going. Investors want the banks to refund them, and financial institutions are pushing back. The result is that client trust that was built over decades has been largely shattered.

Forbidding those who sell securities to accept sales commissions would change the financial advisory services market completely. "It would be a revolutionary step, because henceforth clients would be aware of the fact that financial advice is not free," says Andreas Tilp, a capital markets attorney based in Tübingen, Germany.

Curbs on high-frequency trading

Concretely, what that means is that the banks would have to present a bill for services. Clients would thus be paying a fee for their bank expert to give them good advice. The theory is that the investor would thus feel more sure that the advice being given in his or her interests, since they'd paid for it directly. In Great Britain, a ban on sales commissions for investment products is already in place. The EU Commission's proposals would have to be approved by the European Parliament and EU Council of Ministers before going into effect.

For the capital market, the EU Mifid (Markets in Financial Instruments Directive) was by far the most important piece of legislation in recent years. Since November 2007, it has overseen the rules for securities trading in Europe. The Commission's new proposal aims to get a handle on the speculative practices that make financial markets so volatile, including high-frequency trading. The Commission is also looking at more transparency for over-the-counter derivatives trading in the interbank market.

"The financial system has to work more responsibly for the economy and for society as a whole," the Mifid draft states.

But the devil is in the details. For example, the ban on commissions pertains to "independent" financial advice. The sector is already looking for loopholes. "Banks could tell their customers, for example, that their advice is not independent," says Tilp. But will investors buy it?

Read the original article in German

Photo -justinpickard

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Ecological Angst In India, A Mining Dumpsite As Neighbor

Local villagers in western India have been forced to live with a mining waste site on the edge of town. What happens when you wake up one day and the giant mound of industrial waste has imploded?

The mining dumpsite is situated just outside of the Badi village in the coastal state of Gujarat

Sukanya Shantha

BADI — Last week, when the men and women from the Bharwad community in this small village in western India stepped out for their daily work to herd livestock, they were greeted with a strange sight.

The 20-meter-high small hill that had formed at the open-cast mining dumpsite had suddenly sunk. Unsure of the reason behind the sudden caving-in, they immediately informed other villagers. In no time, word had traveled far, even drawing the attention of environment specialists and activists from outside town.

This mining dumpsite situated less than 500 meters outside of the Badi village in the coastal state of Gujarat has been a matter of serious concern ever since the Gujarat Power Corporation Limited began lignite mining work here in early 2017. The power plant is run by the Power Gujarat State Electricity Corporation Limited, which was previously known as the Bhavnagar Energy Company Ltd.

Vasudev Gohil, a 43-year-old resident of Badi village says that though the dumping site is technically situated outside the village, locals must pass the area on a daily basis.

"We are constantly on tenterhooks and looking for danger signs," he says. Indeed, their state of alert is how the sudden change in the shape of the dumpsite was noticed in the first place.

Can you trust environmental officials?

For someone visiting the place for the first time, the changes may not stand out. "But we have lived all our lives here, we know every little detail of this village. And when a 150-meter-long stretch cave-in by over 25-30 feet, the change can't be overlooked," Gohil adds.

This is not the first time that the dumpsite has worried local residents. Last November, a large part of the flattened part of the dumpsite had developed deep cracks and several flat areas had suddenly got elevated. While the officials had attributed this significant elevation to the high pressure of water in the upper strata of soil in the region, environment experts had pointed to seismic activities. The change is evident even today, nearly a year since it happened.

It could have sunk because of the rain.

After the recent incident, when the villagers raised an alarm and sent a written complaint to the regional Gujarat Pollution Control Board, an official visit to the site was arranged, along with the district administration and the mining department.

The regional pollution board officer Bhavnagar, A.G. Oza, insists the changes "aren't worrisome" and attributes it to the weather.

"The area received heavy rain this time. It is possible that the soil could have sunk in because of the rain," he tells The Wire. The Board, he says, along with the mining department, is now trying to assess if the caving-in had any impact on the ground surface.

"We visited the site as soon as a complaint was made. Samples have already been sent to the laboratory and we will have a clear idea only once the reports are made available," Oza adds.

Women from the Surkha village have to travel several kilometers to find potable water

Sukanya Shantha/The Wire

A questionable claim

That the dumpsite had sunk in was noticeable for at least three days between October 1 and 3, but Rohit Prajapati of an environmental watchdog group Paryavaran Suraksha Samiti, noted that it was not the first time.

"This is the third time in four years that something so strange is happening. It is a disaster in the making and the authorities ought to examine the root cause of the problem," Prajapati says, adding that the department has repeatedly failed to properly address the issue.

He also contests the GPCB's claim that excess rain could lead to something so drastic. "Then why was similar impact not seen on other dumping sites in the region? One cannot arrive at conclusions for geological changes without a deeper study of them," he says. "It can have deadly implications."

Living in pollution

The villagers have also accused the GPCB of overlooking their complaint of water pollution which has rendered a large part of the land, most importantly, the gauchar or grazing land, useless.

"In the absence of a wall or a barrier, the pollutant has freely mixed with the water bodies here and has slowly started polluting both our soil and water," complains 23- year-old Nikul Kantharia.

He says ever since the mining project took off in the region, he, like most other villagers has been forced to take his livestock farther away to graze. "Nothing grows on the grazing land anymore and the grass closer to the dumpsite makes our cattle ill," Kantharia claims.

The mining work should have been stopped long ago

Prajapati and Bharat Jambucha, a well-known environmental activist and proponent of organic farming from the region, both point to blatant violations of environmental laws in the execution of mining work, with at least 12 violations cited by local officials. "But nothing happened after that. Mining work has continued without any hassles," Jambucha says. Among some glaring violations include the absence of a boundary wall around the dumping site and proper disposal of mining effluents.

The mining work has also continued without a most basic requirement – effluent treatment plant and sewage treatment plant at the mining site, Prajapati points out. "The mining work should have been stopped long ago. And the company should have been levied a heavy fine. But no such thing happened," he adds.

In some villages, the groundwater level has depleted over the past few years and villagers attribute it to the mining project. Women from Surkha village travel several kilometers outside for potable water. "This is new. Until five years ago, we had some water in the village and did not have to lug water every day," says Shilaben Kantharia.

The mine has affected the landscape around the villages

Sukanya Shantha/The Wire

Resisting lignite mining

The lignite mining project has a long history of resistance. Agricultural land, along with grazing land were acquired from the cluster of 12 adjoining villages in the coastal Ghogha taluka between 1994 and 1997. The locals estimate that villagers here lost anything between 40-100% of their land to the project. "We were paid a standard Rs 40,000 per bigha," Narendra, a local photographer, says.

The money, Narendra says, felt decent in 1994 but for those who had been dependent on this land, the years to come proved very challenging. "Several villagers have now taken a small patch of land in the neighboring villages on lease and are cultivating cotton and groundnut there," Narendra says.

They were dependent on others' land for work.

Bharat Jambucha says things get further complicated for the communities which were historically landless. "Most families belonging to the Dalit or other marginalized populations in the region never owned any land. They were dependent on others' land for work. Once villagers lost their land to the project, the landless were pushed out of the village," he adds. His organization, Prakrutik Kheti Juth, has been at the forefront, fighting for the rights of the villages affected in the lignite mining project.

In 2017, when the mining project finally took off, villagers from across 12 villages protested. The demonstration was disrupted after police used force and beat many protesters. More than 350 of them were booked for rioting.

The villagers, however, did not give up. Protests and hunger strikes have continued from time to time. A few villagers even sent a letter to the President of India threatening that they would commit suicide if the government did not return their land.

"We let them have our land for over 20 years," says Gohil.

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