Well-intentioned does not automatically mean well-executed. That would be the positive interpretation of the planned EU ban on rebates to stockbrokers. Fear devours stock culture! This might be the negative interpretation of the agreement in principle reached between the Council of the European Union and the European Parliament. Work is currently underway on the specific regulation.
Currently, stockbrokers often receive a commission from the trading platforms to which they route client orders. This enables brokers to offer very affordable stock and exchangeable trading funds (ETF) savings plans even for small amounts. Often, no fees are charged at all. A ban on rebates would likely put an end to this. This might not be significant for larger investment amounts.
However, investing small amounts would become noticeably more expensive. Those who would suffer most from the ban would be investors who, for example, invest 10 or 20 euros per month in a savings plan.
This would strike a blow to the fragile seedling of stock culture that has been growing, especially among younger people, in recent years. They are particularly reliant on harnessing the high and on the long-term reliable returns of the stock markets. This is the opportunity for today’s students, pupils, and apprentices to build up adequate retirement provisions in an aging society. Forecasts predict that in 2050 in Germany about two working people will have to finance one pensioner. In 1950, the ratio was still six to one.
Fortunately, more and more young people are taking advantage of this opportunity: according to the Deutsches Aktieninstitut (German Stock Institute), 600,000 young adults under 30 ventured into the stock market in Germany for the first time in 2022. A total of 12.9 million people were invested in shares, equity funds or ETFs in 2022. That is nearly one in five individuals in Germany above the age of 14. Conversely, however, this means that around 80 percent of people over 14 stay away from the stock market. The advantages of long-term and diversified stock investments have still not spread widely enough.
The planned ban is coming at an inopportune time: Digital platforms, low fees, and the possibility to diversify even small amounts widely across entire stock markets have just made access to stock exchanges and their return opportunities widely available. More and more people are taking advantage of the opportunities offered by these developments. Now, regulatory measures are potentially stifling this progress in the worst-case scenario.
Distrust towards stocks and markets seems to be a reason behind this decision. Regulation appears to be increasingly driven by mistrust towards financial markets rather than an attempt to make use of their opportunities. Anyone who has ever opened a brokerage account may know the feeling: are the many questions about personal risk tolerance and experience supposed to enlighten or deter? Is this supposed to force new providers who offer their customers favorable conditions out of the market?
Undoubtedly, the rebate process is complex. Increasing its transparency would be sensible. However, the ban seems to be using a sledgehammer to crack a nut. Instead of improving market transparency, a practice that appears advantageous to investors is being prohibited. An investigation by the German BaFin (Federal Financial Supervisory Authority) in 2022 concluded that the process is predominantly beneficial for small investment amounts. Collateral damage from cutting off market access would affect small investors, stock culture, and retirement planning. And this is quite independent of whether the ban was well-intentioned or not.