Neo-brokers and affiliate marketing (finfluencers and "refer a friend" schemes): The Dutch AFM makes an extraordinary decision

The Dutch Authority for the Financial Markets (the AFM) has fined BUX B.V. (BUX) €1.6 million for, in their view (!), breaching inducement rules (see the AFM's full decision here).

In short, and simplified, BUX made payments to:

1. "finfluencers" for driving traffic (new customers) to sign up for services; and
2. existing customers for referring new clients who opened and funded accounts with BUX (i.e. a "refer-a-friend" scheme).

We consider the AFM's decision to be wrong on every level. In particular: firstly, there are good arguments that the above payments do not amount to inducements in the first instance; secondly, even if these payments are inducements, they would likely be permissible inducements under European law; and thirdly, we do not consider that any Dutch guidance has gold-plated the above positions (to the extent to which the Dutch regulator appears to believe is the case).

We suspect that this decision may therefore be materially outcomes-focused (albeit wrong under law and regulation). We also query whether the AFM could have achieved a similar outcome by considering whether BUX had an appropriate control framework in place to manage the risks associated with these arrangements.

Indeed, to the extent that the AFM's interpretation of inducements rules was to be accepted (noting that we are not qualified to practice in the Netherlands), it potentially creates an uncertain environment in the EU (and UK) with respect to retail financial services operators (and investment firms more broadly) that utilise new-age marketing techniques. This is because it materially limits the ability for such firms to make payments with respect to introductions of new clients to their business.

What is an inducement?

Broadly, and for the purposes of this article, inducements are payments made by investment firms (here, BUX) to another party with respect to the investment services performed by the investment firm. The payments made by BUX to finfluencers and existing clients in order to attract new business would therefore each be considered "inducements".

An inducement can only be paid if certain tests are satisfied. These include that the nature of the inducement is disclosed to the relevant (potential) client, that it does not create a conflict that cannot be appropriately managed and that it is designed to enhance the "quality" of the service to the end client. It should be noted that introductions are viewed as capable of "enhancing the quality" of a service to a client.

Why was BUX fined?

The AFM found that these payments amounted to improper inducements and, therefore, should not have been made. The AFM also insinuated that, in making these payments, BUX did not have appropriate regard to the interests of the clients who were being introduced.

Are the inducement rules different in the Netherlands compared to other European countries (or the UK)?

The fine insinuates that the Dutch rules have "gold-plated" MiFID, though it is unclear whether the AFM is referring to the Dutch rules being extended, or this simply being a more "conservative" read of the relevant rules.

Either way, we do not consider that this is the case.

The AFM's guidance with respect to inducements is set out in its March 2016 Guidelines and a subsequent December 2021 statement. Taking these documents together with the AFM's decision, it appears that the AFM considers that the ban on inducements extends to all commissions that are paid to introducers / finfluencers. However, if this was the case, the Dutch Rules and the accompanying guidance would simply state that firms cannot, in any circumstances, pay a fee for an introduction from an unregulated person. They do not.

The AFM also does not provide any legal basis for its position on the ban on commissions. Indeed, the AFM's interpretation of the ban appears to be policy driven, noting this gives credence to its attempts to shoehorn the payments made by BUX within scope of the prohibition. This is particularly evident given that the Dutch guidance does not appear to appreciate the unique nature of "execution only" services, nor does it give appropriate consideration to circumstances where the person making the introduction (here, the "finfluencer" or the "friend") is not itself regulated and does not provide any advisory or management service to the introduced client.

Notwithstanding the above, the AFM does accept that fees can be paid to third parties for advertising investment firms, provided that these advertisements comply with more general advertising codes. This includes, for example, that such advertising needs to be clear and not misleading, and, where advertising via social media, an influencer must clearly detail where they are receiving a fee.

We agree with the AFM's sentiments in this regard, though note that they appear to be completely incompatible with its statements that payments to unregulated finfluencers / friends cannot be made (i.e. both statements cannot be true). Nevertheless, we consider that taking action under these general marketing laws, together with considering whether an investment firm has appropriate controls over such marketing and the onboarding of new clients, would provide a more sound legal basis for challenging inducements arrangements. We also consider that this would be more in keeping with the purpose of client protection rules.

Why did the AFM fine the way that they did?

It is not immediately clear.

It is possible to make an inference, given the way in which the notice is put together, that this decision is more "outcomes" focused than standing up a clear belief in the law.

For example, consider the following extracts from the notice (which have been translated):

"BUX has given finfluencers incentives to get as many of their followers as possible into its onboarding process for its execution only services, without in any way putting the customer interest in the picture. This is bad; the very act of engaging influencers created the risk of thwarting the customer's pure choice".

"BUX built in an incentive for these third parties to – in short – bring in as many new customers as possible. This regardless of whether this is in the customer's interest".

Therefore, there seems to be material concern about the customer's interest, which potentially goes above a breach of the inducements rules. Again, one could query if it would make more sense to consider whether BUX had requisite control over (as an example) the influencer's content, and separately could control any of the relevant risk related to clients introduced in such a manner as part of the onboarding process. Put simply, perhaps the way in which a regulator should consider such issues is with respect to the control over marketing strategies and introducers, and not by simply stating that such a model is impermissible.

Where does this leave us?

It is unclear as to whether this decision will be appealed.

Notwithstanding this, we do not consider the decision to be in keeping with the principles of European laws on inducements and, if accepted, it may, in theory, lead to retail brokers being subject to far more stringent advertising and marketing restrictions than was perhaps intended under law.

Taking this to an extreme, it seems plausible that, in the AFM's view, firms could pay an influencer or affiliate an agreed fee each month that could go up and down dependant on the perceived impact of the influencer more generally. However, paying a fee that is directly attributable to onboarded clients, including a "cost per acquisition" fee, would not be permissible.

Such a position is so open to interpretation and manipulation that it could not be consistent with the regulatory intent underpinning the European rules on inducements. Further, to the extent that a regulator believes there are risks with marketing through certain channels (of which we are in agreement), then the better view must be that policing such arrangements through the oversight of such channels and requiring firms to adopt various risk mitigants would lead to better outcomes than simply banning commissions (or, indeed, the usage of such channels altogether).

Is it clear that such payment arrangements are inducements?

Irrespective of whether such payments could be considered "permissible" inducements (and we think the better view is that they are), there is also a very strong argument that such payments are not inducements in the first place.

This is because any "investment service" provided by the firm is so far removed from the activity of the introducer, that it cannot be said that the payment relates directly to that service. Put another way, while the payment and the introduction clearly starts the process for an investment service, it is not directly related to the end service (i.e. the execution of orders). This is because there are numerous steps that a client has to take in order to be accepted and onboarded by the firm before they are free to trade (or not) without any related action with the introducer. That is, the introducer will have absolutely nothing to do with any investment activity.

Taking this one step further, the fee that is paid to the introducer is completely independent of any fees paid by the client for the trading activity. Therefore, the better argument is that such payments are not in fact "inducements" but are otherwise more akin to a third party cost (i.e. they should be viewed more like a marketing cost). While there has never been any definitive position taken on such arrangements, it appears that the AFM opposed this position in this case, but again we query whether its basis for doing so is under sound legal principles or as a means to achieving its desired end.

In the UK, we believe that many firms do not treat such payments as "inducements" but nonetheless satisfy themselves that, should the payment be viewed as an "inducement", they would satisfy the relevant test.

Future changes?

We also note that there are potentially forthcoming changes to inducement rules under the European Retail Investment Package (sometimes referred to as MiFID III). It should be noted that the potential changes to the inducement provisions under this package have been watered down over the last year and, therefore, we also do not consider that the outcome which the AFM reached is in keeping with the potential Retail Investment Package.

The AFM's position may also be inconsistent with the European legislatures intentions in respect of the Retail Investment Package more broadly. This is on the basis that these proposed changes to the regulatory framework are intended to increase retail investor participation in capital markets, while the AFM's position on inducements seemingly prohibits firms from engaging with younger investors via digital means.