Inducement
Family XII · Other terms
Not to be confused with market structure, liquidity, fair value gap.
Inducement is a broad regulatory and market term for any benefit that could sway a person's commercial judgement. It covers cash payments, rebates, commission arrangements, gifts, hospitality, research, training and non-monetary advantages. Whether an inducement is permitted, restricted or banned depends on the jurisdiction, the regulator and the type of recipient.
How inducements arise
Inducements typically appear in three relationships:
- Firm to client — a broker offers a bonus, reduced spread, gadget or travel incentive to encourage deposits or trading volume.
- Third party to firm — a payment or benefit given to an adviser, introducer or intermediary in exchange for directing business.
- Firm to employee — commission, contests or performance rewards that could encourage unsuitable sales.
Regulators generally require that any permitted inducement must not conflict with the duty owed to the client, must be disclosed, and must be designed to enhance the quality of the service. Some jurisdictions prohibit certain inducements outright, particularly around investment advice and order execution.
Worked example: commission as an inducement
An adviser recommends a fund. Two share classes are available with identical holdings and risk. One pays the adviser a one-off commission; the other does not.
The commission itself is not automatically unlawful. The issue is whether it creates a conflict that could bias the recommendation, and whether the client is told about it.
Disclosure and consent
Where inducements are allowed, the usual conditions are:
- The benefit must be clearly disclosed before the service is provided.
- The client must be able to understand the nature and amount of the payment.
- The inducement must not impair the firm's duty to act in the client's best interests.
- Records of the arrangement must be kept and made available to the regulator on request.
Rules differ by country and by activity. A payment that is routine in one market may be prohibited in another, so the applicable regime must be checked rather than assumed.
Often confused with
- market structure
- Market structure is the observable sequence of swing highs and swing lows on a price chart, classified as trending or ranging according to whether those swings extend in one direction or overlap.
- liquidity
- Liquidity is the ease and speed with which an asset can be bought or sold in a market without materially affecting its price, typically reflected in tight bid-ask spreads and deep order books.
- fair value gap
- A fair value gap is a price range on a chart where the high of one candle and the low of another do not overlap, leaving an unfilled area that some traders treat as an imbalance likely to be revisited.