IOSCO has released its final report on neo-brokers. As explained in the update, neo-brokers are described as a subset of broker-dealers that offer services via a business model characterized by the use of seamless client interfaces, leverage of social media platforms, and the provision of online or digital-only investment services. They have led to various opportunities for investors and tend to operate with significantly lower costs.
The report suggests a set of recommendations as a type of guidance for securities regulators as well as neo-brokers in order to help with fostering a more transparent and accountable environment in which neo-brokers will operate in compliance with securities regulations, such as investor protection measures.
Neo-brokers are to:
- Act honestly, fairly, and professionally with retail investors
- Appropriately disclose fees and charges to retail investors and in advertising
- Consider the impact of non-commission-related trading revenue, such as payment for order flow (PFOF,) on the best execution of customer orders
- Ensure they have robust IT systems in place to address disruptions promptly
When providing ancillary services to core trade execution services, neo-brokers may:
- Disclose to retail investors the material sources of revenue derived and the type of conflicts of interest arising from them
- Obtain retail investor consent before providing ancillary services
The report is said to be the latest milestone of IOSCO’s Roadmap to Retail Investor Online Safety, concluding a year of spotlight on the new challenges to retail investor protection.
As stated in the report, the digitalization of brokerage activities has given retail investors greater access “to investment opportunities and financial products.”
Likewise, increased competition may have brought “significant benefits for investors, such as improved service offerings and lower transaction costs.”
But, the scale and speed of this digitalization, “associated with the types of products and services offered by neo-brokers, may transform retail investing
environment in a manner that may warrant additional regulatory consideration.”
IOSCO members and commenters highlighted that while “easy access to brokerage services may bring many benefits and contribute to financial inclusion, some aspects that stem from neo-brokers’ business model merit specific consideration.”
As noted in the extensive report, these aspects tend to focus on the “disclosure of fees and charges to retail investors and how neo-brokers advertise themselves in relation to these fees and charges; neo-brokers’ provision of ancillary services; neo-brokers’ non-commission related revenue generation; and the robustness of neo-brokers’ IT infrastructure, given their business model is based on online services and products.”
