The rise in retail investing, particularly self-directed online investing, is raising a red flag with regulators about the foreign exchange (FX) fees being charged by online brokers.
Speaking at a virtual event hosted by the Canadian Club of Toronto on Wednesday, the chair and CEO of the Ontario Securities Commission (OSC), Grant Vingoe, indicated that the regulator is looking into the FX fees being charged to retail investors.
Vingoe noted that, while the surge in commission-free retail investing in the U.S. is funded by brokers receiving payment for order flow (a practice that’s prohibited in Canada), low-cost trading by Canadian investors is subsidized by FX fees — and that’s raising concerns with regulators.
“We need to ensure transparency in all fees charged by these online and discount brokers,” Vingoe said, noting that FX fees “can easily exceed commissions in cross-border trading.”
“We have concerns over potential conflicts of interest related to these fees, and we are looking at them closely,” he said.
Vingoe said that he’s also concerned about the extent to which online trading has started to resemble online gambling.
The ease with which investors can start trading via mobile apps, and firms facilitating initial trades even before investors’ deposits clear, represents a growing risk, he suggested.
“There’s a fine line between being easy to use and encouraging reckless behaviour,” he said.
Vingoe said the OSC is active on Reddit and other social media sites, in an effort to meet investors where they may be getting information that’s driving their trading behaviour — and to monitor potentially abusive activity, such as false or misleading statements that are intended to manipulate stocks.
“We won’t be shy about enforcing against those who feed misstatements into the market, either to denigrate stocks to profit from short selling or as part of pump-and-dump schemes,” he said, noting that the final report from Ontario’s Capital Markets Modernization Taskforce recommended giving the OSC new tools to help combat such misconduct.
At the same event, Vingoe also noted that there has been a rise in retail investor complaints, both to the regulators and to the Ombudsman for Banking Services and Investments.
Among new online investors, many of these gripes involve service and capacity issues, particularly at the large discount brokers, he said.
Vingoe stressed that firms should not be trying to avoid accountability for their service issues through contractual fine print that aims to prevent investors from seeking redress, and suggested that firms should be prevented from taking on new accounts if they don’t have adequate capacity to serve those clients.
“When firms hang out their shingle to provide retail securities business, they must be able to provide prompt, reliable service on all fronts — not just on opening new accounts but also for existing clients when they need help,” he said.
Despite the array of regulatory concerns and growing pains that have accompanied the rise in retail investing, Vingoe said it’s “good news that younger and tech-savvy investors are coming to the markets.”
Over time, he expects that many of these rookie online traders will be converted to long-term, advised clients for the industry.
“Everyone has to learn the lessons of market cycles, and the inevitable downturns will help reinforce the value of advice,” he said. “In my view, investment firms will pivot to attract and retain fee-based clients by offering advice services that meet the needs of a younger, digital generation.”