Low-cost online brokers are opening up new opportunities to retail investors, but the model also poses investor risk, says a new report from the International Organization of Securities Commissions (IOSCO).
The umbrella group of global regulators issued a report on so-called “neo-brokers” — firms that use digital engagement and social media to attract clients to online-only services with limited human interaction — setting out recommendations for improving transparency, compliance and investor protection among these firms.
The report acknowledges that the emergence of neo-brokers has potential benefits for investors, including greater access to financial products and enhanced competition that leads to lower cost and improved service. But it also said that they may be transforming retail investing in a way that warrants “additional regulatory consideration.”
In particular, it points to investor protection issues that can arise from their business models, including concerns about adequate disclosure, conflicts of interest and client consent.
In response, it calls for fair, clear and simple disclosure of brokers’ fees and other material charges; proper disclosure of conflicts of interest; and obtaining investor consent for the provision of services beyond the core function of trade execution.
It also recommends that firms be required to have robust systems in place to guard against service disruptions, and that they properly assess the impact of practices such as payment-for-order-flow on best execution for clients’ trades.
“In today’s changing demographic and economic environment, broadening retail investor access to financial market is critical, and neo-brokers can play a positive role. However, their business models may introduce risks when products and services don’t align with investors’ best interests,” said James Adronis, chair of IOSCO’s Committee on Regulation of Market Intermediaries, in a release.
“IOSCO’s recommendations provide clear guidance on how to mitigate these risks and ensure investor protection,” he added.