Regulatory body, Bafin, plans to intensify scrutiny over neobrokers.

The financial markets on both sides of the Atlantic are gearing up to scrutinize the business models of neobrokers, following concerns raised by regulatory bodies.

In Europe, the European Securities and Markets Authority (ESMA) has expressed concerns about the potential conflict of interest in the business model of neobrokers. ESMA has suggested that these companies may not always choose the most favorable execution partner for the customer but rather the one that offers the highest rebate. This issue has been raised in 2021 or early 2022, and national supervisory authorities have been asked to address it.

The Federal Financial Supervisory Authority (BaFin) in Germany shares ESMA's concerns. BaFin has announced that it will investigate the handling of conflicts of interest, inducements, cost transparency, and advertising practices of neobrokers. The regulator has also stated that securities services companies may only accept inducements in exceptional cases, and this rule applies to the PFOF (Payment for Order Flow) practice. If multiple execution venues are offered to the customer for order execution, the customer must not be induced to give an instruction that would probably prevent the securities services company from achieving the best possible result for the customer, at least with regard to the total fee.

BaFin has also announced a statement regarding risks associated with securities orders. The regulator will ensure that the PFOF practice does not run counter to the interests of customers.

Across the Atlantic, the US financial market supervisor SEC has neobroker business models on its agenda, and a possible ban on PFOF is being considered. SEC chairman Gary Gensler has been invited to exchange thoughts on the topic with the Economic and Monetary Affairs Committee of the EU Commission.

The potential ban on PFOF is of interest in Europe as well. The business model of neobrokers, while beneficial for customers in terms of low fees, may lead to less favorable execution partners due to the incentive for higher rebates. Companies in Germany engaging in business models involving payments for order flow by trading partners, such as certain retail brokers and fintech firms, will be more closely monitored by BaFin to ensure compliance with the European Markets in Financial Instruments Directive II (MiFID II).

The supervisory authorities on both sides of the Atlantic have set the course for scrutinizing neobrokers. As the investigation continues, it remains to be seen how these developments will impact the neobroker industry and the customers they serve.