IOSCO Considers Risks in "Neo-Broker" Business Model
The International Organization of Securities Commissions ("IOSCO") found that while the rapid global growth of neo-brokers has expanded access to financial markets, their business models introduce novel risks that warrant regulatory attention.
In a new report, IOSCO defined neo-brokers as online-only broker-dealers operating with limited or no human interaction, offering intuitive platforms supported by social media engagement and behavioral design tools. IOSCO examined the rise of neo-brokers across major jurisdictions, noting that their growth is driven by mobile-first apps, commission-free marketing, and high-engagement digital interfaces. IOSCO said these firms have broadened market participation—particularly among younger investors—but rely on revenue models and digital engagement practices that create risks not fully addressed by existing rules. IOSCO urged regulators to evaluate whether current frameworks adequately capture these practices.
IOSCO found that the rise of neo-brokers presents risks and benefits. IOSCO said these firms have lowered barriers to entry, reduced costs, and expanded access to investment products, but their "zero commission" model drives reliance on indirect revenue sources such as payment for order flow, securities lending, margin interest, and ancillary fees. IOSCO warned that these channels can create conflicts of interest by influencing order routing or encouraging excessive trading. IOSCO also highlighted concerns over unclear disclosure of indirect fees, the use of gamified interfaces and finfluencer marketing, and operational vulnerabilities stemming from heavy dependence on IT systems.
To address these concerns, IOSCO outlined five areas for regulatory focus: (i) ensuring neo-brokers deal honestly, fairly, and professionally with retail investors; (ii) improving transparency around all direct and indirect costs, including the indirect fees embedded in "zero commission" models; (iii) enhancing disclosure and consent requirements for ancillary services and related conflicts of interest; (iv) strengthening oversight of non-commission revenue by assessing execution quality, monitoring the effects of payment for order flow, and maintaining detailed routing records; and (v) reinforcing operational resilience through robust IT systems capable of handling outages and disruptions.