SECP to Introduce Online-only Brokers With Huge Incentives

The Securities and Exchange Commission of Pakistan (SECP) will introduce a law for ‘online-only brokers’ in the country for extending the outreach of the business. To this end, it has started working.

SECP on Monday issued a concept note on the online-only brokers for starting a discussion in the country at the public level, keeping in view the international precedents.

It suggests some relaxed rules for obtaining a license of online-only brokers. The online-only brokers will maintain a minimum net worth of Rs 7.5 million. The TREC will be issued by PSX to online-only brokers at significantly reduced rates along with minimal documentation.

The electronic/online brokers would cover three categories i.e. Full-Service Brokers; Discount Brokers and Robo-Advisors.

SECP also suggests the rules covering reduced license fee, reduced license renewal fee and reduced documentation requirements for obtaining the license. It may reduce its licensing fee for online-only brokers to Rs. 50,000 instead of Rs. 100,000 and renewal fee to Rs. 25,000 instead of Rs. 50,000.

The objective of the proposed new category of brokers is to expand market outreach and to reduce the risk of clearing and custody defaults. SEPC also wants to encourage new participants to start brokerage business at lower preliminary infrastructure and operational costs by using electronic means only. It seeks to allow existing brokers to switch to this new category to lower their overhead costs and use electronic means to focus on the core business of trading instead of clearing and settlement.

SECP has proposed the Structure and Permissible Activities of the online-only brokers including mandatorily offer online account opening as per the online onboarding framework approved by SECP and to operate as a sub-category of TO broker that by using online means can only execute trades on behalf of its customers and shall not be allowed to undertake proprietary trading;

The online-only brokers will also not be eligible to settle executed trades or keep custody of securities or money owned by their customers and they shall not be allowed to limited custody model.

The online-only brokers will not deal in cash handled through PCM and client segregation requirements shall not be applicable on the Online Brokers. SECP will entertain the license application for an Online-only broker who has entered into an arrangement with a PCM or TC broker for clearing and settlement of trades. The online-only broker may also provide advisory services, subject to compliance with the Securities Adviser Licensing Regulations.

All trading services will be provided through online mode only and no trading terminal will be provided to customers in any office. It will ensure that no physical place be made available for trading at any premises of online-only broker.

The online-only broker will not have any agent or branch for providing trading services. However, they shall be allowed to open customer/account facilitation centers as per PSX regulations. Each communication will be displayed on the relevant website to the customers that it is not allowed to keep custody or handle cash of customers.

As the business model of the online-only broker shall be highly dependent on robust IT infrastructure, the broker shall ensure meeting any specific standards relating to IT infrastructure as may be prescribed by the PSX and SECP from time to time for the seamless provision of service, protection of customer information and data security against the cyber threats.

The other incentives may be allowed to charge lower brokerage commission, to operate as a Single Member Company, and No Base Minimum Capital(BMC) requirement. However, the online-only broker will maintain a minimum deposit of Rs.1 million with the exchange. At present, only brokers with a net worth of Rs. 25 million can offer internet-based trading under the PSX regulations. This is also suggested to be reduced to Rs. 7.5 million.

There are no compliance requirements relating to customer asset segregation including reporting requirements pertaining to customer assets such as fortnightly reporting, etc. It can outsource its AML/CFT compliance function to PCM.

The new proposed category will offer the benefits including increased investor outreach and financial inclusion, enhanced investor convenience as they can make perform activities like account opening, investments, divestments and modifications without having to physically visit a brokerage office/branch and lower entry and overhead costs for new entrants.

Currently, Malaysia, Hong Kong and Australia have the precedent in this regard.

In the Australian Stock Exchange(ASX), other than full service/wholesale brokers, there is another category of “online brokers” that offer no recommendations or advice regarding the appropriateness of your decision, hence their brokerage fees tend to be lower. This is an attractive option for investors confident in their share market knowledge and trading decisions. They are typically either internet-based or telephone-based.

As per the licensing information booklet of Securities and Futures Commission (SFC), Hong Kong, persons who are engaged in internet trading (internet brokers) are licensed by, or registered with, the SFC for dealing in securities, dealing in futures contracts and leveraged foreign exchange trading.

As per SFC’s Report on the 2019-20 thematic cyber security review of internet brokers, more than one-third of firms licensed for Type 1, 2 or 3 regulated activities provide internet trading services to their clients. Further, as per the Cash Market Transaction Survey 2019 of Hong Kong Exchange, for the year 2019, retail online trading accounted for 57 percent of total retail investor trading (down slightly from 61 percent in 2018), and 11 percent of the total market turnover.

In May 2017, the Securities Commission Malaysia granted a restricted Capital Markets Services License to Rakuten Trade to deal in listed securities and provide investment advice. Rakuten Trade is Malaysia’s first full-fledged online equity broker and provides investors access to an integrated online share trading platform that includes account opening, trade execution, settlement & confirmation, research & trading ideas as well as rewards and knowledge. Rakuten Trade is a joint venture between Kenanga Investment Bank Bhd and Rakuten Securities Inc, one of the largest online brokers in Japan.

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