Rise of European online neobrokers draws regulatory scrutiny
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Increasing numbers of European retail investors are turning to low-cost “neobroker” apps, but there are growing concerns that some could be enticed from the low-risk, long-term investments they originally sought into high-risk punts.
While the growth of neobrokers was broadly welcomed in a report published last month by the European Securities and Markets Authority, it also said it was closely monitoring them to “ensure protection against practices that are potentially detrimental for consumers”.
“The much easier access to a wide range of products, including riskier product entailing significant risks and considerable losses, might favour more risk-taking trading behaviour,” it said.
The Financial Conduct Authority in the UK is also concerned. It issued a warning to stock trading app operators in November last year calling on them to review design features “which risk prompting consumers to take actions against their own interest”.
The features it is worried about included frequent notifications about market news and messages congratulating them for making trades.
Alongside its report it published research showing that customers using such trading apps who are exposed to high-risk investments “appear to exhibit behaviours similar to problem gambling”.
But are regulatory concerns warranted?
Neobrokers operating in the EU, such as Trade Republic, Bux and Scalable, are credited with having been huge drivers in the uptake of exchange traded funds — which mainly offer lower-risk, low-cost, passive exposure to broad markets — by European retail investors. All three offer ETF savings plans which encourage long-term regular investment.
Scalable Capital, which has more than 1mn registered “savings plan” accounts, insists that for its platform at least, concerns are misplaced.
Scalable says two-thirds of its users invest in ETFs. As well as ETF savings plans, to which investors commit a regular amount at regular intervals, Scalable offers the ability to trade stocks and other types of funds, but also derivatives and crypto exchange traded products.
Erik Podzuweit, co-chief executive of Scalable, said that in last year’s volatile markets, trading actually declined on a per client basis on the platform.
About half of Scalable’s customers have an ETF savings plan and these clients have been particularly reluctant to make changes, Podzuweit said.
“People who commit a regular amount per month are much less likely to pull out money in a stock market crash,” he added.
Trade Republic, which claims to be Europe’s largest “savings” platform serving 340mn people across the continent, also offers the chance for investors to open ETF savings plans, or to trade stocks, ETFs, derivatives and crypto. Users can “tap into the world of crypto in just three steps”, it says on the company website.
Despite the marketing, however, Christian Hecker, co-founder of Trade Republic, says investors largely ignore the higher-risk offerings. At the height of the meme-stock frenzy in the first quarter of 2021 only 8 per cent of its customers touched them. Similarly, although Trade Republic offers derivatives, only 5 per cent of customers have ever used them.
“We do segmented analysis and see that people rather stick to their investment categories while building their portfolio,” said Hecker. “We don’t see any huge migration in risk types and asset classes.”
Greg Davies, head of behavioural finance at Oxford Risk, a consultancy, would not be surprised by the broad findings reported by the neobrokers. He said research has shown that people can be divided into four broad investment types (see table).
However, he said that people with Type 1 mindsets, with their very low tolerance to risk of any kind, were very unlikely to open any kind of account on an app. This would mean, he said, that most people on apps were likely to have some openness to both speculation and investing.
It is these people who could be tempted into riskier investments against their better judgment, that regulators might be concerned about.
However, Davies added there was another risk which potential investors should also bear in mind — that of not investing at all.
Podzuweit said the vast majority of people in the EU did not invest. Davies said the picture was similar in the UK.
The UK FCA has found that there are 15.6mn UK adults with investible assets of £10,000 or more. Of these, 37 per cent hold their assets entirely in cash, and a further 18 per cent hold more than 75 per cent in cash.
Part of the problem might be that many people think they need more money before they can start to invest.
Research conducted by Kantar for Bux in the Netherlands, France, Germany, Italy and Spain, found that between 25 per cent and 40 per cent thought they did not have enough money to invest. The respondents, aged 18 to 44, across all five markets, thought the average amount they should have before they could start investing was €2,833 and the average amount they thought they should be able to invest monthly was €799.
In reality, Bux offers ETF savings plans for minimum investments of €10 per ETF per month.
“This perception of needing a lot of money to start investing shows the influence that traditional financial institutions, like banks, have on the European consciousness,” said Yorick Naeff, chief executive of Bux.
Regulators want to encourage more investment and want it to be safe for investors, but the devil might be in the detail. Research conducted by the German Institute for Economic Research on 216,000 users of Trade Republic found just 34 per cent were motivated by the prospect of making short-term gains and 20 per cent were seeking a thrill.
The question for regulators is, therefore, whether these people should be protected from themselves.