Neo-brokers fined $53m globally, IOSCO paper finds compliance weaknesses

Neo-brokers have been fined a collective $53 million to date by the US Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), the Netherlands Authority for the Financial Markets (AFM) and the UK Financial Conduct Authority (FCA).

International securities regulators have also identified a number of compliance weaknesses with the online-only brokerage platforms, prompting the International Organization of Securities Commissions (IOSCO) to issue a consultation report for the sector.

“With this consultation report on neo-brokers, IOSCO takes another decisive step in strengthening investor protection,” Jean-Paul Servais, chair of IOSCO and the Belgian Financial Services and Markets Authority (FSMA), said in a statement accompanying the report. “Building on our recent work on finfluencers, copy trading, and digital engagement practices, we aim to encourage an environment where retail market trading occurs in a safer environment.”

In the report, IOSCO members expressed their difficulties in supervising neo-brokers around the world, raising concerns over ambiguous ‘zero feeʼ advertisements and financial promotion practices. Meanwhile, the rise of neo-broker platforms has led to enforcement actions across multiple jurisdictions.

Enforcement action

The Dutch regulator AMF fined online broker BUX 1.6 million euros and banned the platform from receiving any commissions since November 2024. The platform created an “affiliate programme” that paid finfluencers a fee for each follower who registered for a new investment account, violating the AFM’s ban on paying rewards to finfluencers. 

“The interests of the client must always be central to investment firms. That is why it is not appropriate to pay referral fees to finfluencers. Such financial incentives are undesirable and bad for confidence in the sector,” said Jos Heuvelman, an AFM executive board member.

The inducement ban on BUX was lifted on March 12, the same day that the IOSCO report was published.

Neo-brokersʼ finfluencer programmes have also caught the attention of FINRA, following a targeted examination into firmsʼ use of social media for customer acquisition in February 2023. M1 Finance was fined $850,000 and Moomoo Financial was fined $750,000 in 2024.

Separately, the SEC halted crypto trading on neo-broking giant eToroʼs platform for operating in the US without a brokerage licence, which resulted in a $1.5 million settlement last September. Meanwhile, Robinhood was fined $45 million by the SEC in January for violating more than 10 brokerage regulations, including failures to maintain customer communications, and $3.75 million by FINRA in March for anti-money laundering (AML) and disclosure violations.

Business model transparency

Another complaint is that despite promoting themselves as “free” or “low commission” platforms, neo-brokers are not always transparent about their fees and charges.

The IOSCO report highlighted “a lack of clarity and transparency” among neo-brokers. For example, the Australian Securities and Investments Commission (ASIC) found that they advertised zero-brokerage fees while generating revenue from foreign exchange fees and interest on uninvested money sitting in the platforms.

When an investor trades via neo-brokers, they either place an order directly to a market maker or a trading venue. While market makers generate income from the difference between the buying and selling prices, neo-brokers also receive commission for bringing in orders or payment for order flow (PFOF).

With compensation deriving from transaction numbers, neo-brokers are encouraged to promote more frequent trading. The practice creates potential risks by incentivising the prioritisation of the firm’s interests over those of retail investors.

IOSCO members said regulators should encourage neo-brokers to disclose their fee structures, particularly around foreign exchange fees and incentives for instant settlement, which account for a “large proportion” of their revenues.

Germany’s Federal Financial Supervisory Authority (BaFin) has previously highlighted the difficulty for regulators when monitoring neo-brokers: “BaFin keeps an eye on whether the neo-brokers nonetheless advertise their services as being free of charge — and some neo-brokers still do so. The situation becomes difficult when neo-brokers have their offices in other countries where BaFin has no intervention powers.”

Difficulties supervising neo-brokers

Besides their risky business model, neo-brokersʼcross-border operations also make them hard to monitor. IOSCO said in a survey of its members, out of the 19 regulators that responded, six jurisdictions reported non-domestic neo-brokers — underscoring the need for international cooperation when pursuing enforcement action.

Although neo-brokers are required to disclose all prices associated with their services in all jurisdictions, financial promotion rules vary from country to country.

The IOSCO report also noted an ASIC complaint concerning neo-brokersʼ inappropriate conduct and disclosure of information. This included sending retail investor data overseas without proper disclosure, as well as complaints about finfluencers promoting products leading to inappropriate investor trading behaviour.

However, the report also highlighted: “Enforcement actions taken by regulators against neo-brokers seem to follow the increase of their market penetration but were not reported to substantively deviate from the types of actions taken against traditional brokers in any material way.”