25 November 2018
The Joint Team of the Israel Antitrust Authority and the Israel Securities Authority to encourage competition in the brokerage sector – securities trading services, published its recommendations
The Joint Team of the Israel Antitrust Authority and the Israel Securities Authority published its recommendations on the encouragement of competition in the brokerage sector for public comment. Comments on the report can be submitted until 19 JAN 2019.
The Team found that 97% of the private customers trading in securities do it through banks, despite bank charges being for the most part higher than those offered by non-bank stock exchange members that provide trading services (brokers). The Team also found that there are a number of obstacles that reduce or prevent competition, including:
- *The securities tradin services provided by banks to their customers are only one item in a far larger basket of services. Customers are inclined to use securities trading services in the bank where they keep their debitory current account and which gives them the basket of banking services;
- *Banks are perceived by the public as being more secure than non-bank stock exchange members;
- *Banks offer their customers investment advice, whereas non-bank stock exchange members can provide only investment marketing services, and in the majority of cases they do not offer that;
- *It is difficult to open an account with a non-bank stock exchange member, one reason being that they don’t have the same branch distribution as banks;
- *Customers seeking to transfer securities trading activity to a non-bank stock exchange member are met by customer retention attempts, including discounts that are not offered to other customers. Some even claimed that more aggressive strategies of customer retention have sometimes been adopted, such as: an attempt to persuade the customer that the transfer to a non-bank stock exchange member may put them at risk, or an attempt to create difficulties for the transfer process;
- *It is difficult for customers to compare the fees charged by the various providers.
The Team formulated a number of recommendations to encourage competition in the brokerage sector and strengthen the resilience of parties operating in the sector. Following are the main recommendations:
- *Broker-dealer legislation – The propose regulation of the broker-dealer sector similar to the regulation in developed capital markets around the world. Such regulation would increase protection for the investing public and thus increase the public’s confidence in that activity. The Israel Securities Authority jointly with the Ministry of Finance is currently sponsoring legislation to regulate broker-dealer activity.
- *Customer compensation scheme – An examination of the establishment of a joint compensation scheme that would cover investors in the event of corporate fraud or negligence. Its establishment should enhance the stability of the financial system and increase investors’ sense of security.
- *Possibility of trading through an external broker within the bank account – Providing the various stock exchange members with the possibility of making trades in securities for a customer directly from his bank account, without needing to transfer the securities and money to the stock exchange member. This measure should remove a number of obstacles to competition, since it would alleviate concern over transferring the money to another account and the customer would continue to manage all his accounts in one place.
- *Opening a securities account online – The possibility of making it easier for non-bank stock exchange members to open an account by carrying out the “know your customer” process online, while relying on means of identification such as: digital signature, video call, bank transfer from the origin bank account, and other means.
- *Transfer of an account by the receiving party – All aspects of dealing with the transfer of the customer’s account from their current provider to the party to which they wish to transfer will be attended to by the receiving party.
- *Providing the possibility of making payments and performing various other activities in the securities account – Giving stock exchange members a permit to issue means of payment (debit card and such like) directly from the customer’s trading account. This will save the need to transfer money back to the bank for it to be used.
- *Price comparison mechanism – Adopting the recommendations of the Strum Committee on this issue, which will make it easier for customers to compare prices and examine the feasibility of making a transfer. Moreover, since August 2018, a summary of commissions charged by stock exchange members has been published on the Stock Exchange website for comparison purposes and for the encouragement of competition, in accordance with the Tel Aviv Stock Exchange demutualization bill.
The Israel Securities Authority Chairwoman, Anat Guetta: “I put the brokerage sector and its regulation on the Israel Securities Authority’s agenda to ensure that we would meet the generally recognized standards worldwide for protecting the interests of the investing public. It is the securities trading services providers (brokers) who provide the public with direct access to investments in the capital market. The Team’s recommendations are intended to allow the public to obtain quality services at competitive prices. The technological developments in this sector are creating new ways and new solutions to make these services more accessible, cheaper and more efficacious, and we are working towards the creation of the regulatory framework necessary for their implementation.”
The Israel Antitrust Commissioner, Adv. Michal Halperin: The report’s recommendations tie in with an entire range of actions undertaken by the Israel Antitrust Authority to increase competition in the banking sector. The Authority is focusing its efforts on creating possibilities for customers to use banking services not through the bank in which they keep their debitory current account and give them easy access to all providers of those services, including non-bank bodies. The report that deals with the securities trading services ties in well with this overall effort and is the fruit of thorough market research.”
