The Rise of Neobrokers in Europe: Balancing Innovation and Consumer Protection

In recent years, neobrokers have gained popularity among retail investors in Europe. These brokers offer low-cost services and user-friendly platforms, making investing in financial markets such as Exchange Traded Funds (ETFs) more accessible than ever.

ETFs are popular among retail investors as they are passive and low-risk. However, neobrokers also offer higher-risk products that may attract customers away from low-risk investments and towards riskier ones. Regulators are concerned that customers may need help understanding the risks and could suffer significant losses.

To address these concerns, regulators such as the European Securities and Markets Authority (ESMA) and the Financial Conduct Authority (FCA) in the UK are monitoring the growth of neobrokers to ensure customer protection against potentially harmful practices.

Despite these concerns, neobrokers have played a significant role in increasing ETF popularity among European retail investors. Some platforms, such as Scalable and Trade Republic, even offer ETF savings plans that encourage long-term, regular investment in low-risk, passive investments. However, these platforms also provide high-risk investments like derivatives and crypto exchange-traded products, which are largely ignored by their customers.

Research has shown that people can be divided into four broad investment types with varying attitudes to risk. People with a low tolerance for risk are doubtful about opening any kind of account on an app. Therefore, neobrokers need to provide clear and transparent information about the risks associated with their products. They must also ensure that their platforms are designed to not encourage excessive trading or impulsive decision-making, particularly among investors who may be more susceptible to such behaviour.

Ultimately, neobrokers have the potential to democratise access to financial markets. However, they must do so in a responsible and ethical manner that prioritises the interests of their customers over their own profit margins. As the market for neobrokers continues to grow and evolve, it will be interesting to see how regulators and investors respond to these challenges and whether the industry can strike a balance between innovation and consumer protection.