Hands off our soft dollar incentives say stockbrokers

Australian Securities and Investments Commission (ASIC) proposals which would cut in on volume incentives and soft dollar rewards to stockbrokers have received a frosty response from the Stockbrokers and Financial Advisers Association (SAFAA).

ASIC is proposing changes to the Securities Markets Rules which would have the effect of compelling brokers to police payments in the sector, but the SAFAA says this would be unfair because it would result in market participants being held liable for actions outside their control.

In doing so, the SAFAA referenced its similar opposition to change stated in 2013, particularly around the ability of brokers to offer differential brokerage rates according to the volume of business provided by a client.

“It is a standard aspect of the carrying on of any business to offer discounts to customers who provide more business, and this should not be construed as a ‘payment’. The key consideration is that the lower rate of brokerage results in a lower transaction cost which benefits the end client, and is not a payment of cash to any broker or intermediary directing the order flow,” the SAFAA said in a submission filed with ASIC.

“SAFAA understands ASIC’s concerns that there is a regulatory gap when payments are made between nonmarket participants or intermediaries because they are not subject to the Market Integrity Rules. However, SAFAA does not agree with the proposal to require a market participant to take reasonable steps, in circumstances where the market participant handles or executes orders as a result of an arrangement with another person, to ensure the other person has not made a cash payment to a third party for order flow,” it said.

“We consider that imposing a requirement upon market participants to essentially ‘police’ the prohibition on payment for order flow amongst market intermediaries is an unfair burden. The proposed rule captures all intermediate orders and imposes liability on market participants in the event that the market intermediary has engaged in payment for order flow. It is unfair to hold market participants liable for actions that are outside their control.

“We note that ‘reasonable steps’ as set out in the Consultation Paper might include one or more of:

• Incorporating terms or clauses in the market participant’s agreement with that person.
• Asking the person during the onboarding process whether they engage in payment for order flow or intend to.
• Obtaining an undertaking that the person will not engage in payment for order flow.
• Obtaining an annual declaration that the person will not engage in payment for order flow.”

“The ‘reasonable steps’ set out above also impose an unreasonable burden on market participants and would add to regulatory red tape. Adding to the regulatory burden of market participants when ‘payment for order flow is not commonplace in the Australian equity market’ (as stated in the Consultation Paper) runs directly counter to one of ASIC’s key strategic priorities to administer the law to minimise the costs and burdens of regulatory requirements for its regulated population.”

On the question of soft dollar, the SAFASA submission stated: “SAFAA considers that there are sound reasons for some soft dollar benefits to be provided, for example, trading hardware and software, etc and these are best treated separately and in soft dollar benefit policies and guidance generally. We do not agree that controls on soft dollar incentives should be incorporated within the rule framework”.