There is not much competition in third-party clearing in Australia, despite the healthy financial markets, and good retail and institutional flows. Many have tried yet few who open their doors remain open for long. Given third-party clearing has only been around in this country since 1996, why should this be so?
The first reason is regulation, the landscape of which is far more complex now than it was back in ’96 when the first third party clearer, Berndale, launched in Australia. Both global and local regulations impact clearing, particularly when it comes to retail trading.
The unusual thing about Australia is a unique regulation called a Deemed Agreement. This regulation says that, when providing third-party clearing, the end retail client is deemed to have an agreement with the clearer, even though they’re dealing with them through a stockbroker or adviser.
This is problematic when it collides with two particular pieces of regulation – Anti-Money Laundering (AML) and Know Your Customer (KYC). Because the deemed agreement is with every end retail client, global compliance departments often require that banks from places with strict AML and KYC (like the USA) do these checks with end customers themselves or, in many cases, impose additional checks and documentation. This means even though the broker or adviser has already done AML and KYC with their clients, the bank will be required to do them again. The ensuing irritation for end clients and brokers (why does a client in Wagga have to comply with a rule in Washington?), combined with the intensive manual processes at bank level, prevent many firms who might otherwise happily offer third-party clearing from doing so.
The second factor is credit and/or reputational risk – large institutions believe that facing retail clients carries more risk which institutions are loathe to take on. Bad publicity or regulatory sanctions arising from the treatment of retail clients is a major deterrent.
The problem with lack of competition has three impacts for Australian financial markets. Firstly, competition introduces price pressure making clearing and associated services cheaper for everyone involved. Lack of competition does the opposite. Secondly, without competition there is no pressure for providers to innovate and invest in technology that would deliver better outcomes for their users. And thirdly, third-party clearing is essential for boutique firms to be able to service their customers (read more about why here <link to clearing blog>), and if lack of competition forces prices up and service levels down that can be the final straw that breaks their business model, leaving consumers with less choice.
FinClear has been designed from the ground up to meet these challenges. A serious investment in technology that can be shared by the whole industry, FinClear provides flexible, well-priced services to facilitate innovation and best practise among the firms we work with, by supporting their businesses and allowing them to focus solely on their end clients.