Adel Abdulaziz Khashabi, Head of QNB Financial Services, on the role of bank-sponsored securities brokerage companies

Adel Abdulaziz Khashabi, Head of QNB Financial Services

Competition in the securities brokerage industry is intensifying. The recent introduction of bank-backed brokerage houses has given clients access to topnotch research and professional services, which are improving service quality and offerings to investors.

Greater investment in the financial services sector is essential to the growth of capital markets. Realising this need, commercial banks were allowed to set up their own brokerage arms in 2009. Prior to 2006, commercial banks were offering brokerage services; however, between 2006 and 2009, Dlala Brokerage & Investment Holding Company was established, taking over banks’ brokerage activities. This changed in May 2009 when the Qatar Financial Markets Authority (QFMA) issued a new set of regulations concerning financial services. Among other things, the new regulations stipulate that brokerage is a part of financial services activities and will be regulated by the QFMA. Consequently, commercial banks have been allowed to resume brokerage activities.

This deregulation has led to a number of banks establishing new brokerage operations. QNB Financial Services (QNB FS) was the first incumbent to receive a licence, and launched operations in May 2011. Shortly after, Commercialbank Investment Services and Ahli Brokerage commenced operations. Most recently, Al Rayan Financial Brokerage became operational. These new entrants have brought the number of brokerage firms operating in Qatar to 11.

Commercial banks were allowed to recommence brokerages in order to increase competition and provide value-added services to clients. The new brokerage houses are wholly owned subsidiaries of banks, but maintain their own capital base, separate boards of directors, separate commercial licences, independent staff, independent and robust compliance and supervisory staff, and independent seats on the exchange. These measures have been put in place to avoid conflicts of interest and so that the brokers are able to serve their clients’ interests efficiently and effectively. The separation also allows for greater regulatory oversight of the brokerage business, in line with the best of international practices.

Banks enjoy significant financial strength and resources that they can use to attract talented staff and to establish strong and independent brokerage companies. Thus, firms started by banks will help to ensure that the market continues to develop in line with international standards in terms of products, customer service and transparency.

The new brokerage companies are also introducing “on-the-ground” research and corporate access as important value-added services. Previously, research on Qatari equities was mainly provided by brokerage firms and investment banks that lacked a local presence. Sensing an opportunity, bank-sponsored brokerages, such as QNB FS, have started introducing comprehensive equity research offerings. The value-added benefit of such research is especially relevant for small-to-medium-sized companies that suffer from limited research coverage.

Equity research, in conjunction with economic research from banks such as QNB Group, is fostering increased insight into the Qatari market. Moreover, banks are able to facilitate access to the management of listed companies and economically important unlisted and state-owned companies for institutional investors. By enabling such access, bank-sponsored brokerages are helping bridge the wide information gap that previously existed within the investment community. As a result, bank-sponsored brokerage houses have carved out a niche by catering to the needs of institutional and high-net-worth individuals with differentiated offerings.

Long term, these initiatives should help improve price discovery for listed equities, whilst sustaining Qatar’s growth. Given concerted efforts by major banks in the financial services industry, Qatar is on the right track to elevating its capital markets to a standard that is on par with international norms.

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The Report: Qatar 2012

Capital Markets chapter from The Report: Qatar 2012

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