Kenya’s Capital Markets Authority has vowed to suspend the operations of brokerage firms found handling clients’ cash- in a renewed push to stem trading malpractices, which have caused loss of investor funds.
The regulator says it is stepping up surveillance and enforcement of the code of conduct for market intermediaries which were introduced in 2011 to restore integrity in the capital markets, after the collapse of three stockbrokerage firms — Francis Thuo, Nyaga and Discount Securities — in quick succession, eroding investor confidence.
According to the Capital Markets Regulations 2011, clients’ funds will not form part of the assets of the market intermediary for any purpose and will not be available for payment of any debt.
A firm that receives or holds clients’ funds is required to open one or more client bank accounts and segregate its client accounts from its accounts holding funds.
“The problem is that initially, we used brokers as banks and in that case we were not separating the brokers’ assets from its liabilities (clients’ money) and I think we learnt from it,” said CMA chief executive Wycliffe Shamiah.
“Today if you paid your Ksh100,000 ($751.87) to a broker, we follow it to see where it is deposited. If we ever find it is in their office account, then we call that offence co-mingling clients assets with office assets. It attracts a serious penalty; we can deny you even the license.”
Stockmarket investors who suffer loss as a result of failure of a broker to meet their contractual obligations are compensated out of the Investor Compensation Fund (ICF) set up by the regulator.
Kenya’s stockmarket has been a victim of trading malpractices that saw the collapse of three stockbrokerage firms in quick succession between 2007 and 2009, shaking investor confidence and leading to a massive exit of small and retail investors from the market.
Francis Thuo and Partners collapsed in early 2007, marking the first of a series of stockbroker failures that were largely blamed on weak management, and fraudulent selling of investors’ shares.
It was followed by Nyaga Stockbrokers and Discount Securities in 2008 and 2009 respectively, while in 2010 brokerage firm Ngenye Kariuki was put under statutory management over poor corporate governance and liquidity problems.
Victims of Nyaga Stockbrokers were only compensated up to a maximum of Ksh50,000 ($375.93), regardless of the value of the lost investment. Nyaga collapsed with an estimated Ksh1.3 billion ($9.77 million) worth of investors’ funds.
The CMA has increased the compensation to victims of collapsed brokerage firms to Ksh200,000($1,503.75) from Ksh50, 000 ($375.93).
In Tanzania, the Capital Markets and Securities Authority (CMSA) has set its compensation amount at Tsh100,000($39.13) while in Uganda the Capital Markets Authority (Investor Compensation Fund) regulations 2018 gives the regulator discretion to determine the amount of compensation payable to an investor.
