Weak brokers face stricter checks in new CMA measures

Financially weak stockbrokers and other Capital Markets Authority (CMA) licensees will now face more intense inspections than institutions with strong financial and corporate governance systems, according to the market regulator.

The CMA has in the past inspected uniformly all stockbrokers, investment banks, fund managers, investment advisors and other licensees; a system that has proved to be both inefficient and costly as the number of regulated institutions increased at a faster rate than the market watchdog’s fees income and staff capacity.

The switch to “risk based supervision” approach is however meant to reduce investors’ exposure to losses posed by weak market intermediaries, and at the same time cut on administrative costs incurred while checking licensees’ compliance levels.

“Inspection will now be based on each licensee’s risk matrix as assessed from information collected over the last three years,” said CMA chief executive Stella Kilonzo in an interview with Business Daily.

Institutions will be scrutinised depending on their level of capitalisation and other basic financial ratios, quality of key management staff, strength of their corporate governance structures, their record of response to investor complaints and history of past regulatory breaches.

Some players who have little history of past violations and those who do not directly handle investors’ funds such as investment advisors will undergo less compliance tests but will be required to file specified periodical reports with the CMA.

“All stockbrokers and investment banks will however face inspection for the time being, there will be enhanced surveillance on those that have weak track records,” said Ms Kilonzo.

Stockbrokers have in the past complained about invasive and time consuming surveillance methods but have now welcomed the new approach.

“Focusing on potential risks posed to the investors is an effective approach for both the licensees and the regulator,” said James Wangunyu, managing director of Standard Investment Bank.

Stockbrokers had also petitioned CMA to drop the annual licensing regime saying it denied them the business continuity certainty that is needed when for example negotiating for medium to long-term financing, but Ms Kilonzo said this requirement would stand for the time being.

“CMA can give permanent licences, but maintain constant supervision and inspection of licensees,” said Mr Wangunyu.

All financial sector regulators including the Central Bank of Kenya, the Insurance Regulatory Authority and the Retirement Benefits Authority have signed a memorandum of understanding that allows sharing of information between licensees whose operations cut across the financial sector.

Commercial banks that have acquired stockbrokerage and investment banking licenses will for example be a subject of discussion between CMA and Central Bank while reviewing their compliance levels, an approach that is supposed to ward off systemic risks that may arise from collapse of such firms.

Three stockbrokers have collapsed in the last three years after they were allegedly involved in unauthorised sale of investors’ shares.

Ms Kilonzo was tasked with implementing market reforms since her appointment as CMA chief executive at a time when investor confidence was at an all time low.