Why stockbrokers face challenges

The misfortunes of several stockbroking firms in the past few years that resulted in their collapse, forced sale or takeover is now a well known tale that has dominated social discourse for some time.

The extent to which their misfortunes were the result of unethical behaviour, fraud, theft, mismanagement where proven cannot and should never be defended by anybody.

The untold suffering of particularly small investors who had entrusted their investments to these firms is indeed the greatest casualty of these past events.

The Kenya Association of Stockbrokers and Investment Banks (Kasib), which represents the interests of market intermediaries who are members of the Nairobi Stock Exchange and are key stakeholders of the local Capital Markets, shares the frustration of all market participants at having one of our members, the firm of Ngenye Kariuki and Company placed under statutory management.

The action goes against the recent positive trend captured in a resurgent market, improved regulatory measures that the industry has embraced and deals a huge blow to these gains.

Kasib has been aware of some of the challenges being faced by Ngenye Kariuki and Co and the reasons that may have occasioned them.

Further we have been able to clarify the stated reasons for the action taken by the Capital Markets Authority (CMA) and the extent to which the firm may have been unable to meet its continuing and primary obligations to its clients.

The picture that emerges is that of a firm, like many others in the industry, that has had to bear the brunt of a depressed market and crucially the continued falling out of the various mishandled aspects of the landmark Safaricom IPO.

What is surprising is that the CMA action was not backed by evidence to support the conclusion that the firm is unable to meet its continuing obligations to its clients.

There does, however, appear to be justified concern about the stability of the financing arrangements the firm has adopted to survive the lean market period and this may very well be the basis for what should be viewed as pre-emptive action.

That discretion, however, has fomented the situation by exposing investors at the firm to huge opportunity costs, inconvenience, anxiety and uncertainty about the state of the industry and the safety of their investments held through the firm.

Kasib admits that there will be occasions where it is in the best interest of investors and the industry at large to intervene in the management of an intermediary.

This would be in situations where unethical behaviour, fraud, theft, and mismanagement have been proven.

While such powers must be retained for the good of the market it must be wielded with recognition of the peaks and troughs of a cyclical business like ours, isolated market events and the red flags that herald the imminent breakdown in the structure of a firm.

Above all else such decisions should be justified and explained as being in the considered public interest.