The Capital Markets Authority (CMA) has ordered fund managers and stockbrokers who have been managing billions of shillings for wealthy clients at a fee to get out of the business, leaving it exclusively in the hands of commercial banks.
The CMA, in a circular copied to the Kenya Association of Stockbrokers and Investment Banks (KASIB), the Fund Managers Association (FMA) and the Central Bank of Kenya (CBK), barred fund managers and stockbrokers from offering cash management services to clients, terming the services illegal.
The regulator says provision of the service is excluded from the ambit of the Capital Markets Act and therefore constitutes “an unregulated activity.”
Analysts, however, insisted that the existing situation is typical of what happens when innovation runs ahead of regulation.
Fund managers currently manage assets in excess of Sh800 billion, most of it under pension while the rest is in the form of cash from wealthy clients seeking high returns.
They only determine allocation of assets to various sectors but do not hold cash for pension schemes, as this is held mainly by commercial banks as the custodians. They, however, directly control cash belonging to wealthy clients.
The CMA circular signals an ongoing struggle between commercial banks’ treasury departments and other intermediaries to control cash from wealthy clients.
Only last year, banks were allowed to start trading bonds directly, rather than go through brokers — a move that the brokers did not take lying down.
Following the signing into law of a Bill restricting interest rates, commercial banks are now under pressure to keep making the high returns they have traditionally enjoyed from their cash management business regardless of its source.
“The authority notes the increase in cash management services and products being arranged and facilitated by various capital market intermediaries,” CMA chief executive Paul Muthaura says in a circular dated August 22, adding that the provision of the service constitutes an unregulated activity.
The regulator has cited sections of the Banking Act that place the regulation and licensing of such products in the hands of the CBK and warned those engaged in the service that they risk losing their licences.
A financial expert based in Nairobi said he suspected that the pressure was coming from commercial banks, noting that the practice whereby fund managers and brokers profit from managing clients’ cash has been happening for many years and had not been termed illegal until now.
“What the regulator wants is to have only commercial banks control this business. It is big business and banks’ treasury departments do not want to share it with other intermediaries,” said a Nairobi-based financial adviser.
Fund managers, who have been aggressively marketing cash management services to high-net-worth individuals, now face the prospect of losing revenue from the products.
In the case of stockbrokers, the financial results currently being released show a good number are performing badly and some have made losses.
Mr Muthaura says consultations between the authority and the CBK had backed the clarification that, in accordance with the interpretation Banking Act and Microfinance Act, products and services with respect to cash management services would be deemed to constitute banking or microfinance business.
The CMA chief executive said the decision had been taken to “protect investors”, adding that such services had been on the rise among the intermediaries despite comprising unregulated activity.
The FMA, an umbrella body representing 11 fund managers, welcomed the decree, saying members are bound by the regulations to comply.
“The decision by CMA has been made in the interest of upholding integrity and so it is welcome,” FMA chairman Stephen Muriu said. KASIB chief executive Willie Njoroge did not return calls or answer messages left on his voice mail by the time of going to press.
- Additional reporting by Geoffrey Irungu.