New financial markets law to stem fraud

A reader from the United Kingdom, who often draws my attention to governance and regulatory developments in that jurisdiction, sent me a link to a 4 September 2018 Financial Times article titled ‘Five jailed in £2.8M London based boiler room scam’.

According to the article, boiler rooms are unauthorised brokerages that use cold calling and other high pressure sales tactics to sell worthless or overpriced investments to unsuspecting members of the public.

In this particular case, the article reports, the United Kingdom’s Financial Conduct Authority (FCA) alleged that between July 2010 and April 2014, members of the public were persuaded to invest in a company that owned land on the island of Madeira. Investors were told that the land and therefore the company’s shares would increase in value to give returns of as much as 228 per cent. No investors were ever paid and more than 170 investors lost money in the scam.

In a criminal prosecution brought on by the FCA, the court found the defendants, who were sales brokers of a “wealth advisory firm”, guilty of offences of conspiracy to defraud, fraud, money laundering and perverting the course of justice as well as breaches of markets legislation.

This case brings me to the recently tabled Financial Markets Conduct Bill 2018 (FMC). As Nairobi evolves into a regional financial hub, an enabling legislative framework is required to protect users of financial products and services that will continue to emerge in this innovative market.

We have a multiplicity of regulators in this market, from the Central Bank to the Capital Markets Authority to the Retirement Benefits Authority to the you-name-it-we-could-regulate-it-authority. But lurking in the unlicensed shadows of all these authorities are grow-your-money-using-fairy-dust schemes, land buying-but-never distributing companies, buy-one-plot-get-another-over-yonder-county-company and so on it painfully goes. You see all these pyramid schemes and land buying and selling companies have one thing in common: they are offering customers a product in an unregulated field.

These verminous purveyors of investment options have gotten away with the fact that the only recourse victims would have would be the police who should prosecute the directors and management of the firms for fraud. Well, our police and criminal investigation units are kept far busier doing more police-like activities than they care to reveal, so the innocent victims are often left gesticulating wildly and shouting themselves hoarse to anyone who will listen. Then it dies down, we rinse and repeat the scenario a few short years later.

The FMC Bill could potentially address this as it defines a financial product as a facility or arrangement through which a person makes a financial investment, manages a financial risk or makes a non-cash payment.

Putting money into a scheme which purports to grow your returns with zero indication of what the underlying instrument that is providing that growth is, unequivocally, a (not very clever) financial investment.

In other words, a pyramid scheme like what we saw not too long ago could fall within this category. So too would all the land buying companies that purport to buy land for their “members” and vaporise the title deeds.

But did you see the third element of a financial product that is caught by the Bill? The definition captures “non-cash payments” and goes ahead to clarify that a person makes non-cash payments if that person makes payments or causes payments to be made other than by physical delivery of Kenyan currency in the form of notes and coins. Yup, it looks like cryptocurrencies are envisaged in this sweeping definition.

The opportunity that this Bill provides is for the Financial Markets Conduct Authority (FMCA) which the Bill creates to regulate and supervise the conduct of providers of financial products and services to retail customers. If the regulator finds that an organisation is purporting to sell such products it should require the organisation to either become licensed or demand that it stop selling the same.

It can revoke the licences of non-compliant licensees or cause the prosecution of unlicensed providers thereby offering some much needed relief to previously hapless victims.

The FMCA would also provide quality assurance to retail customers if it required licensees, just like the Central Bank licensees, to quote “licensed by the FMCA” in any public advertisement of their services.

The predecessor to the FMC Bill 2018 was the Financial Services Authority Bill of 2016 which was crucified, died and was buried. We await with bated breath to see the outcomes of this renewed legislative venture.