Use of rule can help CMA monitor trading even with limited funding.
Someone asked: When the Capital Markets Authority’s (CMA) budget equals Sh1 for every Sh2,000 that it’s charged with protecting, should we “huff and puff” when it fails to arrest bad operators? This is a compelling point on chronic underfinancing. In regard to this matter, a couple of questions arise; can we expect the regulator to fulfil its statutory objectives?
Is it reasonable to expect greater market scrutiny? And how will it sell the country as a safe place to invest? These are very pertinent questions. Solutions?
Let us broaden the scope a little before that. Insufficient regulator funding is not a unique problem. Self-funded or not, most major market regulators suffer from inadequate financing.
From Securities and Exchange Commission (US) to Financial Conduct Authority (UK), Australian Securities and Investments Commission (Australia) and Financial Services Board (South Africa); all run on 99.99 per cent smaller budgets compared to the markets (NASDAQ-NYSE-AMEX, LSE, ASX and JSE respectively) they’re mandated to police.
Its unsurprising arguments on why market vices—insider trading, price manipulation, corporate governance breaches, front running, false statements, Ponzi schemes, money laundering et cetera – are still rampant easily jump on the underfinancing problem.
The facts is, there have been several responses some good, others not so good. External funding has been a great support.
A third of CMA’s income is donor-funded and a fifth of its expenditure is donor-supported. Recent suggestion to reward corporate whistle-blowers with a portion of the loot is laudable. However, downward shift of responsibilities via self-regulatory organisations (SROs) is somewhat problematic.
A history of abuse (read regulatory capture and conflict of interest issues) as experienced in other jurisdictions means Nairobi Security Exchange as a SRO may as well travel that route - the idea is built on the “Chinese Wall” rule which is a high-sounding impractical corporate notion. Verdict for the move towards “apply or explain” model is still out there. But is this all?
One more option that needs serious activation is the Stewardship Code. Three reasons: first; it calls asset managers into shareholder activism – way to influence a company’s behaviour in order to maximise its value.
Under Principle 2 of the Code, asset managers are expected to press issuers on matter of governance, ethics, risk, performance, strategy, remuneration, shareholder rights and other factors that influence long-term success. Some of these areas have attracted blame on the regulator.
Second, it turns asset owners into indirect enforcers. Finally, investors have the chance to hold asset managers to account by ensuring they remain faithful to their stewardship policies.
Three, it allows overseas institutional investors to bring their international best practice to bear in the local scene.
In summary, in light of CMA’s enormous responsibilities, the Steward Code is a necessary addition. It adds a creative twist to enforcement.
More importantly, it eases the funding pressure. This is not an overstatement. To help shape a better future for the industry, asset managers becoming/remaining signatories of the code will be a big plus. But that said, the code remains a paper gain. Its reality is yet to be seen.
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