Broker Malpractices: When Should Reform Take Effect?

Published on 24th October 2006

When The East African published a scathing feature on how brokerage firms are making money at the expense of their clients, there was a lot of rage from all circles with people questioning the efficiency of the Capital Markets Authority (CMA).

This feature came in a few days after a battle closed over the possibilities of insider trading and price manipulation of the cable listed firm, East Africa Cables (EAC). As the battle closed, there was clear evidence that the major losers were the retail clients, most of who were rushing to the counters when the steam had already leewayed.

That being among the milder misdeeds, it would be sad to note the worst cases that have at many times gone unnoticed. Questioningly, one would wish to know if the CMA can stand the beefs that customers have against security dealers. There are too many perfect scenarios of misdeeds that do not appear anywhere in the public records, and matters that were not brought to the attention of CMA.

Here are just a few examples that depict this.

i) A client gets his refund check from the recent Initial Public Offer (IPO) and deposits it back to his account. Just a few days later, he asks for his check (cash already in account) and it takes a whole month to process a meager Ksh. 4,000.00 check. That’s an investment bank. As a new client to the firm, you would wonder; how worse would this have been if one was issuing a purchase/sale order other than a request for cash.

ii) A client leaves transfer documents (CDS 4A, 4B) and a bankers cheque to have his shares unfrozen. Having been told to pick them up after a few minutes, he leaves everything under the care of his broker. Minutes later, he returns back as had been promised. After several attempts to speak to any of the managers fail, he is directed to a Mr. Nthiga who happens to be an Operations Manager. Sadly though, not only are the documents unsigned but everything he had left disappeared. The Operations Manager has no explanations but to ask the client to restart the transfer process again. For a busy person who can only make it to the Central Business District after 6.00pm, that does a lot of injustice.

iii) A client pays cash to have his shares bought at the IPO stage. Three weeks after the securities start trading at the secondary market, prices have appreciated by over three hundred percent. The client, who is certain of having got the maximum allotment, asks his broker to sell off all his share only to find out that the shares were never bought.

iv) A client sells off her shares and just after the T+5 cycle, she is told that her check can only be ready after 2 weeks. To get her check however, she is asked to part with 4.6% of her proceeds. In desperation, she accepts to the terms only to be given a post dated cheque that requires 2 weeks before it clears.

“Can we buy the shares for you at the current market price?” The broker asks. That sounds like a good idea. However, that cannot work in the Kenyan context where most investors take positions for capital gains.

These are just a few cases of what the retail investor goes through. Some cases could even be worse and people talk less about themselves. One would wonder why this has not been addressed and looking at how the Securities and Exchanges Commission (SEC) handles retail complains tells why it has become hard to deal with such complains.

To begin with, clients are usually able to post complains directly to SEC and matters taken up seriously. CMA is more of a registration body and does little on the investor side. More effort could see the creation of an interactive forum that will allow ease of follow up for all issues that require attention as far as problems affecting investors are concerned.

In addition, as much as our market does not require any more brokerage firms to be registered, the existing ones should develop a way of handling huge volumes. The major reason why most brokers are unmoved by loss of clients is because they do not have much pressure looking for clients. We only have a handful of brokerage firms competing for close to a million potential investors. This has turned the situation into clients fighting for broker houses. This situation beats business logic as it is the brokerage firms that should be fighting for clients.

As the excess liquidity in the market continues to keep the market ripe and steamy, our CMA should work more tirelessly to introduce a Kenyan equivalent of the CRD (Central Registration Depository) that is used in the US. The CRD was established in 1980, and it is a data bank that tracks information mainly relating to client's complains. Such information is acted upon seriously and with speed to avoid jeopardizing the performance and integrity of the SEC.

As much as we need reform and action on brokers misdeeds, much still lies with the regulation body; the CMA. It may be hard to tell what efforts are in place for now, but the private efforts may be the only way. If all the small investors joined hands and pushed for action, we could probably start noticing some change.

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