Pay for customers of brokerages that collapse to double

Money Markets

Investors outside the offices of collapsed Nyaga Stockbrokers. Investors will be paid up to Sh92,000, a substantial increase from the Sh50,000 maximum previously paid, in new proposals. FILE PHOTO | NATION MEDIA GROUP 

In Summary

• The Investor Compensation Fund (ICF) will pay up to Sh92,000 ($1,000), a substantial increase from the Sh50,000 maximum previously paid to every person who loses cash in the event of the insolvency of the broker.
• Kenya has been building the compensation fund to buttress its financial standing.
• The new rules are contained in proposals by the East African Community (EAC) and are waiting to be agreed upon by the council of finance ministers in the region. It means the rules will be applied in each country within the EAC once adopted.

Kenya will nearly double the compensation paid to investors who lose money when a brokerage collapses so as to maintain confidence in the stock market.

The Investor Compensation Fund (ICF) will pay up to Sh92,000 ($1,000), a substantial increase from the Sh50,000 maximum previously paid to every person who loses cash in the event of the insolvency of the broker.

The amount paid will however rise in the event the Kenya shilling depreciates against the dollar since the payment is expressed in the green back rather than in local currency.

More or less cash can be paid depending on the size of the compensation fund. Kenya has been building the compensation fund to buttress its financial standing.

It has also taken a 5.1 per cent shareholding in the Nairobi Securities Exchange following demutualisation, with the dividend going to the fund.

The new rules are contained in proposals by the East African Community (EAC) and are waiting to be agreed upon by the council of finance ministers in the region. It means the rules will be applied in each country within the EAC once adopted.

Already the rules have been discussed and adopted by the East African Securities Regulatory Authorities (EASRA) and are only awaiting the regional finance ministers’ approval.

EASRA expects the new rules to be adopted and be applicable by June this year.

“Eligible investors shall be compensated up to $1,000 (Sh92,000) in respect of aggregate claim. The (administrator of the) ICF may adjust the amount taking into account the size of the investor compensation fund,” say the rules.

They also specify that compensation will be paid within six months after the collapse of a broker rather than the long time it has been taking in Kenya such as in the cases of brokers who collapsed between 2007 and 2009.

An investor who has lost money is also required to inform the statutory manager of a collapsed intermediary of the financial loss within three months of the announcement of the fall of a broker.

Suffered pecuniary loss

“Where a statutory manager has been appointed, every investor who has suffered a pecuniary loss shall within three months of the announcement notify the statutory manager of such a loss. … The statutory manager shall pay all valid claims within six months of its appointment,” say the proposals.

The rules state that the ICF will be administered by an independent body. Currently, the ICF is administered by the Capital Markets Authority (CMA) in Kenya. The ICF will be allowed to receive cash from various sources including the contributions market intermediaries pay into it, interest and returns from cash it has received, fines or penalties imposed on those who contravene CMA laws and rules.

The ICF administrator is required to have the fund audited every year by an independent firm and keep records that show in detail all the transactions it has been involved in.