Money Markets
Mr Paul Muthaura, the Capital Markets Authority CEO. PHOTO | KEVIN ODIT
By BRIAN NGUGI
In Summary
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.
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