Cytonn: Assess regulatory failure, upgrade of the law

Cytonn chief executive Edwin Dande. FILE PHOTO | NMG

By BUSINESS DAILY
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Summary

• Cytonn has been in the news for the wrong reasons after investors who put their hard-earned money in the investment firm accused the company of defaulting after their investment matured.
• The CMA appeared to distance itself from the crisis involving two funds holding investments worth Sh13.5 billion.
• This points to a problem of regulatory failure or the need to upgrade the law — which must form the basis of the parliamentary probe and recommendations.

As the Capital Markets Authority top executives meet MPs from tomorrow over Cytonn defaults, it would be important to examine a case of regulatory failure and possible review of the law.

Cytonn has been in the news for the wrong reasons after investors who put their hard-earned money in the investment firm accused the company of defaulting after their investment matured.

The CMA appeared to distance itself from the crisis involving two funds holding investments worth Sh13.5 billion This points to a problem of regulatory failure or the need to upgrade the law — which must form the basis of the parliamentary probe and recommendations

The agency does not regulate the two funds, which have failed to pay investors upon maturity of their investments in properties developed by Cytonn.

The company has been marketing the funds as private placements, a closed shop of a few sophisticated investors, which do not fall under the ambit of the CMA. But filings in court show that Cytonn had raised money from 3,000 investors in breach of regulations that demand funds raised through private placements to involve less than 100 people. If it’s confirmed that Cytonn breached the threshold for private placements without the knowledge of the regulators, then the CMA is sleeping on the job.

For the CMA to remain unmoved when a single unregulated product has collected Sh13 billion reveals a regulator whose ability to scan the market is wanting. The defence that it does not regulate the two funds fails to hold.

The CMA has an obligation to monitor that market for persons running products akin to what it regulates.

It is difficult to run an outfit that operates like a bank or an insurance company without knowledge of the Central Bank of Kenya or the Insurance Regulatory Authority (IRA).

Still, the Cytonn investment model had red flags early. They promised top returns in the short term but were investing in long-term assets. This mismatch and Cytonn’s position that the troubled funds were above the threshold of regulations demand upgrade the law

We hope the Finance Committee will tackle the likelihood of regulatory and legal gaps on Cytonn’s failures and offer timely recourse