ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) on Monday approved new regime for securities brokers to expand narrow investor base, but the new law caught broker community by surprise as they look forward to further discussion over the regulations.
The SECP said it finalised the amendments into the Securities Brokers (Licensing and Operations) Regulations 2016 in light of comprehensive consultations with all stakeholders to minimise custody risks and safeguard investors.
However, brokers are not glad over the approval as they are expecting further changes in the draft that has been into discussions since last year.
“PSX (Pakistan Stock Exchange) Stockbrokers Association (PSA) is astonished to see that despite the fact that the matter of new broker regime (NBR) was fixed for consideration and call notices had been issued to all the stakeholders for February 6, 2020, before the National Assembly’s Standing Committee on Finance, Revenue and Economic Affairs, the draft for proposed broker business model has not only been approved but also sent for gazette notification,” the association said in a statement.
“It had never happened in the past,” the body quoted the secretary National Assembly standing committee as replying to a question by the association. But, the secretary said the meeting would be held as scheduled.
The SECP extended the timeline for implementation of the new regime by three months from July 1, 2020 to October 01, 2020 to ensure no disruption to the market and a seamless transition.
The SECP said a concept paper proposing to introduce the new broker regime, based on global benchmarks, was first released in April 2019. The SECP organised numerous extensive consultative sessions with the stakeholders, including brokers based in Karachi, Lahore and Islamabad, stock exchange, central depository, clearing company and mutual fund industry. In November 2019, a revised concept note was issued for public consultation, taking into consideration valid suggestions of the stakeholders.
The amended regulations introduced categorisation of securities brokers with enhanced measures for investor protection through safe custody of their assets, improved governance standards in brokerage industry, transparency and risk management. “This move will help in addressing repeated broker custody defaults, our market had witnessed in the past, which shattered investor confidence and market integrity,” the commission said in a statement. “The regulations also catalyse migration to an effective risk-based compliance culture and a shift from the traditional way of regulating brokers alike resulting in over regulating smaller brokers.”
Presently, all brokerage houses retain custody of investor assets and are subject to the same compliance requirements regardless of their size or capacity, making it difficult for many brokers to comply with the law and ensure adequate investor protection. The practice is contrary to global benchmarks.
Under the new regime, brokers would be categorised according to their net worth and governance requirements into three categories: trading and clearing broker (T&C), trading and self-clearing (TSC) and trading only (TO).
T&C and TSC categories would be permitted to retain custody of client assets, whereas TO broker would only have custody of its proprietary book, directors and sponsors and their close relatives. Brokers in TO category would operate with significantly reduced compliance requirements. Pakistan’s capital market has a very narrow investor base as compared to most regional and global markets. “One of the reasons is that insufficiently capitalised brokers have lacked capacity to spread their branch network,” the SECP said. “These weak brokers also lack internal controls, compliance procedures, and infrastructure and governance standards.”
The weak structure made it difficult for them to implement Finance Action Task Force’s standards, which require intermediaries to have comprehensive protocols to curtail money laundering and terrorism financing risks.
“The new broker regime is expected to bridge the regulatory compliance gap, while increasing commercial viability of brokerage industry,” the SECP said.
Net worth requirement for TO brokers have been reduced to Rs15 million from Rs35 million and to Rs75 million from Rs150 million for TSC brokers under the new regime. TSC brokers have been exempted from complying with the code of corporate governance for listed companies.
They would now be bound to appoint only one independent director instead of two. Requirement for them for minimum qualification of chief financial officer and head of internal audit has been removed. Requirement on TSC broker to constitute audit committee has been relaxed. The SECP would specify more simplified provisions. Similarly, requirements for other broker categories have also been relaxed.