SECP considers shifting client’s assets’ custody away from stockbrokers

ISLAMABAD: In the wake of MR Securities debacle, misappropriation of client’s assets by brokers has become a serious cause of concern for the SECP. Taking a proactive approach, the apex regulator initiated investigations focused on brokerage houses likely to be involved in abuse of investors’ assets. This exercise has so far led to suspension of trading terminals of MAM Securities, SZ Securities, Sunrise Securities, AWJ Securities, Invest Forum and HK Securities, etc.

Under the vision of Minister for Finance Senator Ishaq Dar, SECP Chairman Zafar Hijazi has deduced that custody of client assets by brokerage houses is the real root cause for abuse of investors’ assets and unless this issue is addressed, investors will continue suffering in hands of some brokers.

It has been observed that investors are extremely innocent/careless while maintaining trading account with licensed securities brokers. In case of MR Securities and other suspended brokers, it has been noted that investors demonstrated extreme negligence even with regards to the balance confirmations sent to them by the Central Depository Company (CDC).

Rather than directly verifying their balances with the CDC, the investors confirm incorrect balance with their brokerage houses, paving way for brokerage houses to abuse their assets. The SECP in the past has tried to create an awareness through media campaigns emphasising their own account; maintaining complete documentation of their trading activity; not authorising any one for trading from their account and maintaining custody and complete control on the securities, but most of the investors have been found to be totally ignoring these instructions.

Over the years, SECP, Pakistan Stock Exchange (PSX), CDC, and National Clearing Company of Pakistan Limited have initiated various measures to reduce custody risk for investors. These include closure of group or ‘benami’ accounts, provision of investor accounts service by CDC, SMS alerts on movement of securities and execution of trades. But now the SECP feels that as long as custody of clients assets is with brokers, in Pakistan environment the object of investor protection cannot be appropriately achieved. The SECP introduced Securities Broker (Licensing and Operations) Regulations in 2016 but the feeling that is developing in SECP is that the matter requires to be looked into afresh so that custody risks to client’s risks are perfectly eliminated.

Here it is pertinent to mention that SECP’s custody regime concerning investors in mutual funds has proven robust. Today, about 175 funds have more than Rs 600 billion in assets under management. However, regardless of the capital and governance structures of the Asset Management Company managing this fund, custody of client’s assets is kept separate with a trustee. This separation of custody has withstood the test of time and no investor investing in a mutual fund has ever faced custody risk. A similar approach can be used for stockbrokers, putting an end to brokers fleeing with clients’ assets.

The chairman SECP has already constituted an internal committee to consider and propose viable options while the PSX Board is also being advised to look into this matter on an urgent basis.