Kenya seeks to change investor protection

Proposed amendments to Kenya’s Capital Markets Authority (CMA: Act would block institutional investors from getting compensation for money lost in cases of collapse of their stockbroker or any other investing agent. Currently all investors are eligible for compensation from the Investors Compensation Fund (ICF).
The draft CMA Act 2009 excludes financial institutions, insurance companies, collective investment schemes and other categories of investors who are generally recognised as “institutional investors” from drawing compensation from the ICF kitty. This leaves the “retail investors” as the only category of investors that can claim compensation for losses suffered due to failure or fraud by market intermediaries.
Current ICF regulations cap the maximum compensation payable per investor at KSh50,000 (US$667) and have called it to be increased to match commercial banks’ depositors compensation ceiling (KSh100,000).
Hong Kong-based International Securities Consultancy Ltd (ISC) drafted the proposed amendments jointly with local law firm Kaplan and Stratton Advocates. ISC’s Ray Astin reportedly says “It is generally assumed that the professional investors have the capacity to make prudent investing decisions and can look after themselves,”
Market players have argued that it will be unfair to compel institutional investors to contribute to the ICF pool while they do not expect to get any compensation for losses incurred. Mr Astin said contribution is guided by best practice recommendations by the International Organisation of Securities Commissions (IOSCO) of which the CMA is a member. The CMA uses allocations from new product listing charges and fees received from trading commissions in the secondary market to boost the ICF.
The ICF has had to pay out an estimated KSh302 million ($4 mln) to investors who lost money following the collapse of Nyaga Stockbrokers in March 2008, and the kitty is also likely to come in handy in paying claims to investors who also lost following the collapse of Discount Securities Stockbrokers early this year. About 90% of the estimated 27,879 Nyaga claimants were expected to receive full compensation for their losses, but some invested more than the maximum amount allowed
The CMA estimated that Nyaga could have gone under with over Sh800 million of investors’ funds, while there were allegations that Discount Securities had misappropriated Sh1.4 billion owed to the National Social Security Fund. The CMA’s financial statements for 2008 show the ICF had KSh227.5 million (June 2008), up from KSh165.2 mln (2007). “If you are investing a lot of money please take caution to know your broker and his lifestyle,” said the CMA chairman Micah Cheserem in September, according to reports.
Capital markets will be regulated by two sets of laws, the CMA Act, which deals with establishment of the regulatory body, and the Securities Industry Act addressing trading rules. The Central Depositories Act, which regulates custody of tradable securities such as shares and bonds, will also be amended.
The Nairobi Stock Exchange ( has meanwhile introduced a mobile phone short message service (SMS) to receive complaints from all over Kenya. Complaints and questions can be sent to 8485, on both Safaricom and Zain mobile phone service at a cost of KSh10 per message.
“It is important to have an educated investor who understands the products traded and procedures governing transactions, said NSE chief executive, Peter Mwangi.
“Statistics show that 30% of the queries received at the Complaints Handling Unit (CHU) refer to a request for general information on processes, while a further 14% relate to questions on dividend issues by shareholders.”
Wycliffe Shamia, the market regulator for the Capital Markets Authority (CMA), reportedly praised the SMS complaints service and asked licensees and agents to provide clients with service charters. “Clients need to know beforehand what to expect from an agent or whoever they are dealing with, in order to make it clear what they offer, and avoid unnecessary delays and misunderstandings.”
The SMS service, which will also be used as a vehicle for investor education through the Complaints Handling Unit website ( launched in August.


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