Crackdown on non-compliance: The fine line regulators walk on

Brokers feel the heat as SECP takes action to next level

KARACHI: Regulators of capital markets are walking a fine line. Their leniency may wreak financial havoc on millions of lives, but going overboard on market discipline also poses the threat of stifling business development and growth.

In its drive to punish non-compliant market players, the Securities and Exchange Commission of Pakistan (SECP) has ruffled the feathers of many brokers in recent months.

While the SECP goes to great pains, in its press releases, to defend the crackdown on non-compliant brokers, most market participants have been highly critical of the apex regulator in their private as well as public conversations.

Speaking to The Express Tribune, Invest & Finance Securities CEO Muzammil Aslam said the SECP is now trying to ‘overregulate’ the stock market.

“Many brokers run small brokerages. Requirements regarding the separation of client assets and certifications for staff members have resulted in extraordinarily high compliance costs. Most brokers don’t make that much money,” he said.

Admitting that the reforms the SECP wants brokers to implement are needed, Aslam adds that extensive operational modifications cannot be implemented on an overnight basis. “I fear that only 10 to 12 big brokers will be able to survive if the present situation continues. This will eliminate small players,” he said.

The drive against non-compliant brokers seems to have gathered pace after the appointment of Zafar Hijazi as SECP chairman in December 2014. Non-compliance with regulatory provisions led the SECP to pass as many as 38 orders against market participants in 2014-15, according to official statistics. In contrast, only three orders were passed against market participants for such violations in the preceding fiscal year.

Nineteen of the 38 orders passed against market participants last year pertained to insider trading/front-running as opposed to only one such order in the preceding fiscal year. Five detailed enquiries into the dealings, business or other transactions of various market participants were also initiated on suspicion of market manipulation and insider trading in 2014-15, official data shows.

In addition to the investigation into recent violations of regulatory provisions, some brokers are also critical of the SECP for reviving old cases relating to the 2008 stock financial crisis.

Requesting anonymity to avoid any backlash, a prominent stock broker told The Express Tribune that the regulator was reviving old cases just to punish those who have already defaulted and gone out of business. “The real motive is to flog a dead horse while protecting real perpetrators of the crisis who are still at large,” he said.

Responding to the allegation, the SECP spokesman said the study on the 2008 stock market crisis is publically available and that the commission has taken action in terms of recommendations contained therein.

“As a regulator, the commission ensures that market participants comply with the laid down legal requirements. Action against regulatory non-compliances is taken as per law,” he said.

Defending the prosecution of brokers who have defaulted, the SECP spokesman said the objective is to recover the hard-earned money of small investors who have been defrauded by brokerage houses.

Brokers are of the view that the sudden drive against the violation of regulatory provisions after a long period of ‘relaxation’ is ‘overwhelming’.

“Lack of capacity is a major challenge for brokers. The SECP should first help brokers build capacity to handle such pressure. The process should be gradual,” said Aslam of Invest & Finance Securities.

The writer is a staff correspondent

Published in The Express Tribune, November 8^th, 2015.

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