Proposed regulatory regime for stock brokers: SECP extends consultation period till November 27

The Securities and Exchange Commission of Pakistan (SECP) has extended the consultation period till November 27 on recently proposed regulatory regime for stock brokers that aims at revitalizing the capital market and expansion of investor base.

Sources told Business Recorder that now the stakeholders and interested can submit their comments and suggestions on concept paper floated by the SECP by November 27, 2019. The SECP, on request of brokers and stakeholders has extended the said consultation period on recently proposed regulatory regime for stockbrokers.

The SECP on November 6, 2019 has floated a concept paper to introduce categorization of brokers for addressing the issue of custody of client assets. The newly proposed broker regime caused some anxiety among brokers.

In the proposed new broker regime, brokers are instead divided into three categories - Trading & Clearing Broker (TC), Trading & Self Clearing Broker (TSC) and Trading Only Broker (TO). The current minimum net worth requirement for a brokerage house is Rs35 million, as per the Securities Brokers (Licensing and Operations) Regulations, 2016.

Since brokerage houses handle client assets, they are required to comply with AML/CFT and other regulatory requirements for which requisite infrastructure is needed including comprehensive compliance arrangements and hiring of requisite staff including head of compliance.

1. In order to provide brokerage services and retain custody of client assets, brokers need to have minimum financial capacity and scale of operations to function as a financially viable business while ensuring maximum investor protection.

2. Possibility of misuse of client assets with brokers exists which has led to loss of confidence in the capital market and stagnant investor base over the years. Historically broker defaults have led to a loss of significant amount of client assets. Whenever a broker defaults it causes reputation damage to the market, loss of investor confidence and limited investor outreach.

3. Based on representations received from major stakeholders and recommendations of the Stock Market Reforms Committee, the SECP has issued a concept paper to introduce categorization of brokers for addressing the issue of custody of client assets. This concept is in line with international best practices and tailored to local market requirements. Globally custody of client assets is handled by financially sound institutions and brokerage houses, which facilitate investor protection, capital market outreach and strengthening of the brokerage industry through enhanced financial viability of brokerage houses.

4. In order to ensure commercial viability of brokerage houses, provide maximum facilitation and ensure protection of investor assets, category of Trading Only brokers is proposed to be created which would not retain custody of client assets.

5. This regime will ensure safe custody of client assets by keeping custody only with financially sound institutions and brokerage houses, categorized as Trading & Clearing broker and Trading & Self Clearing broker. These brokerage houses shall be subject to enhanced net worth requirements, stringent credit and management rating, annual inspections, classification as public interest companies, appointment of category A auditors only and corporate governance requirements.

6. The minimum capital requirements for a brokerage licence for Trading Only brokers are being reduced to Rs.15 million. Further, such brokers shall have the flexibility to have a satisfactory QCR rating auditor.

7. Trading Only brokerage houses would be allowed to carry out transactions in all markets, including derivatives and leveraged products, with no restriction on number of branches.

8. These brokerage houses would also be allowed to provide securities and futures advisory services by charging a fee and sell/ distribute financial products and also act as consultants to the Issue.

9. Several compliance requirements relating to client asset segregation, clearing membership, depository participant etc. shall not be applicable on Trading only brokers and they would also not be subject to multiple audits/inspections during the year.

10. The new regime would enhance commercial viability of trading only brokers by reducing compliance costs enabling them to focus on their business and expanding investor outreach across the country.

11. The proposed regime is aimed at increasing investor protection, enhancing investor outreach, strengthening the brokerage industry, enhancing commercial viability of brokerage houses, improving regulatory compliance particularly AML/CFT and ensuring robust growth of the capital market.