An interview with Chairman Securities & Exchange Commission of Pakistan

Published on Friday, 5 July 2019

Farrukh H. Sabzwari has nearly three decades of experience in capital markets in Pakistan and overseas. Prior to joining the SECP in December 2018, he was the CEO of BMA Capital Management. Earlier, Farrukh was Director, APAC equity sales at Credit Suisse Singapore from 2010 to 2017. He has also served as CEO KASB Securities - a Merrill Lynch JV Partner - from 2005 to 2009. Before that, he served as Country Manager and Head of Sales at CLSA, a Citic-owned boutique investment firm. He has an MBA in Finance.

BR Research sat down yesterday with the securities czar and discussed his approach towards regulating a number of sectors that the SECP oversees. Selected excerpts are produced below:

BR Research: Six months into your term as chairman, what are the objectives that you have set out to achieve?

Farrukh Sabzwari: There is a broader aim here to what I want to achieve in my three-year term as chairman. It is a simple philosophy: we want to turn SECP into a modern, best-in-class regulator – one that is independent of political and vested interests; one that practices highest levels of integrity and fair-play; and one that chooses minority rights and interests above all others. Given the amount of time and money being spent on IT systems and processes-uplift under a project we have entitled LEAP, our aim is also to make SECP the most technologically-advanced regulator in the region and in the process ensure that we make the organization a paperless environment.

To become a regulator that people are in awe of, we first need to rattle the culture within the organisation. This organization needs to become a lot more facilitative and customer friendly. We need to change the way we interact with our client base, which is all of our stakeholders. The seeds of this change in culture have already been sown. This is my main message to staff whenever I interact with them: as public servants, are we fulfilling our core responsibility, which is to serve the public and help resolve whatever issue is presented to us?

In my opinion, one big reason for SECP’s legacy problems is the constant change in leadership, due to which despite some good measures from the past leadership, the organizational culture did not evolve enough to keep up with the times. In the past seven years, for instance, top leadership was changed five times. Any organization will lose its sense of purpose in such an environment.

One of the first things that I did on joining in January was to look at the regulatory framework. Some of the regulations were onerous. While this is still work in progress, trying to make regulations more user-friendly will continue to be front and centre of what we do even over next few months. The recently-approved amendments in the Buy-Back of shares Regulations, 2019 are a great example, where, thanks to the onerous regulations, Buy-Backs have never really worked or been used in Pakistan. We consulted the stakeholders, took a long, hard look at what we could chop, delete and make easier and announced the regulations last month. I am happy to note that a lot of sponsors have given us positive feedback on it. We are now in the process of rehashing the entire Company’s Act. This exercise will take a couple of months but it looks like an important thread in the ease of doing business exercise.

BRR: Let’s pivot to specific areas under your watch. What is your roadmap for developing the capital market ecosystem in Pakistan?

FS: To develop the capital markets and perk up interest levels in what is a very challenging, slow-growth macro environment, we have already taken some measures in the six months that I have been in charge. For instance, we have notified the regulations for buy-back of shares, watering down requirements to a bare minimum. The SECP has also increased foreign shareholding limit of PSX from 10 percent to 20 percent. We have increased the number of margin-eligible scrips from 56 to 92. We have also broadened the scope of existing SME Board, by allowing qualified individuals and investors and abolishing paid-up capital and profitability requirements.

Going forward, we will soon issue Warehouse Receipt and Collateral Management Companies Regulations. The matter just went to public consultation starting yesterday. But this is a great product for the development of the eco-system in agriculture. Farmers can get credit against their warehoused goods. The receipts can trade on PMEX. The opportunities, once this gets going, are endless. One other matter being given serious thought is the prospect of allowing the listing of loss-making entities.

In addition, with a truckload of SMEs and Fintech opportunists looking to access the capital markets, the Commission will engage with stakeholders over the next few weeks to determine how best to move forward on this score. Also in implementation phase is reform of the business model of brokers! The custody-driven business model that we have proposed is being appreciated; now we aim to put final touches over the next few months. If everything remains on track, the launch of an Alternate Board should also take place by March next year. We are also working on a regulatory framework for P2P lending, which should be ready by June next year.

Basically, our main focus is to looks at all facets of the markets. The number of active UINs in the market, which currently stand at 250,000, is too little. The fact that only 5,000 UINs account for more than 80 percent of the business on the PSX makes matters a lot more urgent. Thankfully, in the new products’ platform, with work on ETF regulations in final phase, we should be able to offer this to the market over the next few months.

BRR: What is your proposal to encourage competition in Pakistan’s capital market? Currently, it looks like a monopoly with a single exchange, one clearing company, and one central depository.

FS: A single market will work too, provided that we rally around the real key issues. Unfortunately, the real issues – depth of markets, lack of products, lack of investors, etc. – are drowned out by the simple politics of the place. There has to be a relentless focus on the breadth and depth of the markets and on developing an ecosystem that helps channel savings to capital formation. Thankfully, with help from present management and the Board at the PSX, I remain positive on delivery this time around.

BRR: On that note, what steps can be taken to encourage participation of Pakistan’s middle-class in capital markets?

FS: The most significant challenge is to improve financial literacy in the country, especially on how people deploy small savings and investments. The SECP has come out with a book on that subject three months ago, called Savings and Capital Markets in Pakistan. I am trying to have the HEC include this content in university curriculums. I think the lack of financial literacy is a stumbling block – and so is lack of confidence and trust in the capital markets. Both issues get resolved by the investor education thrust from SECP and PSX together and by protecting investor custody with a new broker custody model.

We need to look at how other countries, such as India, have reached out to their middle class. That’s the kind of thing that we want in Pakistan and for that, we will let the market decide what their pricing for an AMC product is going to be. The AMCs wanted some leeway on pricing and on charging of expenses to the fund. These recent initiatives by the SECP will help them pick up their game in terms of growing the domestic reach via both brick-and-mortar and technological advancement.

Pakistan made a huge mistake by not introducing a viable alternative to badla when we phased it out in 2008. India, for example, phased out badla in 2002 – but the phase-out was accompanied by offering derivatives as an alternative. With volumes under pressure for now – and markets in consolidation phase – this may be a great time to test new products. The fact that this government is going all out to arrest ills such as tax evasion and is also seeking to document the real estate market should also help channel money into equities.

BRR: Linked to the above question, what do you think about beefing up the investor protection fund in order to give confidence to small investors that the regulator has their back?

FS: The basic idea of an enlarged investor protection fund makes sense, but it doesn’t really click with me. The argument that people do not trade because they do not have insurance against risk does not make sense anywhere in the world. Equities are risky by definition. What we instead would like to do is ensure that brokers take risk exposure which commiserates with their size. This measure will better serve to protect retail interests. We need to effectively mitigate custody risk. We need to also raise more awareness and encourage investors to hold their securities in investor accounts at the CDC.

BRR: What is the progress on launching exchange-traded funds?

FS: We are aiming to launch the first ETF by August/September this year. To that end, we are going to introduce a revised regulatory framework to create enabling regulatory conditions for the product.

BRR: Why are penetration levels in the insurance industry so low in comparison with the rest of the region?

FS: I agree that penetration level of the insurance industry is quite low and the level of financial literacy in the country combined with low level of disposable income and saving rates are major contributing factors. However, SECP is actively working towards increasing the penetration level by working towards introducing compulsory insurances such as Motor Vehicle third-party liability insurance, Group Health Insurance and Occupational Health Insurance. We are engaging with the industry a lot more than we have in the past few years. I have also reorganized SECP’s setup for Insurance – splitting product development, regulations and enforcement under three separate teams so we can better focus on development needs of the sector. A three-year comprehensive plan has also been developed in consultation with stakeholders.

BRR: FATF compliance is a burning issue. SECP is among the institutions that are leading Pakistan’s response. Please identify the progress and challenges in implementing the existing AML/CFT regulations.

FS: As chairman, I oversee all facets of SECP’s different functions. But when I joined the SECP, FATF was front and center; therefore, I decided to keep this portfolio to myself. FATF will continue to remain front and center – and in fact, even minus FATF, the need for compliance on AML/CFT will remain. As of last year, SECP’s own understanding of FATF-related AML and KYC issues was very limited. We have really come up the curve this year – both in terms of our own understanding of the issues but also in terms of outreach and training our regulatees to adhere.

To address the issues falling in SECP’s basket, we have taken several steps. For instance, we have conducted the annual risk assessment for securities market, NBFCs, and Modaraba sectors with respect to AML and CFT. We have also carried out TF (terrorist financing) risk assessment of financial and NPO (non-profit organisations) sectors that are under SECP’s regulatory ambit. We have formulated AML/CFT offsite and onsite inspection manuals. I tell my regulatees that I can assist them with any regulatory concern that they have, but that they will need to brace themselves for the penalties that come along with non-compliance on this score. But this is a new world order – and we will simply need to adhere.

BRR: Let’s talk about facilitation. What sort of measures has the SECP taken under your watch to improve ease of doing business?

FS: In the capital market sector, we have introduced a new Category B of eligible securities in the Margin-trading and Deliverable Futures market to increase liquidity and activity. This measure has resulted in addition of 23 new securities. We have also removed earlier restrictions in the Negotiated Deal Market (NDM) with respect to intra-participant NDM transactions and back-to-back repo transactions between same accounts. In addition, to enable a wider spectrum of possible collaterals that can be furnished to the clearing house, we have increased the number of acceptable securities to 88 from 54 previously.

In the corporate sector, the company incorporation process has been made easy and fast by providing the option of fee payment through 1 Link. Now more than 50 percent of companies are incorporated within one day, with the minimum time to incorporate reduced to four hours. We have also formed a Secured Transaction Registry. We have amended the regulations to exempt small, non-bank microfinance companies from obtaining a license. Thanks to all of the above, I am hoping to see better results on the World Bank’s ease of doing business score.

BRR: To encourage the startup ecosystem, what kind of a regulatory framework can work best for social enterprises and digital intermediaries?

FS: I feel that instead of having a fixed regulatory framework for such businesses, it is perhaps better to ease them in. As I mentioned earlier, there are too many SMEs and Fintech that are waiting to access capital markets. We are trying to help them by bringing in an Alternate Board, which looks like a good solution. The proposition is that this will be a watered down board – where small businesses can look to implement listing and corporate governance regulations over a phased-out period. By September, we plan to also issue regulations for equity crowd funding, which will be a boost for Fintechs in Pakistan.

BRR: In the end, SECP is sitting on a treasure trove of data but it does not share the numbers publicly, unlike the SBP that shares data in quite detail. Are you going to look into this issue?

FS: We are clearly moving in that direction. Under project LEAP – Leading Efficiency through Automation Prowess, we are using an upgrade of IT systems and processes to enhance efficiency. Once this project gets going, we should be able to offer more data points to the general public. Among other things, LEAP will also offer online supervision of our regulatees.