Islamabad and Lahore-based brokers on Tuesday appreciated the new brokers regime (NBR) for securities brokers by Securities and Exchange Commission of Pakistan (SECP), saying it was their long-standing issue which will help in reducing custody related risks.
Senior brokers of Islamabad welcomed the new regulations and stated that the new regime will help standardizing the brokerage industry. Over the preceding years, the capital market in Pakistan has shrunk significantly in terms of size and liquidity. Moreover, a declining trend has also been observed in the number of investors in the market. This has created liquidity crunch for the brokerage industry which is under pressure to preserve its commercial viability. Further, considering swelling compliance requirements especially in the context of AML/CFT, it has become increasingly difficult for a substantial number of brokers, which are insufficiently capitalized, to ensure compliance with the law.
A senior Islamabad based broker Zahid Latif Khan informed that well-capitalized brokers will be in a much better position to expand their branch network, increase investor outreach and enter into collaboration with other market players to explore new distribution channels. With an expansion in outreach, market depth would increase creating demand for issuance of new securities.
Talking to Business Recorder here on Tuesday, two Islamabad based brokers Mukhtar Hussain Jaffery and Brig Fateh Khan Malik (retd) stated that globally high standards are prescribed for the financial sector particularly where institutions handle public money. However, up till now a one-fit-all approach was practised in the brokerage industry where all brokers retained custody of investor assets regardless of their capacity and were subject to all regulatory requirements. The new regime would increase alignment of regulation tuned to the business activities of brokerage houses.
Brig Fateh Khan Malik (retd) stated that one of the foremost benefits of the new broker regime is that entry barriers for market participants have been significantly reduced for Trading Only (TO) brokers from Rs 35 million to Rs 15 million. This would encourage an increase in the number of TO brokers in the industry. Further, with reduced compliance requirements for TO brokers, they would be able to focus more on their business side and client acquisition thus increasing investor base.
From Lahore, Dr Yasir and Asif Baig Mirza elaborated that by adopting a risk based approach, brokerage houses which retain custody of investor assets shall be subject to enhanced financial resource and governance requirements. This would address the issue of custody default risk in the market, enhance regulatory compliance in the industry particularly in relation to AML/FATF requirements and improve investor confidence. It is also expected to bridge the regulatory compliance gap while increasing commercial viability of brokerage industry.
Asif Baig Mirza stated that due to an improvement in governance standards in the brokerage sector, perception of the Pakistani capital market would increase amongst foreign investors. It is expected that this would result in increased foreign investment enabling sustainable growth of the market and the economy.
Explaining advantages of new regime, Umer Abbasi, a senior broker stated that the explained that a more stringent custody regime will result in a secondary market with financially sound brokers with more robust internal controls and compliance regime.