January 22, 2020 (MLN): The Securities and Exchange Commission of Pakistan has found itself on the receiving end of some serious flak, owing to the proposed amendments made by it to the brokers’ regime.

For the uninitiated, the SECP had earlier made changes to the existing brokers’ regime, wherein the stock brokers were divided into three main categories. Most of these amendments were stern in nature, and revolved around compliance to the conditions put forth by Financial Action Task Force.

Immediately after the news of changes in brokers’ regime surfaced, the small sized brokers were the first ones to express their displeasure over it. According to the media reports, these brokers felt that creation of divisions would only result in the concentration of market in the hands of large brokers.

To jointly convey their dismay over the proposed amendments, the PSX Stockbrokers’ Association sent out a letter to the Prime Minister Imran Khan, Advisor to PM on Finance and Revenue Dr. Hafeez Shaikh and Minister for Planning and Development Mr. Asad Umar.

The Stockbrokers’ Association, in a rather desperate attempt to express the intensity and severity of the matter, started the letter off with a red tinted, large writing that said ‘FAIR COMPETITION UNDER SERIOUS THREAT IN CAPITAL MARKET AND CREATION OF MONOPOLIES TO THE DETRIMENT OF INVESTORS’.

The letter stated that the division of stockbrokers under the proposed amendments would trample the Constitutional right of businesses. Elaborating further on the issue pointed out earlier, the letter stated that the concentration of risk in a few hands was against the golden principle of risk management, and due to the risk in some few hands, Stock Market will be at verge of collapse.

“The investors / clients will be subjected to deal with handful of brokers. It will create a monopolistic environment in the Stock Market. Clients are being served with the different levels of services in the present situation as per their comfort level with their brokers. The new regime will ultimately kill the investor base due to the monopolistic environment” the stockbrokers added in their letter.

The Stockbrokers’ Association also went on to oppose the view that these amendments shall ensure that the custody of customer assets is allowed to brokers with sufficient capacity to meet the requisite level of compliance.

“If the object of the Regulator is to safeguard the assets of the clients only, the same could be achieved without putting 90% of the brokers out of business and simply by making opening of an investor account mandatory by the clients and letting the clients have their sale proceeds through DPS. The proposed Broker Regime if implemented as it is, without any meaningful consultation with the actual stakeholders the Capital Market may suffer an irreparable loss which all of us may later, regret” the report said.

“Participants at Capital Market are fully documented and so are their clients. Client’s assets in the custody of broker stay segregated from own assets of the broker 24/7” it further added.

Concluding the letter on an equally dramatic note, the Stockbrokers’ Association wrote “SAVE THE PAKISTAN’S CAPITAL MARKET AND BROKERAGE INDUSTRY”

However, the CEO of First National Equities, Ali Malik differed on the view that amendments to brokers’ regime would put stock market on the brink of collapse. ‘Stock market volume is controlled by forces other than these small brokers, so it will not really collapse the market as such’, he said.

When asked if SECP should reconsider its decision following the strong criticism received from stockbrokers, Ali Malik noted that SECP should think again in order to avoid any litigation that might start between the brokers and its regulator.

Seeing the concerns of the small sized brokers as legitimate, he said that if this regime is put in place, small brokers will vanish in 2 years’ time.

The outrage amongst small brokers that has been created by this regime is quite understandable, as it has put a big question mark on the future of these people. If the role of the small brokers is restricted to just forwarding trades for clearing to the clearing brokers, then what is the possibility that the need to have smaller brokers shall exist, as the clients may directly engage with the big / clearing brokers?

To this, Ali Malik said, “When there will be no small brokers left, then automatically all the clientele will go to big brokers”.

The CEO of Spectrum Securities, Ahmed Nabeel also had a similar stance on the matter, as he said that the regime will refine the Brokerage Industry and give a Corporate Image of Brokerage Houses amongst Investors.

‘The regime will also enforce the Brokers to strengthen their Back office and Front Office, which will help in protecting investor confidence and assets. However, there should be a flexible condition on qualifications of the CFO and Internal Auditor, as we don't think any qualified CA will be happily willing to work in Brokerage Industry’, he added.

Further adding to the point, he believed that since the SECP had already altered the regulations in a much flexible manner, there was no room for any reconsideration.

When asked if the small brokers were putting their interests in the forefront, the CEO of Spectrum Securities said that most of the small sized brokers who are raising concerns are doing Proprietary Business, hence, their concerns about having a stronger back office team are not legitimate.

Another medium sized brokerage house, on the condition of anonymity, replied that clearing members should not be providing brokerage facilities as it will result in a conflict of interest and other than that the smaller brokers have no other objection.

Similarly, a renowned brokerage house that wished to remain anonymous, stated that while the amendments may impact the small sized brokers the most with their role being eliminated with the passage of time, the changes would nonetheless result in better governed entities.

On being contact by the team of Mettis Global to share their perspective on the matter, some of the bigger names within the brokerage industry chose to stay mum.

While the views and opinions of the above-mentioned brokerage firms, most of which classify within the large-sized category, were more or less the same, the observations of medium and small-sized brokerage firms on the proposed amendments were highly contrasting.  

The CEO of Rafi Securities, Naeem Rafi held that the new regime would indeed put the stock market on the verge of another downfall, and that SECP must reassess its decision to create divisions within the stockbrokers.

The CEO of Merchant Securities, Afroz Merchant had a rather intense view on the subject, as this is what he had to say, ‘In my opinion, if God forbid this scheme is launched, 170 out of the 200 brokerage houses along with their staff will be wiped out in the first phase. And in the second phase, entire capital market along with surviving 30 brokerage houses and their staff will also collapse. Hence, 72-year old stock exchange and only exchange in Pakistan – PSX along with remaining 30 brokerage houses and their will cease to exist as well.’

Providing the rationale for this viewpoint, he told Mettis Global that no client would like to trade with one broker while keeping cash and shares with another broker. Hence, 100 broker only category brokerage houses would remain only on paper. Hence, in reality all 100 brokerage houses will surrender their licenses to PSX.

Joining in the bandwagon, the CEO of Darson Securities, Malik Dil Awayz Ahmed also gave his two cents by stating ‘When we talk about investor base in Capital Market is limited to less than 250,000/- customers, restricting small brokers (which are also marketing agent of Capital Market) will make it hard to increase investor base with fast pace. So all stakeholders must be on board irrespective of size to make our Capital Market more robust, accessible and attractive.’

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