12 February 2018

East Africa: Boon for Victims of Rogue Stock Brokers

East African Community member states have agreed to introduce a uniform compensation rate of $1,000 for small and retail investors who lose cash when stockbrokerage firms collapse.

This marks a policy shift seeking to bolster activities in the capital markets and help governments raise funds for infrastructure.

The compensation, however, excludes large and institutional investors such as banks, insurance companies and pension funds, whose claims are usually met from the assets of the troubled firms during liquidation.

Tanzania's Capital Markets and Securities Authority's current maximum compensation stands at Tsh100,000 ($44); Kenya's Capital Markets Authority limits it at Ksh50,000 ($500) while Uganda has no ceiling, as its Capital Markets Authority's board has power to determine how much an investor should be compensated.

The resolution passed by the EAC Council of Ministers is binding to all investor compensation funds in respect of the securities markets within the bloc. It aims to protect investors and reduce delays in the payout of investor claims.

Those who suffer losses from a broker's failure to meet their contractual obligations are compensated out of the Investor Compensation Fund set up by the respective capital markets authorities.

The region requires more than $100 billion over four years to bridge infrastructure funding gaps and wean it from reliance on volatile domestic revenues and expensive loans from development financial institutions.

East African governments are now turning towards regional capital markets and public-private partnerships to fund mega projects.

Kenya's stock market has seen its fair share of trading malpractice, which saw the collapse of three stockbrokers in quick succession between 2007 and 2009: Francis Thuo and Partners collapsed in early 2007, Nyaga Stockbrokers in 2008 and Discount Securities in 2009.

These collapses shook investor confidence, leading to a mass exit of small and retail investors from the market.

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