What happens to your investment when your stockbroker collapses
African Alliance Group owned by the South Africa based Toni De Castro family has announced that it is closing its stock brokerage division in Kenya at the end of June 2020 to focus on asset management.
The Kenyan subsidiary of firm with a presence in several counties across Africa, cited diminishing business at the Nairobi Securities Exchange and the need to capitalize on existing gaps in the market.
“The AAKIB Board, along with management, constantly reviews the business segments in which the company operates and as a result of the structural decline in the agency trading model in both the local and global financial markets, has decided to divest from its stockbroking activities,” the firm said in a statement.
This is the fifth stock brokerage firm to collapse in the country in under two decades. Between 2007 and 2010, four brokerage firms collapsed with millions of shillings in investor funds.
Francis Thuo and Partners in 2007, Nyaga Stockbrokers in 2008, Discount Securities Limited in 2009, and Ngenye Kariuki and Company in 2010, were all placed under statutory management either because of failure to meet client obligations, non-compliance with regulatory requirements, and liquidity problems.
Stock market brokers exist to make stock trading a simple for ordinary Kenyans, but what happens when a brokerage firm hits a headwind? Say, when it is put under statutory management or declared bankruptcy or even closes in a huff like in the case of African Alliance Securities?
“When a broker ceases operations for whatever reason, the securities held by such a broker on behalf of the customers are ordinarily transferred to another registered broker who is operational,” says David Muriithi, an Economist and Researcher at GDC. “Customers are then notified of the new broker to whom they should transfer their CDS account details.”
This, however, has not always been the case. It was only until 2015, after a prolonged court battle when the Capital Markets Authority (CMA) amended the law. Investors were previously only entitled to a maximum of KES50,000 in compensation when a stock brokerage collapsed. They would then wait for the firm to be liquidated for any subsequent payout.
“Compensation of investors is done through the Investor Compensation Fund, established for compensating investors who suffer a pecuniary loss resulting from the failure of a licensed stockbroker or dealer to meet their contractual obligations. An investor can receive up to a maximum compensation amount of KES50,000 as provided for under the law,” Paul Mwaura, Former CMA CEO said in a 2015 press statement.
Today, brokerage firms are required to separate their accounts from their clients’ accounts.
“You can’t lose money when a brokerage firm fails,” says Johnson Nderi, Manager, Corporate Finance and Advisory at ABC Capital Ltd.
“CMA requires that brokers keep clients cash accounts separate from the company accounts. This is to ensure that client’s money is not spent on brokerage firm’s day-to-day operations.”
The biggest challenge is moving shares, which can be a tedious process. The affected customers are required to fill in 4A4B forms to move their shares from the collapsed firm to another firm.
The share transfer process from one brokerage firm to another is bureaucratic by default and involves multiple stakeholders to guard against any fraudsters.
“There are four parties in the transfer of shares. These include the account holder, the existing broker, the destination broker and the CDSC,” Mr. Nderi clarified.
“Stock brokerage firms only use your money to trade, but they can’t move the money outside the account,” Tony Watima, a Nairobi Based Economist told Moolah. “Customers are still in management of their CDS account, so customers can still move to a separate stock brokerage firm. The customers are safe.”
In any case, CMA requires registered brokers to keep the minimum capital requirement to ensure that customers’ securities are safe in case of any collapse. So the customer securities are always secured by such net capital requirement.
African Alliance will do a cash refund to clients and those with holdings will be moved to a broker selected by the company and licensed by Capital Markets Authority.
The company has advised its clients to urgently reach out and transfer to broker of their choice and also select their preferred means for cash refunds.
When you choose your broker always keep regular contacts with him and ask him about the market scenario.
African Alliance Securities, has had a bearish past 12 months. In April 2019, it exited the Uganda bourse and transferred the client’s account to UAP Old Mutual Capital after 15 years of trading in the Uganda Stock Exchange.
In May, African Alliance Botswana Securities, another subsidiary of African Alliance Group and brokerage unit in Botswana was suspended by Botswana Stock Exchange and Central Securities Depository Botswana from trading and other brokerage services.
Kenya has 24 stock brokerage companies registered by the NSE. Most of these firms registered a decline in brokering commissions as the economy slowed down in 2019.