Lawmakers are expected to question Capital Markets Authority CEO Wyckliffe Shamiah on Thursday over regulatory failures that have led to the loss of over Sh36 billion of investors’ money.
Also required to appear before the Finance and National Planning Committee of the National Assembly is CMA chairman James Ndegwa.
“The committee deliberated and resolved to invite you for a meeting to discuss the regulatory issues,” National Assembly senior deputy clerk Jeremiah Ndombi says in a June 30, 2021 letter summoning the duo.
“You will be required to prepare a comprehensive report on the issues raised which should reach the committee on or before July 7, 2021.”
The letter is copied to National Treasury Principal Secretary Julius Muia, Mr Ndegwa and Garissa Township MP Aden Duale, who complained about regulatory failures at CMA.
Sh36.8 billion lost
A document presented to the House by Mr Duale last week claims that Kenyan investors lost Sh36.8 billion in the capital markets due to CMA regulatory negligence.
The losses, including the collapse of commercial banks with investors’ money, Mr Duale claimed on Thursday, are equivalent to half of Sh72.59 billion in customer deposits held by Family Bank as of March 31, 2021.
“In the recent past, the CMA has failed to regulate the capital market industry, leading to the recent failures including the proliferation of unregulated and illegal investment funds and loss of funds by innocent investors,” Mr Duale said in the document.
The Capital Markets Act mandates CMA as a regulatory body to supervise, license and monitor the activities of market intermediaries, including the stock exchange and the Central Depository and Settlement system, among others licensed under the law.
CMA also facilitates the mobilisation and allocation of capital resources to finance long-term productive investments.
But Mr Duale claims the authority has failed and wants the committee to get to the bottom of the issues that raise questions about the effectiveness and efficiency of CMA in regulating the capital markets industry.
The committee, led by Homa Bay County Woman Representative Gladys Wanga, will determine instances that point to CMA’s failures to regulate capital markets effectively “in total disregard of the Capital Markets Act”.
Internal financial fraud
Mr Duale notes that in 2005, Imperial Bank allotted Sh2 billion to bondholders even as it was dealing with ongoing internal financial fraud.
The bank, Mr Duale claims, eventually collapsed with investors’ money under CMA’s watch.
The document also claims that in 2005, CMA cleared Chase Bank to issue Sh4.8 billion in bonds before it subsequently fell into receivership with the investors’ cash and was later sold to SBM Holdings.
This, Mr Duale says, resulted from poor regulatory oversight by the capital markets regulator.
The committee is also required to investigate CMA’s commissions and omissions in the collapse of Nakumatt supermarket chain.
Mr Duale says that in 2018, the retailer issued Sh4 billion in commercial paper and thereafter defaulted, resulting in write-offs by banks and suppliers.
He also notes that in 2019, Cytonn issued a Cytonn High Yield Solutions with “an attractive” 18 percent returns per annum and in the process, collected over Sh10 billion from investors.
Interestingly, and as if Cytonn operated under an unregulated environment, only last week, CMA issued a statement saying that Cytonn is not a licensed and approved entity.
Though the Capital Markets (Securities) (Public Offers, Listing and Disclosures), Regulations restrict private offers to 100 members, the Mr Duale says Cytonn’s High Yield Solutions product has an unregulated “but ironically approved collective investment vehicle of 4,000 members, who had invested Sh10 billion”.
Mr Duale also argues that despite the requirements of the Capital Markets Act on disclosure obligations, Cytonn offered to investors two products with similar names when one had no regulatory approval.
The Act requires that a fund manager or investment adviser fully disclose to any client or prospective client the nature of the advisory service offered or fees to be charged in such services.
In all its undertakings, Mr Duale claims, Cytonn continued to promise “innocent Kenyans” a return of 18 per cent in the Cytonn High Yield Solutions “under the watchful eye of CMA”.
This is notwithstanding that the Capital Markets Act prohibits investment funds from guaranteeing clients that a specific result will be achieved arising from the advice that will be rendered.
The committee will try to establish the number of all unregulated capital markets products and the investors in those products.
The committee will also establish the role of CMA in the proliferation of illegal investment funds in the capital markets as well as its effectiveness and efficiency in regulating the markets.
As lawmakers investigate the matter, CMA will be required to provide the number of firms penalised in the last five years and remedial action taken for investors who lost money.