In the not too distant future when the world has returned to some normality (whatever that means in a post-COVID-19 environment), the NSE will complete its journey towards de-mutualisation and its current regulatory powers over the listing and trading of shares, listed companies and, Stockbroker will be transferred to NGX Regulation Limited (NGX) (the independent regulatory subsidiary of the NSE).
The transfer of NSE’s regulatory powers to NGX will address concerns about the conflicts of interest that might have arisen had the NSE, on de-mutualisation, retained its regulatory powers over its activities and Stockbrokers. The NSE would then have been in the interesting position of regulating itself as a listed company and other market participants whilst also seeking to make a profit. The NSE’s approach of transferring its regulatory functions to NGX is in keeping with best practice as leading stock exchanges such as The New York and the London Stock Exchanges respectively adopted this model on de-mutualising.
Sohow should NGX, regulate the NSE, the Nigerian Capital Market (NCM), and more importantly, establish its credibility when it takes over this critical responsibility from the NSE?
In our view, as regulatory and compliance specialists, NGX has 4 Must-Dos to establish its credibility and independence as a regulator. At the core of these Must-Dos is the adoption of an enhanced risk-based approach to regulation. A risk-based regulatory approach requires the NGX to focus the bulk of its regulatory activity(s) and powers on the medium to high-risk areas of the NCM rather than seeking to regulate all activities with the same intensity and effort. Given the limited resources available,(in common with regulatory agencies worldwide), it would have to adopt this approach to be more efficient and effective.
What are these 4 Must-Dos? They are:
1.Commission a thematic review(s), across a selection of Broker-Dealers of the regulatory issues listed below:
a) Quality of investment advice provided by Broker-Dealers to clients
b) Best Execution i.e. are Broker-Dealers buying and/or selling securities at the best possible price for their clients?
c) The depth and breadth of compliance monitoring undertaken by the Compliance Function of Broker-Dealers
d) Client money protection
2. Embrace Data-driven regulation
In addition to the thematic review, NGX should increasingly embrace and, become more data-driven in its regulatory approach. It should increase the depth and range of data collected from Stockbrokers Broker to include not only financial data but also conduct data e.g.
a) Operational errors and regulatory breaches.
b) The number of sales and/or advice provided by firms to clients and products or services sold.
c) The number of transactions or sales canceled by clients and reasons for cancellation.
d) The number of customer complaints and types of complaints.
3. Promote transparency of enforcement decisions
The current NSE has improved tremendously the enforcement of rules and NGX can improve on this by publishing the following details of enforcement actions against a firm:
I. Rules breached
2. How and why
3. How the breach was discovered
4. The role of senior management and the compliance function
5. Participants
6. Sanctions
Publication of these details would enable participants to learn the appropriate lessons from them and understand the rationale for the sanctions.
4. Client Classification
Lastly, NGX must introduce a system of client classification (similar to how the NSE has classified Stock Brokers into 4 broad categories) that requires stockbrokers to classify their clients into 3 broad categories. These categories would be based on the client type i.e legal entity or individual, level of expertise or knowledge, and whether the client is a financial services institution. The protection afforded to clients would depend on how they are categorised with retail clients i.e. individuals having the highest level of protection. Clients should also be allowed to request a lower or higher level of protection subject to appropriate warnings. A system of client classification is critical to the successful implementation of an enhanced risk-based regulatory approach.
Asthe relationship between the NSE and its key stakeholders become fundamentally altered by its de-mutualisation, NGX’s role as a neutral arbiter will assume greater importance. Thus, the adoption of our recommended measures will contribute to establishing its credibility as a truly independent and forward-thinking regulator.
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