Regulator wants it spent on investor protection, brokers prefer to keep it

Stockbrokers are at loggerheads with the securities regulator over the utilisation of interest income earned from investors' idle funds kept in a bank account namely Consolidated Customer Account (CCA).

The Bangladesh Securities and Exchange Commission (BSEC) wants the money to be spent over investors' protection and financial literacy programmes. It has already sought public opinions on its proposal that a quarter of the interest amount in the CCA of a broker should be transferred to the Investors' Protection Fund and the rest should be available for raising awareness among investors about financial matters that affect economy and investment.

Brokers, however, are against the proposed usage of the fund generated out of interest income from money deposited to the CCAs for trading in the secondary market. They want restoration of the provision, which was in place before 2021 and which did not require the intermediaries to distribute interest income to investors or divert the fund to somewhere else.

According to the existing rules, brokers are supposed to divide interest income among their clients. Before 2021, stockbrokers could avail of the interest income from the idle fund in their CCA.

"The stockbrokers will go into a legal battle if their opposition [to the BSEC proposal and the existing rule] is not considered," said President of the DSE Brokers Association (DBA) Saiful Islam.

More than 200 brokerage firms submitted their opinions against the BSEC's proposal, according to the DBA.

Mr Islam said stockbrokers are to bear the cost of distribution of interest income to investors and that the management of the fund in that case is not cost effective. The second concern is that even a minor mismatch in the distribution of interest income turns into a matter of non-compliance in a regulatory scrutiny.

In February 2021, a provision in the Securities and Exchange Rules, 2020 was brought into effect, which imposes a proportionate distribution of net interest income (interest income minus bank charges) to brokers' clients.

And the undistributed amounts, if any, shall be transferred to the Investors' Protection Fund of the exchanges within 30 days of the closure of each fiscal year.

Stockbrokers are yet to comply with the 2021 provision and they are now opposing the proposed changes to it as well.

Meanwhile, the deadline for submission of opinions expired on May 12.

BSEC spokesperson Md Abul Kalam said the final decision will depend on public opinions.

On the proposed amendment, he said investors are the owners of the money deposited into CCAs. The Protection Fund has helped settle a portion of clients' claims after fund embezzlement by some rogue brokers. The fund could better support claim settlements if it can be enlarged with interest income.

"That's why the securities regulator proposed a contribution of interest income in the [Protection] Fund," Mr. Kalam said.

Moreover, investors will have an improved understanding about their investment status if literacy programmes are organised with money made available for the purpose.

"The stockbrokers will then just submit a report on utilisation of the income for awareness programmes," Mr Kalam added.

On the opposition to awareness programmes, the DBA president said there are around 600 stock brokers under the exchanges.

The number of awareness programmes will be at least 1,200 if each broker holds at least two programmes per year. "Are there sufficient resources for such a number of awareness programmes?"

Moreover, brokerage firms find no resource persons to hold programmes outside Dhaka. The Bangladesh Institute of Capital Market (BICM) and the stock exchanges are dedicated organisations for such campaigns. Also, the common resource persons for awareness efforts are officials of the Bangladesh Securities and Exchange Commission (BSEC). "BSEC officials will intensify investigations into brokerage firms if they are not invited as resource persons," said the DBA chief.

Regarding the transfer of interest income to the Protection Fund, he said the regulator should look at practices in other countries.

To insist that the proposal is not rational, Mr Islam also gave a reference to IPO (initial public offering) proceeds. "Such funds are also kept in a bank account for a certain period. Do the companies distribute the interest income earned from IPO funds?"

The proposed changes will pave the way for ransoms in regulatory probes into brokers' compliance, added the head of the brokers' association.

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