Can we get capital markets regulation right?

Much is said these days about capital markets, with tonnes of exchanges taking place on social media. I applaud the contributors to the discourse. Most articles, however, tend to focus on playing God with the value of assets traded on the markets and the impact the trends the authors create will have on the future values. 

Little is said about the benefit or damage regulation has on the performance of the markets, and because it stays in place for years, if it is not beneficial, it damages the markets for a long time. 

The Initial Public Offering (IPO) and listing of MTN in 2021 and Airtel last year, have brought to light some issues with the law and regulation of capital markets. Other matters are simmering below the surface but are having deleterious effects on the markets in Uganda.

Currently, there are two efforts to amend the Capital Markets Authority Act. A Private Member moved the first effort a year ago, and the government, having seen the proposed changes, initiated another effort. The Private Member has asked for three other laws to be amended. These include the Companies Act, the National Payment Systems Act and the Securities Central Depositories Act. It must intrigue stakeholders that the government’s proposals are not expected to have anything in common with the Private Member’s bill.

The markets will want to know how we got to have such differing views about regulation of capital markets. There are many areas where such differences manifest. I will raise attention to three, which are fundamental and demonstrative of the failure to get regulation right. 

CMA Act 
The CMA Act provides for a ‘regulated person’, who could be an individual or a corporate entity. This means that it is persons who should be regulated in the capital markets. Some sections of the law and the regulations currently in place have tended to provide for regulation of persons, assets, and activities, yet the law does not define a regulated asset or a regulated activity. 

Those years when financial regulation was about assets and activities stymied the markets and are in the past. The Private Member’s Bill seeks to ensure that the provisions of this law and the regulations are consistent with the defined target of regulation. 

The CMA Act of 1996 and the 2016 amendment mandate and require the CMA to issue principles for the regulated parties. The CMA has never fulfilled this requirement of the law. The movers of the Private Member’s bill have proposed that CMA issue principles to guide its own operations and approach towards regulation, believing that principles for the regulated parties are internal to them, informed by the market and should not be legislated. 

However, with clear principles espoused by the regulator, a regulated party would only need a few modifications to complete its own set. The government proposals do not seem to reflect appreciation of how the proposed amendment would improve regulation.

The CMA Act of 1996 did not provide for approval of prospectuses, which was probably to mean that exchanges would approve. In 2011, it was amended and started leaning towards the CMA approving prospectuses. In 2016, a clause was finally inserted to give CMA approval powers. 

However, during the 20 years prior, issuers of securities would go to the CMA to seek approval, even if CMA did not have the approval power. A survey of 37 markets across the world revealed only 7 where the regulator approved prospectuses. Among those 7 are the worst performing markets in that selection. 

Proponents have argued that CMA must approve that single transaction between the securities issuer and the exchange to fulfil its investor protection mandate. While it clamours for that single transaction, CMA never gets to see the millions of transactions between investors arising from it. CMA’s intervention is therefore in a realm where the beneficiaries of its protection are not. 

The CMA Act also provides for the exchange to approve prospectuses. Both the CMA and exchange approvals are based on the rules of the exchange that are approved by the CMA. The movers of the Private Bill indicate that the CMA’s approval duplicates the approval rendered by the exchange, which is the transacting party, while its rejection conflicts with the exchange approval. 

Some have argued that CMA regulations apply, while others have indicated that CMA does not regulate at two levels and issuers are not regulated persons, as they are screened from the regulator by the exchange, which is regulated. 

Without principles, a regulator risks running a rudderless show. If we had principles, the two critical issues of the target of regulation and the party that approves prospectuses would not be the subject for debate.

 Joseph S. Kitamirike is the founder and chief executive officer of ALTX East Africa Securities exchange.