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Revenue Drive or Market Development - Making Sense of SEC's New Circular to CMOs

Capital Market	2203 VIEWS
Capital Market
2203 VIEWS

Saturday January 22, 2022 / 22:27 PM / by TheAnalyst / Header Image Credit: SEC

Proshare Nigeria Pvt. Ltd.

The recent announcement of a hike in the registration fees of capital market operators (CMOs) could be a major test for the Nigerian Capital Market or the start of the redefinition of the relationship between Trade Groups/SROs and their market regulator, the Securities and Exchange Commission (SEC) Nigeria.

This will be a major test for the Nigerian Capital Market or it would signpost the start of the redefinition of the roles and relationship between the regulator and Trade Groups who it is understood, have asked members to hold payments of annual registration fees to allow for follow-on engagement with SEC Nigeria on the controversy the recent hike has generated.

While this is considered a good first move, it precipitates the need for a bigger conversation which must be held - one that properly contextualises the focus, role and engagement ethos within the execution of a growth-focused capital market master plan.

Analysts have concluded that a bigger conversation must be held over the future of market development, one that properly contextualizes the role and adopted engagement principles within a forward-facing capital market master plan (CMMP).

Market watchers have observed that a similar conversation was held in 2009, where it was agreed that a capital market renewal fee and rate rise be jettisoned as a matter of consensus in favour of a market-development led regulatory stance. It was noted that this was the driver for the creation of the Securities and Exchange Commission (SEC)- led quarterly Capital Market Committee (CMC) meeting designed to serve as a bridge builder and consensus enabler on matters/issues of mutual market concern.

The reintroduction of renewal fees in 2021 was therefore stoutly resisted by Trade Groups upon its announcement; further to which the commission's argument for it's desire to use same to help in revalidating its database of active CMOs was reluctantly accepted. If that was the case in 2021, analysts have questioned the basis for the fee increase in 2022.

When Bad Policy Inflicts Burning Pain

The current 2022 fees have attracted such resistance not only on account of the above argument but also the perception that the fees were introduced with utmost arbitrariness and high-handedness, devoid of further consultation or opinion sampling. The steep and even prohibitive increases go further to worsen the trust issues between parties including the questioning of the validity of the current rule-making process which is now seen as draconian and hostile to market progress.

Firstly, the regulator should not be a revenue-generating agency for the government. Its primary responsibility should be to see to the orderly transaction of legitimate capital market business. In addition, it should provide regulatory guidance supporting the growth and development of the market rather than become a tax and spend government agency. A Shylock oversight agency in the long run does nobody any good. Cutting one's nose to spite one's face appears brave but it does very little, if anything, to achieve anything meaningful. Charging CMOs exorbitant renewal fees on the back of a COVID-19-induced downturn in business is bad regulation.

The revised Nigerian Capital Market Master Plan (CMMP) to be relaunched soon, has as part of its growth objectives, the reduction of transaction costs compared to other markets such as Malaysia and Brazil. For inexplicable reasons, SEC Nigeria has chosen to kick a ball between its own posts by contradicting the intentions of the plan and booting CMOs in the gut.

Funding for the SEC at this fragile stage of market development aside from enforcement revenues should be a top priority of the government. Unfortunately, it appears that the federal lawmakers have little understanding of the consequence of high-cost capital market transactions and the damage it could do to attracting foreign capital into the market. Economists recognize this as the classic case of the "Cobra Effect" or the law of unintended consequences.

Second, coming out of a recession (2020-2021), devaluation, declining foreign investment (capital importation has dropped to US$17bn in 2021 from an average of US$21bn over the previous three years) and a COVID-19 pandemic, the policies of the government should be geared towards revenue increases from sectors where growth is evident. The areas the government should turn its sights towards are venture capital and private equity where the new fee hike inadequately reflects.

The rather sensitive buy and supply side of the public market is barely N4trillion by current estimates, a disappointingly small size comparatively; and a relatively small size when compared to other emerging markets, the relatively small total buy-side value reflects comparatively lean trading activities amongst domestic stakeholders/trade groups suggesting no reasonable cause to raise registration fees at this moment. The eventual passing of such costs to investors is bound to drive them further away into the hands of the unscrupulous Ponzi schemes which the market is yet struggling to contain.

Thirdly, to improve SEC revenue; the time-tested practice of focusing on enforcement (sanctions, charges, restitutions etc. based on deterrence and not discretion), guided by a Standard Operating Practice (SoP) would be more appropriate. A Standard Operating Practice (SoP) on sanctions, charges and restitutions that are not premised on discretion but the principle of deterrence will give the necessary focus that will equally ensure that the regulator, with the support of the legislature, gives teeth to bite in enforcing sanctions on entities involved in the growing Ponzi industry beyond 'caveat emptor' announcements.

Lastly, it is imperative that the current focus on revenue drive by the regulator should have its roots deeply in the objective of market orderliness rather than being unnecessarily punitive, and this should be supported by the lawmaking organs to ensure the ISA 2007 is brought up to date in sync with the evolving world of highly innovative investments obviously currently eluding the market.

Closing Remarks - In Praise of Engagement

The market is better off embracing engagements than pronouncements that exposes the information and coordination gaps within our regulatory system in achieving the capital market masterplan.

Whilst it is understandable that the stalemate originates from inadequate fiscal funding, the SEC could have handled the situation better by engaging market operators in a meaningful discussion while it fights its battle for increased federal funding. The SEC loses its moral and regulatory high ground when it relies on private sector funding of its activities.

The reliance on the private sector to keep its operations working would mean that the SEC would be mindful in taking fair and firm market decisions where it affects actors that contribute significantly to its operational sustainability. Exposing the SEC to such demeaning position weakens its market authority and defeats its purpose of existence. Market regulatory institutions such as the SEC are too important to mobilizing domestic capital formation to be left to the whims of self-promoting and self-absorbed capital market operators.

The signals this issue is sending to the world is not the best especially if the Trade Groups come to a position that it is indeed in the best interest of the market to legally challenge SEC's stonewalling and this would be most unfortunate in the scheme of things to genuinely lift the market as everyone expects.

We welcome comments and encourage such to be sent to research@proshareng.com