Strict regime for SL’s money brokers

Stringent rules for errant money brokers particularly fit and proper guidelines for senior staff in these companies were recently promulgated by the Central Bank (CB), all in the backdrop of the scandal over Perpetual Treasuries Ltd (PTL).

Conflict of interest and illegal trades are dealt with firmly in the new rules including banning the use of mobile phones and the need for all dealing conversations to be properly recorded, at issue that came to the fore in the drama surrounding PTL

Though the gazetted Money Broking Regulations, which repeal and replace the Money Broking Regulations No. 1 of 2013, were issued in March this year, it was issued as a direction or circular on June 18 as stated in the CB website.

Dealers and traders in the money market told the Business Times that while much of the regulations were similar to the previous rules, the most significant changes were in the ‘fit and proper’ criteria for directors and senior staff in money broking firms.

Rather than pumping US dollars into the market to reduce volatility of the rupee, the Central Bank (CB) is using a method called ‘moral suasion’ to intervene in the market.

Moral suasion is described as an act of persuasion in a certain way through appeals or even unwritten directives.

Dealers said CB officials have been visiting some dealing rooms of banks in recent times and observing trading patterns. “Sometimes they would ‘request’ dealers to trade or not to trade based on the movement of the local currency,” one dealer said.

The rupee was trading at Rs. 159 + on Friday.

Meanwhile the CB said it has extended the suspension of business of PTL “from carrying on the business and activities of a primary dealer” for a further period of six months from July 5 in view of current investigations against the firm.

“These provisions were not there earlier and appear to be designed to ensure ethics and a more disciplined market place,” one veteran dealer said, adding that recent revelations – during the Commission hearings on tainted Treasury bond issues – of a former director of a bank acting in collusion in primary dealings may have also triggered these new rules.

He said that it is believed that still some brokers are involved in front running (trading on a bogus claim) and other allegedly illegal activity.

Under the new fit and proper requirements, staff in money broking companies, including that of the chief executive officer, director or key management person, shall be fit and proper persons to conduct the activities they are responsible for, and shall have the requisite experience, qualifications and competence.

“No person shall function and participate at Board meetings as director or function as a key management person or chief executive officer or become a significant shareholder of an authorised money broking company until approval has been granted by the (CB’S) Director, Domestic Operations to do so after assessment of fitness and propriety,” the rules state.

The stringent regulations also cast a responsibility on the company reporting to the authorities (CB Director, Domestic Operations) reporting any suspicious activity or findings “to the effect that any CEO, director, key management person or significant shareholder is not a fit and proper person to hold office …”

It also stipulates that the director, CEO, key management person or significant shareholder of a money broking company is barred from holding these positions unless they possess academic or professional qualifications or effective experience in money broking, finance, law, business or administration or other relevant discipline.

Money brokers are required to divulge the names of the principals (the buyer and seller of a deal done by the broker) only when satisfied that both parties display a serious intention to transact while any suspicious or malpractices have to be reported.

Internal controls have also been tightened. Proper records of all transactions with clear documentary evidence, electronically or otherwise have to be maintained for a minimum period of six years while activities (transactions) has to be through exclusive tie lines. Tie lines are direct lines by the dealing room to clients (banks, etc).

Telephone conversation records (voice records) have to be maintained for not less than six years from the date of the telephone conversation while a stringent physical access control system in respect of the telephone conversation records must be maintained;

The use of private mobile phones by all employees inside the operational floors is barred under these rules.

Explaining rules on mobile phones, dealers said that mobile phones are prohibited since transactions cannot be recorded.

The rules also cover those who are barred from serving as a director, CEO or senior management of a money broking firm. They include people declared bankrupt, subjected to an investigation or probe in a criminal or civil case or professional association among others; found guilty in a criminal or civil offence; among other areas.