Background to the conduct of Inspections
The Capital Markets Authority (CMA) has a statutory mandate by virtue of Section 20 of The Capital Markets Authority Act to inspect the books, accounts, documents and transactions of a stock exchange, a broker or dealer or an investment adviser. This is conducted on an annual basis by the Market Supervision Department so as to assess compliance with applicable laws, regulations, codes of conduct and best practice standards, evaluate internal control systems and appraise business development efforts of these licensed persons. The approach taken is a risk based supervision approach which focuses on the identification of potential risks faced by a business and the assessment of controls in place to minimize and mitigate those risks. At the end of each inspection, a summary of findings is prepared within a report for each licensee detailing key areas that they need to address.
What we do
Each licensed person is inspected in the following ways;
- On-site inspections – Both planned and ad hoc
- Off-site inspections such as trend analysis and compliance reviews
- Tracking of new developments
The most common form of inspections is the on-site inspection which involves members of the Market Supervision team physically being present at the business premises of the licensed firms. Most of these are planned and the licensee is informed ahead of time of the Authority’s intention to inspect their premises and/or books of accounts. An average inspection is conducted between 1-2 working days and involves collection of information and interviews with key staff members so as to understand the overall performance of the licensed firm within the period of inspection. The benefit of these inspections is that they provide the most timely, accurate and reliable information to assist the Authority in carrying out its supervisory role.
Ad hoc inspections may however be carried out where the Authority shows up at the business premises of the licensed firm, without prior notification to the licensee. In the year2014/2015, the Authority conducted twenty two (22) planned inspections for the licensed brokers, fund managers, investment advisers and trustees under collective investment schemes as well as the Uganda Securities Exchange.Approximately two (2) ad hoc inspections were conducted during that financial year.
Off-site inspections are also conducted by the team through the various trend analysis and compliance reviews of reporting requirements. Broker/dealers are required by Law to submit monthly reports to the Authority covering areas such as net capital, shareholders’ funds and working capital. Fund managers are also required by Law to submit quarterly assets under management reports to the Authority. This information is reviewed by the Market Supervision team who develop a trend analysis to track performance of these businesses and give explanations to any significant changes in the performance curve. By tracking these reports, the Authority is improving compliance, preventing fraud and monitoring risk.
The team also conducts inspections through tracking of new developments. Each licensee is required to notify the Authority on key changes to the business such as the appointment/dismissal of a key staff member.
Why we conduct inspections
Generally speaking, the inspection process involves the identification, management, measurement and oversight of various business risks that form part of a firm’s internal control structure.The CMA is the statutory body created to provide such oversight to ensure that investors’ interests are protected. We have a statutory mandate pursuant to Section 5 of the CMA Act to create, maintain and regulate a market in which securities can be issued and traded in an orderly, fair and efficient manner.As a result, the carrying out of inspections gives investors the satisfaction to know that their interests are protected and that the Authority has oversight of the market intermediaries and their operations. The results of the inspections are used to inform rule making initiatives, identify and monitor risks, improve industry practices and pursue misconduct.
What we look for during inspections
Our priority areas are summarised as;
- Examining whether market intermediaries are providing advice, products and services to investors that are consistent with applicable laws, rules and regulations;
- Assessing issues related to internal and market wide risks and
- Analyzing performance of licensed persons to understand key trends and how these would affect investors funds
What we are finding
During the inspections, we have found a number of issues around corporate governance (e.g. lack of separation of ownership and control, Board meetings are only once a year, lack of a board manual, Board agenda is not comprehensive, Lack of Board oversight on audit matters, lack of independent directors and gender balance on the Board and presence of an unbalanced board), inadequate client checks and balances(e.g. inadequate KYC information and procedures, lack of AML reporting,comingling of client funds, no risk assessment carried out for the investor,source of funds not indicated on order forms and inadequate complaints handling procedures) and inefficient internal controls (e.g. dual roles played by the business development manager and compliance officer, low staff members and high turnover, back-ups are not tested, lack of procedures to identify and manage conflict of interest, unclear business plan, failure to save key electronic records and ineffectively maintained information systems).
Going Forward - Paving the way for a more rigorous inspection programme
The focus of our inspections has shifted from a compliance based to a risk based approach. We therefore envision a more thorough and rigorous procedure that will be able to identify key risks and the controls in place to mitigate those risks. There is need to liaise more with other regional regulators so as to understand key operational similarities. In order to reduce the regulatory burden, the CMA needs to focus its inspections not on all market intermediaries but on the sample licensees that have a trend of poor performance and that are more averse to risk. This sample form of inspection will allow for a more detailed inspection that could last longer than a day. The Authority welcomes feedback on how we can better fulfill our function to create, maintain and regulate a market in which securities can be issued and traded in an orderly, fair and efficient manner.