Kenya’s Capital Markets Authority (CMA) has proposed a comprehensive review of rules governing the operations of Collective Investment Schemes (CISs) to check dominance of commercial banks.

The review of the Collective Investment Schemes Regulations, 2001, also seeks to introduce a harmonised criteria of valuing assets held by CISs in line with international best practices.

According to CMA, the review will ensure transparency in the management of investments and reporting of the schemes’ performances to the regulator.

The EastAfrican has learnt that the regulator and the stakeholders have agreed to expand the eligibility of trustees of unit trust funds to non-banking trustees such as accountancy and law firms.

The current regulations, which have been in operations for close to two decades, prohibit non-bank and non-financial institutions from acting as “trustees” in collective investment schemes.

However, concerns have emerged over the fees and capacity of banks to discharge their functions as trustees effectively.

As a result, CMA with the support of Financial Sector Deepening (FSD) Africa, has hired a consultant to review the regulations, and make them robust and responsive to market dynamics.

“The law allows commercial banks licensed by CBK to be trustees and that comes with some advantages and disadvantages because you know banks will charge you for their service,” CMA Chief Executive Wycliffe Shamiah told The EastAfrican.

“Normally, the collective investment schemes will complain about the fees they are paying. We have had people saying please relax that requirement because it says that either you are a commercial bank licensed by Central Bank or a financial institution, then you will then need to get an approval from CMA.

‘‘The problem is that when you look at the definition of a financial institution, normally you go back to where banks are. We have now tried to look at other entities that can offer this kind of service of trusteeship.”

A CIS is an investment vehicle where investors pool their resources together to invest in various products such as equities, bonds or any other approved money market instruments.

These schemes are managed by fund managers and are mostly set up as unit trusts with the holdings in such a scheme known as units.

Collective investments

A unit trust trustee is corporate body appointed to safeguard the assets of investors in a collective investment scheme by monitoring the operations of the schemes to ensure they are run in line with the laid down rules and regulations.

In Kenya there were 24 approved CIS made up of 92 funds as at March 31 of which 19 were active and five dormant, according to a market report by Cytonn Investments Ltd.

The CMA’s 10-year Capital Market Master Plan (2014-2023) had projected that assets under management in CISs to increase from Ksh40 billion ($400 million) in January 2014 to Ksh132 billion ($1.32 billion) in 2020 and Ksh220 billion ($2.2 billion) in 2023.

However, by June assets under management in CISs were estimated at Ksh88 billion ($880 million).

Investor confidence

“We recognise that the development of a strong asset management sector is critical to creating investor confidence that boosts deepening of the capital markets. By putting in place a robust legal framework it will spur increased interest and participation by investors in Collective Investment Schemes,” said Mr Shamiah.

“While CISs have traditionally offered avenue to retail investors with minimal investment capital to benefit from professional asset management, a need has emerged for sophisticated products such as pooled funds that are well managed and currently not available in the existing asset classes. There are also calls for greater flexibility and risk/investment strategy to determine portfolio allocation among asset classes.”

In September, CMA issued new guidance to fund managers of CISs on valuation, performance, measurement and reporting.

Material harm

The guidance, which takes effect on January 1 2021, is expected to entrench international best practice in the capital markets by standardising investment performance measurement and presentation by CISs.

Under the guidance, fund managers will be required to establish comprehensive, documented investment policies and procedures to govern the valuation of assets held by a CIS.

The policies will identify the methodologies that will be used for valuing each type of asset and will clearly indicate how performance will be calculated, measured and presented.

Fund managers will also be required to have policies and procedures in place to detect, prevent and correct pricing errors that result in material harm to CIS investors.