Licensing – A Core Regulatory Function in the Capital Markets

Licensing – A Core Regulatory Function in the Capital Markets

A number of licenses held by the various capital markets intermediaries in Uganda including stock brokers,dealers, investment advisers, fund managers, collective investment schemes and their managers, custodians and securities central depositories will be expiring during the last quarter of this financial year (April-June 2019/20). Consequently,we expect that the intermediary firms, many of whom hold more than one type of license, will be applying for license renewal. The Capital Markets Authority (CMA) is mandated to license (or approve) firms or individuals to deal in the business of securities.

Essentially, regulation begins with issuance of an operating license (and in some cases, an approval). The regulator then has to supervise the licensed or approved entity by; (a) employing various surveillance mechanisms to ensure licensees are conducting themselves professionally and ethically, and (b) conducting onsite or offsite inspections to ensure that they continuously comply with the requirements for which they hold a given license (continuous licensing obligations). While some licenses may be granted perpetually,others are valid for only one year (as per Section 41 of the CMA Act) and therefore have to be renewed regularly.

But why license, or why do we need to renew licenses regularly? Generally, regulators are obliged to protect consumers (or investors in the case of capital markets) from possible market abuses. Licensing players therefore aims at ensure that only those firms which have the requisite financial and technical capacity to effectively carry out the business are authorized to do so. Just like in other regulated sectors,licensing in the capital markets is a core function provided for by the CMA Act, Cap 84 as amended, and the Licensing Regulations. A person seeking a license to operate must first fulfill all the legal requirements such as being a body corporate with the prescribed minimum capital (where applicable); payment of the application fee and possession of the requisite administrative capacity to carry out the business. On the other hand, when seeking license renewal, an intermediary is required to apply at least thirty days before the license expires and the application must be accompanied with among other things, proof of payment of the renewal fees and audited books of accounts for the previous year. Ultimately, the onus is on the applicant to satisfy the regulator that they have what it takes to effectively undertake the business. The law also gives CMA the power to de-license or revoke an approval to an intermediary who is non-compliant with the continuous licensing or approval requirements which include; proper conduct of business; minimum capital requirements and proper record keeping.  

Incidents in the securities industry invariably inform changes that need to be made in regulatory requirements which result into changes in licensing conditions. In our case, the CMA Act allows the Authority to attach other conditions or restrictions to licenses. For example, in 2018, CMA issued a regulatory notice requiring representatives of licensed market intermediaries to undertake the professional certification as away of enhancing professionalism in the industry. The Authority issued this notice in line with section 35 (2) of the CMA Act and notified intermediaries that after a specified period of time, having at least two certified professionals among the client facing teams will become a license renewal requirement. Therefore, whereas it was not originally a requirement, it becomes one and could actually be grounds for one’s renewal application to be denied.

However, it is not always automatic that a license holder will apply for renewal. In some cases, the firms may opt to apply to either cease doing the business or to have their licenses changed so that they can venture into other business operations under the capital markets. This process is also provided for in the law and it is essential that anyone coming to do business in the securities industry is alive to the fact that much as there is a clear entry procedure to be adhered to, they have to also follow a certain set procedure when exiting the industry to ensure clients or investors are not adversely inconvenienced by their withdrawal.

By and large, licensing/ license renewal is conducted to ensure that the public who are going to be dealing with these firms are protected by ensuring that client securities and / or funds are ring-fenced from those of the intermediary firms at all times, and to ensure that the individuals behind these firms not only possess the technical expertise to meet their clients’ expectations, but also observe the minimum ethical and professional standards expected in the market.  

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