Risks unregulated investment products pose to investors

In a bid to earn extra income amid the rising cost of living, aggravated by the negative effects of the Coronavirus, some Kenyans seem to be attracted to unregulated investment products in the online foreign exchange market.

While the products seem quite appealing by promising above average returns compared to regulated products, the promoters of the products are most times unable to sustain the promised returns nor refund the principal sum. When this happens, investors are usually exposed as they do not have a fallback position compared to investors in regulated products.

While the rapid adoption of technology supports the growth of online businesses and e-commerce and has seen online retailers such as Amazon and Alibaba, transform the customer journey positively, it has also come with challenges.

The main downside is that businesspeople set up online businesses that are well packaged and attractive quickly. The area which seems to be the main target is online foreign exchange trading, which attracts innocent Kenyans who seem not to undertake due diligence before investing not knowing that some of the business entities do not have licences to operate.

Some Kenyans seem to make investment decisions based on referrals from relatives and friends who have benefited previously, unknowingly exposing themselves to the risk of investing in unregulated investment products.

In line with its investor protection mandate, the Capital Markets Authority (CMA) has cautioned Kenyans severally against engaging in online foreign exchange trading through platforms of unlicensed entities as they risk losing their investments.

CMA requires all online foreign exchange brokers or money managers not licensed by the Authority to cease and desist from trading, conducting sensitizations in Kenya and onboarding Kenyan investors or managing online foreign exchange portfolios.

CMA has issued three non-dealing online foreign exchange brokers licenses to EGM Securities Ltd, SCFM Limited, and Pepperstone Markets Kenya Ltd in line with the Capital Markets Act and the Capital Markets (Online Foreign Exchange Trading) Regulations, 2017. The Authority has also granted a Money Manager licence to Standard Investment Bank (SIB) Limited.

There is also an emerging trend where offshore firms are advertising online foreign exchange in Kenya without a license. This is also illegal as such firms are not licensed by the Authority.

The challenge is that in the event of failure the investors may not have recourse in the home country where the entity is based.

Regulation 56 of the Licensing Regulations states, ‘’No person shall market securities in Kenya, whether the securities have been issued in Kenya or not, through advertisement, solicitation, invitation or by other means in whatever form or manner with an aim of reaching the general public or a section thereof unless such a person is licensed under these Regulations’’.

The Authority takes appropriate enforcement action against any persons or entities illegally conducting online foreign exchange trade or collecting client funds in contravention of the above regulatory provisions. However, in some cases, the issue may come to the attention of the Authority after investors have been defrauded and the entities have shut down their operations. Members of the public who have been affected or become aware of such illegal online foreign exchange transactions are advised to report to the Authority or to the Capital Markets Fraud Investigation Unit (CMFIU) who will do their best to trace the entities involved.

While the Authority and CMFIU are doing their best to protect investors, they are encouraged to ensure they confirm the license status of any entity before investing to mitigate the risk of losing their investment in the event of failure or collapse of such entities.