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Regulators count on custodial services to protect investors – AACN vice president

Regulators count on custodial services to protect investors – AACN vice president

BABATUNDE MAJIYAGBE, Vice President of the Association of Asset Custodians of Nigeria (AACN), speaks on a wide range of issues affecting Nigeria’s banking and capital markets, including custodial services and the way forward, in this interview with HOPE MOSES-ASHIKE. Excerpts:

Capital market regulators have been taking several measures to enhance the participation of retail investors in the market, as well as attract new investors, especially young investors, which are crucial for market development. How would you assess the success of these interventions so far?

Across the globe, investors’ choice of assets to own in view of changing market dynamics is putting operators under immense pressure. Such factors as non-financial investing, political developments, cost and efficiency have brought the original concept of sustainable investing to the crossroads. It was in response to this that PwC undertook a survey that led to the creation of the Investor Alignment Index which measures the gap between investor expectation and asset managers’ performance.

The survey made far-reaching recommendations, including the need to widen the securities market by attracting new players, especially the retail and youth segments. This is an inevitable route for the Nigerian market, given the rising clout of retail investors in shaping the market direction.

Armed with the power of new technologies, which has democratised trading processes, the participation of retail investors on the Nigerian Exchange Limited (NGX), is on the increase, with one account saying they contributed 29 percent to equity trading in 2020. This is expected to grow even more.

So, it was in recognition of the rising importance of the retail segment that the Nigerian Exchange Limited, the Securities and Exchange Commission (SEC) and other stakeholder groups have been organising financial literacy campaigns targeted at the retail base with the intention of more numbers from the current figure of about three million. The gains of these investor education interventions have been contributory to the market recovery and uptick we are currently seeing.

The ideal situation is the one where it is easy for retail investors to find ways to channel their savings into productive investment and returns. In other climes, retail investors provide long-term funding for the economy, which minimises over-dependence on bank loans.

While there has been some level of progress, market participants must continue to work with regulators on factors that often impact adversely on market development, including such issues as transparency, price manipulation, among others.

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When are we likely to see a reversal of the current situation in which the bulk of assets managed by Nigerian custodians are owned by foreign portfolio investors?

Tough! Attaining such a status is not a tea party. It will result from considerable market development and not wishful thinking. There is a natural tendency for people to seek investment options when an economy is vibrant. This means that the people have something to spare as savings. At present, we are still way back from that ideal. We must also take note that asset custodianship is global in nature. So, it is not unusual to have foreign dominance of the Nigerian custody or capital markets. As you go across the West African sub-region, you would also notice that Nigerians are major investors in the other countries in the sub-region.

The insurance sector is rarely using custodians for their investments but rather building their own investment operations teams which they basically do internally at a very high cost whereas a custodian would do it for them more efficiently and at a far cheaper cost. Has there been any change in this scenario?

Custodianship is a globally acclaimed post-trade function for asset safety and safekeeping. The bulk of custodian banks in the world is some of the biggest in their countries of origin and in the regions where they operate. They also have an impeccable reputation for sound management and trust. What else can anyone ask for?

All key regulators such as the Central Bank of Nigeria, Nigerian Pension Commission, Securities and Exchange Commission, National Insurance Commission, etc, have seen the significant benefit custodians provide to asset safety and independent assurance from a control perspective. Regulators have also begun using custodians to aid and protect investors.

The choice of hiring an independent custodian could be up to the investor. Efficiency and cost-effectiveness are imperatives that any business would embrace. Our duty as custodians is to be an agent of the investors, protecting their assets and advocating for an efficient and effective market.

Things such as stable power, a good transport system, sustainable foreign exchange liquidity and availability, clear and predictable tax regime need to be in place to support the growth of the real sector and in turn, create opportunities for capital market depth. Are there signs Nigeria is on the road to addressing such needs?

Whilst there is predictable progress in terms of investments in some of the enablers that drive economic growth, Nigeria still has a lot to do. Citizens whether private or corporate businesses, as well as the government, need to work together in harnessing economic growth driven by innovation, infrastructure, and investments. This collaboration would create products and services people need, provide employment opportunities, promote efficiency, address environmental challenges and create regional economic integration in the sub-region.

Have Nigerian custodians faced peculiar challenges in terms of providing a level playing field that meets the requirements of global investors?

In terms of the core functions of custodianship, I will not say we are lagging. I think regulation of the industry has largely conformed to our level of development. Nobody will entrust you with his assets if he does not have confidence in you. But for a country with some gaps in infrastructure and technology, there will always be room for improvement. The solution to effective regulation within the space includes a deep and wider stakeholder consideration to review the impact of any rule, tax modification/inclusion, policy, etc before the policy is enacted. This ultimately drives the ease of doing business as well as the perception given to Nigeria as the go-to investment destination in Africa.

Would you consider cybercrime as a major threat to custody services in Nigeria?

Deviance or criminality is from creation a part of human nature. While I do not condone criminality, I only want to say that perfect compliance with standard conduct or expectation is tough and might be almost impossible in some instances. However, being proactive, deploying appropriate risk mitigation structures and staying ahead of the criminal masterminds is very germane in combating these vices.

What has happened is that the invention of the internet has created an alternative universe with almost the same population as the physical world. So, criminality in that space is only a logical offshoot. Like in the physical form, we have a natural duty to devise means of countering crime in whatever form it manifests, including cyberspace. I do know that at organisational levels, various measures are being taken to protect businesses from the intrusion of hackers and other criminal elements. Our industry is not an exception.

What ultimately happens is that every organisation deploys what it considers as its ideal level of security using firewalls, concepts of demilitarised zones and other tools, one that is not easily breached by cyberattacks, and one that continues to elicit client confidence and trust. In the banking industry, earning a customer’s trust is the numero uno.

QUOTE: The solution to effective regulation within the space includes a deep and wider stakeholder consideration to review the impact of any rule, tax modification/inclusion, policy, etc before the policy is enacted