Preliminary Thoughts on the SEC’s Action Against Standard Chartered in Zambia
The recent action by Zambia's Securities and Exchange Commission (SEC) against Standard Chartered Bank for allegedly mis-selling Chinese property bonds to local investors raises critical questions about regulatory consistency, the responsibilities of financial intermediaries, and the broader implications for Zambia's financial market development. These preliminary thoughts rely on the available understanding of Standard Chartered's global practices and the context of this case.
Standard Chartered operates in over 50 markets, adhering to rigorous compliance standards aligned with international norms. Investment product sales typically involve thorough processes, including detailed client suitability assessments, recorded calls, and comprehensive risk disclosures. These measures ensure that clients fully understand the inherent risks of their investment decisions. If Standard Chartered followed these protocols—as it typically does—it raises a fundamental question: What exactly justifies the SEC's decision to penalize the bank?
In March 2022, Standard Chartered sold bonds issued by Sino-Ocean, a state-backed Chinese property developer, to a local client in Zambia. At the time, China's property sector was experiencing significant upheaval. Defaults by major players, such as Evergrande, had already shaken investor confidence, drawing global attention to systemic risks in the sector. Sino-Ocean was not in acute distress but was rated speculative grade, reflecting elevated credit risk. The bond's higher yields likely signalled these risks, offering compensation for the uncertainty involved. Such pricing dynamics are standard in global markets, where informed investors assess potential returns against underlying risks.
The SEC's allegations include claims that Standard Chartered failed to disclose "material information" about these bonds and used "exclusionary" clauses that assigned all investment risk to the client. While compliance with local regulations is non-negotiable, it is critical to question whether the SEC’s implied expectation of principal protection considers the inherent trade-offs in such products. Principal protection, though available, typically comes with reduced returns to reflect the lower risk profile. Investment products inherently involve varying degrees of risk, and globally, clauses clarifying the allocation of this risk are standard practice. Penalizing intermediaries for systemic risks outside their control risks misplacing accountability and could discourage financial institutions from introducing diverse, higher-yield investment options in Zambia. Such actions ultimately limit investor choice and stifle market development.
The implications of this case extend far beyond this specific transaction. The SEC's action raises broader concerns about regulatory consistency in Zambia's financial markets. For instance, if the Government of the Republic of Zambia (GRZ) defaulted on its domestic debt, would the SEC impose similar penalties on the Bank of Zambia (BoZ) or local banks that sell government bonds? Similarly, intermediaries were not held accountable during Zambia's Eurobond defaults, affecting local and international investors. Such inconsistencies undermine trust in regulatory systems and could dissuade financial institutions from offering innovative financial products, particularly those designed to hedge risks or manage market volatility. This chilling effect could leave Zambia's financial sector stagnant, less competitive regionally, and ultimately underdeveloped.
Further complicating Zambia's financial market landscape are regulatory fees that increase the cost of offering investment products. Fund registration fees, annual maintenance charges, and fees tied to assets under management (AUM) place a significant financial burden on institutions. These costs discourage innovation and limit access to global financial instruments that could diversify portfolios or hedge against inflation and currency volatility. In contrast, markets like Kenya have adopted growth-oriented regulatory frameworks that give investors easier access to various global instruments. This disparity makes Zambia less attractive to local and international investors alike.
For high-net-worth individuals (HNWIs), systemic inefficiencies and a challenging regulatory environment often lead to the retention of only a fraction of their wealth within Zambia. While the availability of superior products in other markets plays a role, systemic barriers within Zambia's regulatory framework amplify these capital outflows. Without targeted reforms, Zambia risks stifling market growth and alienating the institutions and investors critical to its long-term development.
Protecting investors is a core regulatory responsibility but must be balanced with fostering a dynamic and competitive financial market. Regulatory actions that appear reactionary or disproportionate can create a precedent discouraging participation and innovation. A more constructive approach would ensure robust compliance and disclosure processes, enhance investor education to improve financial literacy and align local regulations with global standards to attract local and international investments.
The SEC's enforcement in this case risks being seen as counterproductive, particularly if it deters financial institutions from operating in Zambia's markets. By addressing systemic barriers, encouraging product diversity, and building trust through consistent and transparent regulation, Zambia could position itself as a competitive and resilient financial hub. The country's regulatory framework must strike a delicate balance between protecting investors and enabling market growth. Missteps in this area could have long-term consequences for Zambia's financial ecosystem.
Dean N Onyambu is the Founder and Chief Editor of Canary Compass, a co-author of Unlocking African Prosperity, and the Executive Head of Treasury and Trading at Opportunik Global Fund (OGF), a CIMA-licensed fund for Africans and diasporans (Opportunik). Passion and mentorship have fueled his 15-year journey in financial markets. He is a proud former VP of ACI Zambia FMA (@ACIZambiaFMA) and founder of mentorship programs that have shaped and continue to shape 63 financial pros and counting! When he is not knee-deep in charts, he is all about rugby. His motto is exceeding limits, abounding in opportunities, and achieving greatness. #ExceedAboundAchieve
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Dean, you're analysis here is spot on. The action taken by the SEC is retrogressive to Zambian financial market development , while we want our financial markets to be regulated, regulation mustn't stifle it's growth and development infact regulation must be an enabler. For example the SEC could have taken a different approach one I'd call a "postmortem analysis" on the failure of the Sino-Ocean bonds drawing key learnings and lessons from which they educate local investors on what to look out for the next time a legitimate investment opportunity such as the Sino-Ocean bonds arises again. This approach will normalise the fact that there is risk even in legitimate investments and that it's normal to win or lose. Sadly the SEC action, in the mind of the ordinary Zambian, sets off thoughts of " perhaps StanChart marketed a "fraudulent" bond when Infact they marketed and sold a genuine, legitimate investment instrument.
You seem not to have analysed the Act's shortcomings.
A quick chatgpt says:
In Zambia, the Securities Act, 2016 (No. 41 of 2016) governs the securities market, including provisions related to risk disclosure and the allocation of risk to investors in financial instruments such as private credit bonds.
Risk Disclosure Requirements:
The Act mandates that issuers provide comprehensive and accurate information to potential investors to facilitate informed decision-making. Key provisions include:
Prospectus Requirements: Issuers must prepare a prospectus containing all material information about the securities offered, including associated risks. This ensures transparency and enables investors to assess the potential risks and returns.
Material Information Disclosure: Issuers are obligated to disclose any information that could significantly impact an investor's decision. This includes financial statements, details about the issuer's business operations, and specific risks related to the securities.
Risk Allocation to Investors:
The Act emphasizes fair treatment of investors and prohibits practices that unfairly shift risk to them without proper disclosure.
Prohibition of Unfair Contract Terms: The use of exclusionary clauses that unduly transfer risk to investors is prohibited. Contracts should not contain terms that absolve issuers or intermediaries of responsibility without clear disclosure and justification.
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The fact is that banks/ intermediaries must abide by laws of the jurisdiction not to international practices. If SCB did not then that is an internal failure of controls and oversight within the Zambian unit. This internal failure of disclosure or T&Cs can open up the bank to compensation claims in my view.
Zambia's Securities Act does not imply that an investor's principal is or should be completely protected from investment risks. Instead, the Act focuses on risk disclosure and fair risk allocation, ensuring that investors are fully informed about the risks they are taking and are not unfairly burdened with undisclosed or unjustified risks.
The SEC is not applying the Act inconsistently when it comes to government bonds. Unless explicitly stated in the terms of the investment (e.g., in structured products with guarantees), private credit bonds and similar investments do not come with a guarantee of principal protection. Investors are generally expected to bear the investment risks as part of participating in capital markets.
The sanctions against Standard Chartered for mis-selling Chinese property bonds in Zambia demonstrate that the regulatory framework is designed to prevent misleading practices, not to protect investors from market-related losses.
Onyambu points to a wider issue of regulation of investment products more generally. Other jurisdictions, eg UK have regulators that deal with compensation for mis-selling and fraud while Zambia does not. If it wants to expand the industry then more can be done to expand domestic investment opportunities across assets.
His other point about fees and charges is unrelated to SCB. Zambia’s regulatory fees and charges are relatively moderate and competitive compared to some regional peers.
- Zambia’s registration fees are competitive for larger issuances due to the capped maximum. However, the relatively high minimum fee makes it less attractive for smaller funds.
- Zambia appears cheaper in terms of AUM-related charges compared to many of its regional peers, especially Nigeria and Ghana.
- Zambia’s annual licensing fees are relatively low compared to more developed markets like South Africa and Nigeria.
- Zambia’s use of caps makes its fee structure more favourable for larger issuances compared to many peers.
The investment reform agenda widely advocated by the private sector applies equally to the wealth management sector to make it especially more attractive to investors. Only then will the investor's choice of assets and providers expand