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.
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
A. The SEC’s Penalty Against SCB Highlights Gaps in Zambia’s Regulatory Framework
1. Government vs. Private Securities:
Zambia's Securities Act, 2016, exempts government securities from its provisions, creating a regulatory double standard. Intermediaries involved in distributing Zambia’s Eurobonds—initially rated 'B+' (non-investment grade) at issuance in 2012 (Fitch Ratings) and later defaulted—faced no penalties. In contrast, private intermediaries like Standard Chartered Bank (SCB) were penalized for distributing Sino-Ocean bonds, which at the time of sale in March 2022, were rated 'BBB-' (investment grade) by Fitch.
2. Timeline of Sino-Ocean's Credit Ratings and Default Timeline:
a) March 2022: Fitch rated Sino-Ocean's bonds at 'BBB-' with a Negative Outlook, categorizing them as investment-grade with a speculative-grade risk due to challenges in China's property sector.
b) August 2022: Fitch downgraded Sino-Ocean to 'BB+' and placed the rating on Negative Watch due to deteriorating financial conditions in China's property market.
c) September 2022: Fitch further downgraded Sino-Ocean's rating to 'BB', maintaining the Negative Watch status.
d) November 2022: Fitch affirmed Sino-Ocean's rating at 'BB' and maintained the Negative Watch.
e) March 2023: Fitch downgraded Sino-Ocean to 'B+', reflecting the worsening financial health and continued systemic risks in China's property sector.
f) August 2023: Sino-Ocean defaulted on its debt by failing to make an interest payment of USD 20.9 million on its overseas bonds. This marked the official default of Sino-Ocean's debt obligations.
The selective enforcement of regulations unfairly targets intermediaries for systemic risks tied to evolving credit dynamics while exempting government securities and their intermediaries from equivalent scrutiny. This disparity weakens the fairness of Zambia’s regulatory framework and undermines confidence in its markets.
3. Investor Accountability and Standard Chartered's Compliance Framework:
High-net-worth individuals (HNWIs) are expected to be highly sophisticated investors who understand the risk-reward dynamics of speculative investments. Standard Chartered, operating in over 50 markets, adheres to rigorous global compliance standards. This includes thorough client suitability assessments, recorded calls, and comprehensive risk disclosures—procedures designed to ensure that clients fully understand the risks inherent in their investment decisions.
Given Standard Chartered’s rigorous compliance process, it’s reasonable to assume that the investor was well-informed at the time of purchase. In March 2022, when Sino-Ocean bonds were sold, the bonds were rated 'BBB-' by Fitch, indicating speculative-grade risk. While not in acute distress, the property sector in China was experiencing instability, further heightening the investment's risk. Publicly available information highlighted the systemic risks tied to the broader sector, including defaults from major players like Evergrande.
Speculative investments, by their nature, carry higher risks and require ongoing monitoring by the investor. The investor, particularly a high-net-worth individual, had access to detailed, public information on the financial condition of Sino-Ocean, as well as the broader risks in the property market. After the bond’s downgrade to 'BB+' in August 2022 and then to 'B+' in March 2023, the investor had every opportunity to reassess the investment’s viability. The investor's failure to act in response to these developments is a clear case of neglecting their responsibility to actively manage their portfolio.
While Standard Chartered provided the necessary disclosures and adhered to industry standards, the responsibility for managing the risks associated with the investment ultimately lies with the investor. The investor had the necessary tools and information to track the performance of the bonds and assess the associated risks. Their inaction, especially after the significant downgrade of Sino-Ocean’s rating, constitutes a failure to properly monitor and protect their own investment.
4. Undermining Investor Confidence:
Regulatory inconsistencies erode trust in Zambia’s financial markets by creating a perception of bias in the treatment of government and private securities. While both categories of securities may share similar credit risks at issuance, the selective enforcement of regulations amplifies concerns among sophisticated investors, such as high-net-worth individuals (HNWIs). These investors often retain only a fraction of their wealth within Zambia, drawn instead to superior products and more predictable regulatory environments abroad. Systemic barriers within Zambia’s regulatory framework, including selective enforcement and a lack of transparency, discourage the introduction of diversified financial products and amplify capital outflows.
B. The Securities (Fees and Levies) Rules, 2020, impose uniform fees on all participants, disproportionately burdening smaller funds and deterring innovation. Zambia’s financial market lacks the product diversity and investor capacity of South Africa, Nigeria, or Kenya, making direct fee comparisons inappropriate. High minimum fees amplify these challenges.
I always emphasize this: managing a portfolio actively is not an easy task. Even for high-net-worth individuals with sophisticated understanding, you cannot expect to apply the same level of attention and dedication to your investments as you would in your primary profession. Active portfolio management demands continuous monitoring, research, and timely decision-making—elements that require focused, full-time engagement. When an investor fails to track key developments like rating downgrades or market changes, they neglect their responsibility to manage their investments effectively.
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.
--
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
A. The SEC’s Penalty Against SCB Highlights Gaps in Zambia’s Regulatory Framework
1. Government vs. Private Securities:
Zambia's Securities Act, 2016, exempts government securities from its provisions, creating a regulatory double standard. Intermediaries involved in distributing Zambia’s Eurobonds—initially rated 'B+' (non-investment grade) at issuance in 2012 (Fitch Ratings) and later defaulted—faced no penalties. In contrast, private intermediaries like Standard Chartered Bank (SCB) were penalized for distributing Sino-Ocean bonds, which at the time of sale in March 2022, were rated 'BBB-' (investment grade) by Fitch.
2. Timeline of Sino-Ocean's Credit Ratings and Default Timeline:
a) March 2022: Fitch rated Sino-Ocean's bonds at 'BBB-' with a Negative Outlook, categorizing them as investment-grade with a speculative-grade risk due to challenges in China's property sector.
b) August 2022: Fitch downgraded Sino-Ocean to 'BB+' and placed the rating on Negative Watch due to deteriorating financial conditions in China's property market.
c) September 2022: Fitch further downgraded Sino-Ocean's rating to 'BB', maintaining the Negative Watch status.
d) November 2022: Fitch affirmed Sino-Ocean's rating at 'BB' and maintained the Negative Watch.
e) March 2023: Fitch downgraded Sino-Ocean to 'B+', reflecting the worsening financial health and continued systemic risks in China's property sector.
f) August 2023: Sino-Ocean defaulted on its debt by failing to make an interest payment of USD 20.9 million on its overseas bonds. This marked the official default of Sino-Ocean's debt obligations.
The selective enforcement of regulations unfairly targets intermediaries for systemic risks tied to evolving credit dynamics while exempting government securities and their intermediaries from equivalent scrutiny. This disparity weakens the fairness of Zambia’s regulatory framework and undermines confidence in its markets.
3. Investor Accountability and Standard Chartered's Compliance Framework:
High-net-worth individuals (HNWIs) are expected to be highly sophisticated investors who understand the risk-reward dynamics of speculative investments. Standard Chartered, operating in over 50 markets, adheres to rigorous global compliance standards. This includes thorough client suitability assessments, recorded calls, and comprehensive risk disclosures—procedures designed to ensure that clients fully understand the risks inherent in their investment decisions.
Given Standard Chartered’s rigorous compliance process, it’s reasonable to assume that the investor was well-informed at the time of purchase. In March 2022, when Sino-Ocean bonds were sold, the bonds were rated 'BBB-' by Fitch, indicating speculative-grade risk. While not in acute distress, the property sector in China was experiencing instability, further heightening the investment's risk. Publicly available information highlighted the systemic risks tied to the broader sector, including defaults from major players like Evergrande.
Speculative investments, by their nature, carry higher risks and require ongoing monitoring by the investor. The investor, particularly a high-net-worth individual, had access to detailed, public information on the financial condition of Sino-Ocean, as well as the broader risks in the property market. After the bond’s downgrade to 'BB+' in August 2022 and then to 'B+' in March 2023, the investor had every opportunity to reassess the investment’s viability. The investor's failure to act in response to these developments is a clear case of neglecting their responsibility to actively manage their portfolio.
While Standard Chartered provided the necessary disclosures and adhered to industry standards, the responsibility for managing the risks associated with the investment ultimately lies with the investor. The investor had the necessary tools and information to track the performance of the bonds and assess the associated risks. Their inaction, especially after the significant downgrade of Sino-Ocean’s rating, constitutes a failure to properly monitor and protect their own investment.
4. Undermining Investor Confidence:
Regulatory inconsistencies erode trust in Zambia’s financial markets by creating a perception of bias in the treatment of government and private securities. While both categories of securities may share similar credit risks at issuance, the selective enforcement of regulations amplifies concerns among sophisticated investors, such as high-net-worth individuals (HNWIs). These investors often retain only a fraction of their wealth within Zambia, drawn instead to superior products and more predictable regulatory environments abroad. Systemic barriers within Zambia’s regulatory framework, including selective enforcement and a lack of transparency, discourage the introduction of diversified financial products and amplify capital outflows.
B. The Securities (Fees and Levies) Rules, 2020, impose uniform fees on all participants, disproportionately burdening smaller funds and deterring innovation. Zambia’s financial market lacks the product diversity and investor capacity of South Africa, Nigeria, or Kenya, making direct fee comparisons inappropriate. High minimum fees amplify these challenges.
I always emphasize this: managing a portfolio actively is not an easy task. Even for high-net-worth individuals with sophisticated understanding, you cannot expect to apply the same level of attention and dedication to your investments as you would in your primary profession. Active portfolio management demands continuous monitoring, research, and timely decision-making—elements that require focused, full-time engagement. When an investor fails to track key developments like rating downgrades or market changes, they neglect their responsibility to manage their investments effectively.