Amid the drama recently surrounding Cytonn, the headline-hogging investment firm, a question that came up innumerably on Twitter is whether the Capital Markets Authority slept on the job as Cytonn had its way with investors.
First of all, I am uninterested for the purposes of this article, in whether Cytonn broke the law, negated its fiduciary duty to investors, or whether it embezzled investors’ funds as has been widely claimed in the media. Those are allegations that must be dealt with by investors, the company and the competent authorities.
Turning our attention to CMA in particular and regulators in general, I am always astonished by how naïve retail investors are with regard to regulatory watchdogs. It is sad especially when things go wrong, to see investors and ‘tweeps’ indiscriminately vent on hapless, bureaucratic institutions that are often underfunded and mostly understaffed.
There are a few things we must make clear to better protect ourselves. Again, these are general points of discussion, and not related to the Cytonn snafu.
- Financial markets exist more on good faith and due diligence than regulation
This fact may not be apparent to large sections of investors in the public markets.
Just because a company is “regulated”, doesn’t exempt you from your duty to conduct due diligence. Being regulated in many industries means that you have signed some paperwork, paid some fees to the regulator, and agreed to a set of procedures – including the submission of regular reporting documents to the regulator. Nothing here suggests a close, day by day follow up on business activity by the company.
In fact, a company chanting ad nauseum that they are regulated, while not a red flag in itself, is generally an ominous sign even if the company is indeed regulated.
- Regulators are not auditors
Though regulators can send auditors to companies they regulate – often without notice – they are not the company’s auditors. In addition, those rare visits by the regulators are often treated with contempt by witting company insiders. If anything is not in order, insiders usually have tactics to throw the regulator’s auditors off track. In any case, auditors aren’t criminal detectives, we all need to collectively lower our expectations here.
- Miscreants are always several steps ahead of regulators
Regulators are not omniscient. Like the rest of us, they can be caught flat-footed.
Remember regulators are typically a collection of moderately talented, underpaid government employees using outdated technology to perform mostly clerical functions.
Regulated companies on the other hand can afford the best talent, are more agile, better resourced and can lawyer up more rapidly.
As far as financial sophistry goes, the offenders have an upper hand. Regulators are always playing catch up.
- Don’t even talk about the justice system
Regulators like the CMA can get sued by companies they regulate when those companies are unhappy with actions imposed upon them. Dragging a poorly resourced regulator through endless lawsuits, court appearances, injunctions, appeals et cetera, can significantly distract even a well-meaning regulator from the issues at hand.
- You are your first line of defence, not the regulator
If you buy bread and it tastes funny, your impulse is not to cancel KEBS on Twitter. Your impulse is to be more mindful of the brands of bread you buy forthwith. That is not to diminish the role of KEBS, rather, it is to demonstrate an important truth – to be helped, you’ve got to first help yourself.
There are some problems that are clear to large swathes of the market before the inevitable failure happens. Yet, many people go ahead to invest, probably hoping they are immunized against losses. They are the first to point fingers at the regulator when the investment goes tops-turvy.
Your indifference will cost you actual money. Regulators will just issue a press release exonerating themselves.
Regulators have a role to play. I am not saying they are doing their best. They can do more – I hope. In the meantime, protect yourself!
Speaking of finances and investments check out this article on How To Plan For The Things We Cannot Plan For To Avoid Being Blindsided