Ghana’s fund management industry meltdown

In 2018, the Bank of Ghana taught its fellow financial services industry regulators a crucial lesson; if they have to engage in mass liquidations of companies under their regulatory purview, announce it on a Friday evening, thus giving time for the dust – and peoples nerves – to settle before working hours come around again.

This is precisely what the Securities and Exchange Commission, the regulator of Ghana’s capital market, did at the end of last week. Its official announcement that it had revoked the operating licenses of 53 fund and asset management companies was released after most of corporate Ghana had closed for the weekend, giving stakeholders a chance to digest the announcement and its implications over a weekend during which the financial media was pushed into overdrive.

The dust though has not quite settled. Despite an assurance by SEC that customers of the 53 affected firms would be informed last Monday on the process through which they would be refunded part of their investments through the grace of government, this did not happen. By Tuesday afternoon, with no news as to how much they could hope to retrieve, under what timelines and through what process some peoples’ nerves were becoming frayed, especially those who still have claims on their deposits with liquidated commercial banks still awaiting validation and subsequent payment.

While fund management firms are not as widely used as deposit taking financial intermediation companies such as banks, savings and loans companies and microfinance institutions, they nevertheless comprise a vitally important pillar of the financial services superstructure. Indeed it is instructive that between them, the 53 firms that have just had their licenses revoked, had GHc8 billion under management.

Actually, the impact of their activities has been grossly understated. The official statement puts the number of their clients, collectively at 77,000. But many of those are institutional clients comprising large groupings of people, such as credit unions, co-operatives and investment clubs. Even some individual clients indirectly represent groupings such as with susu collectors who invested the contributions of all their clients. Resultantly no knows quite how many people are being affected by the melt down in the fund management industry, with guesstimates ranging from 400,000 to several millions.

To be sure, the latest action by the SEC was not altogether unexpected – the regulator has been beating the war drums over the past year, warning of impending action against both insolvent and rules-breaking fund managers under its regulatory purview. In fact the Commission has been publishing on its website a list of firms that are facing investigations into regulatory infractions for several months.

But perhaps the strongest warning as to its determination to sanitize the industry came recently when it set a firm deadline to asset managers to stop guaranteeing returns on investment to their clients on the grounds that this is outside their charter – they are simply investment managers not financial intermediaries and indeed their operating  licenses do not require the capital buffers requisite to enable them assume the risks inevitable in providing such guarantees on investments that could easily go wrong. Instructively SEC had been issuing warnings to desist from making such guarantees since 2012, but without enforcing them and consequently the fund managers it licenses had learnt to ignore them.

Under the current executive management, installed in 2017, however, the SEC had begun to enforce that regulation stringently, forcing some fund managers effectively out of business, their having been reliant on providing guarantees they could not effectively live up to in order to attract their clientele.

But this was just a precursor to what was to come; late Friday evening SEC issued a terse public statement which read in part as follows:

The Securities and Exchange Commission (SEC) has, with effect from today revoked the licenses of Fifty-Three (53) Fund Management Companies (see Annex A for list of Companies). These actions were taken pursuant to Section 122 (2) (b) of the Securities Industry Act, 2016 (Act 929 or “the Act”) which authorizes the Securities and Exchange Commission to revoke the license of a market operator under any of the following circumstances

• If it is wound up;
  (b) It ceases to carry on the business for which it was licensed;
  (c) If the Commission has reason to believe that the licensed body or any of its directors or employees has not performed its functions or the functions of directors efficiently, honestly and fairly;
  (d) If the licensed body contravenes or fails to comply with a condition or restriction applicable in respect of the license or any other provision of Act 929; and
  (e) If the licensed person fails to commence business within 6 months of being granted a license.
  The revocation of the licenses of the specified companies has become necessary as they have largely failed to return client funds which remain locked up and in a number of cases, they have even folded up their operations. Essentially, they have failed to perform their functions efficiently, honestly and fairly and in some cases are in continuing breach of the requirements under relevant securities laws, rules or conditions, despite opportunities provided to them by the SEC within a reasonable period of time to resolve all regulatory breaches. The SEC has concluded after extensive engagement with these institutions that their continuous existence in the light of their conduct poses severe risks to the stability of the capital market and to the interests of investors.
  The SEC has taken this action in accordance with its mandate of protecting investors and the integrity of the capital market. The SEC and its authorised agents will secure the premises of the affected companies for further investigations under section 26 of the Act. In addition, the SEC has notified the Registrar of Companies of the revocation of these licenses and has requested that the Registrar petitions the High Court to commence winding-up proceedings against these companies under the Bodies Corporate (Official Liquidations) Act, 1963 (Act 180).
  The authorized agent of SEC (and the Liquidator once appointed) will work together with the Government to pay a capped amount to all affected investors of these firms in line with Government commitment to support the securities industry and to provide some immediate relief to investors who are hurting because of their locked-up funds. The outcome of the court process will inform the handling of assets retrieval and liquidation to further sort out validated investor claims.

*The highlighted companies, according to SEC, are Fund Managers with major regulatory issues: pending complaints, suspension etc.

The list of fund managers that have had their licenses revoked include some of the biggest, oldest ones such as Gold Coast Fund Management, as well as some of the fastest growing new generation firms in that genre such as First Banc Financial Services and All Time Capital Partners. Unsurprisingly therefore, the reverberations within the industry itself keep resounding.

The most common theme linking them – big or small, young or old – is that they invested in the wrong instruments and the wrong beneficiaries. For instance Gold Coast had nearly its entire investment portfolio in the so called Ghana Growth Fund which SEC asserts is un-regulated and therefore wrong.

Similarly First Banc had been heavily invested in unregulated private corporate bonds – commonly issued as uncollaterized commercial paper which effectively is simply an I.O.U. The problem is that since most of this is issued by unlisted companies, which are therefore not subject to any corporate governance and financial reporting standards, these are not rated as investment grade and therefore amount to junk bonds.

Several other companies were invested in financial intermediaries that ran into trouble themselves, such as the recently liquidated microfinance institutions and savings and loans companies, because they offered higher yields than the commercial banks.

Another problem was sheer malfeasance. “Many fund management firm owners and managers ran them as their personal piggy banks” asserts Joe Jackson, chief operating officer of Dalex Finance. “They used investors monies for their pet projects and gave monies to their favoured beneficiaries whether or not they were worth the investment.”

The ultimate result of poor investments and outright diversion of customers funds was illiquidity and eventually, complete insolvency. Indeed it was the inability of many fund managers to meet their obligations to customers that alerted SEC to their practices and resultant predicaments in the first place. Complaints by clients about their inability to retrieve their investments with fund managers have been inundating SEC for quite some time and the systemic meltdown resulting from the mass liquidations of hundreds of financial intermediation firms of various genres took the situation from an unsettling one to an outright crisis, thus prompting urgent regulatory intervention.

To be sure, a combination of cavalier investment strategy and financial malfeasance by fund managers is more to blame than lack of technical capacity in structuring investment portfolios. It is instructive that some of the liquidated fund managers have been running very successful collective investment schemes – mutual funds and unit trust schemes – even as they were running down the investments of their clients with individualized portfolios. The reason for these contrasting results is simply that licensed collective investment schemes have regulatory restraints as to what can be invested in and just as importantly, their structure requires that the investment assets are held by a separate custodian, rather than the fund manager whose role is restricted to making investment decisions; this means the fund managers cannot get their hands on investors monies for malfeasant purposes.

Unsurprisingly though, SEC’s latest regulatory action has been met with withering criticism by those adversely affected. Investors, unsure of how much they will retrieve and when, blame the regulator for delaying action until the problem had become too big to comfortably manage.

The fund managers who have had their licenses revoked are unsurprisingly protesting too. To be sure, most industry analysts claim they are crying wolf. Indeed, in typical fashion, they are already propounding conspiracy theories with political dimensions in the expectation that they will get sympathy from opponents of the incumbent government.

The main conspiracy theory already making the rounds is that SEC is carrying out the agenda of Finance Minister Ken Ofori Atta, who is a co-founder and the largest shareholder of Databank, one of the largest investment banking and fund management groups in Ghana. This theory holds that he wants to eliminate some of the competition in the industry and this is why he got SEC’s current Director General Reverend Daniel Ogbarmey Tetteh appointed to the position in the first place, the latter having been one of the top executives at Databank prior to his SEC appointment.

Such conspiracy theories however do not hold up to the facts and legalities behind SEC’s actions however; simply put the affected fund management firms they did break the rules and SEC is within its regulatory rights to take the actions it took.

Perhaps the only grey area is one similar to one which put the BoG under scrutiny too – that it has revoked the licenses of some companies that were suffering from temporary liquidity challenges caused mainly by the mass liquidations in the financial intermediation industry where investments had been made and are ultimately recoverable, rather than structural insolvency.

For most customers however this is not their worry; rather it is how they will recover at least part of their investments. Members of collective investment schemes managed by the liquidated  fund managers have a different problem; although their assets are supposedly still intact they will have to either select a new fund manager of move their assets into another pooled investment scheme, managed by a fund manager that is still duly licensed.

For government itself, the dilemma is how to cough up part of the investors monies that have been lost – translate as a significant portion of GHc8 billion – at a time it is suffering revenue shortfalls and must adhere to a self- imposed five percent cap on its fiscal deficit each year.

Clearly, last weekend’s revocation of 53 licenses of fund management companies is just the beginning of a long and bumpy road for thousands, possibly millions of stakeholders of various types.

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