Inside the FNC: Irresponsible investors, not regulatory agency are the problem

Regulation and education are essential in every nation’s financial armoury, but too often personal responsibility is overlooked.

Investors monitor stock information at the Abu Dhabi Securities Exchange. The FNC has turned the spotlight on market regulation but it does not feel that the nation’s financial watchdog needs sharper teeth – it feels greater personal investor responsibility is required. ReutersShow less

At a recent Federal National Council session, members raised questions with the Securities and Commodities Authority (SCA), the UAE’s stock-market regulator, about recent turmoil in share trading, saying the agency had not done enough to improve investor literacy and awareness.

But the problem is not the regulator, which has made great efforts to strengthen rules and regulations and improve an industry that has existed since 2000.

Instead, the problem has more to do with investor greed. Go to the stock exchange floor and you will see retail investors reading financial statements, calculating profits and forecasting dividends. They are well aware of what they are doing when they, for example, double their risk by taking margin accounts.

But they seek to benefit from creating volatility in prices.

One broker said: “I sat with this client, told him he should invest in three blue chips that would give him nice capital appreciation and high one-figure dividend, and then after all the advice he decided to buy Arabtec.”

Arabtec, the biggest listed contracting company in the region, is vulnerable to price swings, making it appealing as well as a higher risk for investors.

Retail investors have an affinity for the stock, which has become susceptible to rumours and speculation and whose price can go up and down significantly with each trade.

Too many investors prefer to buy a stock as soon as it bottoms and sell as soon as they make their target return, rather than hand over their cash to a fund manager with a specific risk mandate.

It is not uncommon to hear investors describe the Abu Dhabi exchange and its stocks as "Ali Baba's cave" from 1001 Nights, a wild, free-for-all environment.

Investors can see the stock market as a quick gamble, rather than as a place to put their money for the medium or long term, as they do in more developed markets.

Dozens of new regulations have been passed and others amended in light of the changing landscape of the UAE equity markets in the wake of the Dubai debt crisis and its impact on local listed companies.

That is not because they were weak to begin with, but every regulator – whether the Securities and Exchange Commission in the US or the Financial Conduct Authority in the UK – constantly reviews its laws and legal framework in light of events. Furthermore, regulators always play catch-up with markets, which always seek to exploit loopholes.

The SCA should not be unduly criticised when breaches happen, as these are bound to happen as they do everywhere in the world. It should, however, be tested for its ability to react decisively, penalise and make an example of others.

In the past four months, the regulator has warned that short-selling is illegal. It has suspended four individuals from trading, reviewed margin accounts at brokerages and asked banks to reveal how much was loaned to investors against shares.

This is what we know publicly. Because of outdated laws, the regulator must respect privacy and cannot “name and shame” companies or investors. If it was able to change the law the SCA would be on a par with Saudi Arabia, which is empowered to reveal and punish even the highest of officials who breach market regulations.

In terms of financial literacy, much has already been done to improve awareness, through publications, reaching out to schools and university programmes and the introduction of a mandatory exam for brokers to ensure they cater to their clients’ needs.

The SCA has even introduced a popular television show, Almahfaza, or The Fund, where a handful of ordinary people are selected to trade shares using virtual money, but with live stock prices, and have to follow the rules and regulations.

Those who broke the rules were evicted from the show at the end of every episode and the last one to remain with an improved value of the virtual fund was able to take home a cheque for the real amount of their fund.