AN investor protection fund (IPF) is a confidence booster for investments but could also incentivise reckless risk taking by investors if not properly structured and managed, fund managers and corporate trustees have warned.
Any such fund must, therefore, meet the fine balance of protecting investors in the event of a default while letting them know that risky appetites carry consequences, the Ghana Securities Industry Association (GSIA) has said.
The President of the GSIA, Winston Nelson Jr, said in an interview that while efforts to establish the insurance mechanism for investments were necessary, an extensive sentisation exercise was required to build an investment-conscious populace.
That, he said, would reduce the potential moral hazard that insuring investments could create.
It would also bolster confidence and cement public trust in investments, especially following the bruises suffered by some investors in the course of the domestic debt exchange programme (DDEP).
Forum
The President of the GSIA, an umbrella body of investment dealers, including advisors, fund managers, registrars and custodians, was commenting on the recent revelation by the Director-General of the Securities and Exchange Commission (SEC), Rev. Daniel Obgarmey Tetteh, that an IPF was in the offing to help cushion investors against unforeseen losses.
He made the disclosure at the Graphic Business/Stanbic Bank Breakfast Meeting in Accra last Tuesday, where he explained that the proposed fund would provide minimum protection for investors in the event of default.
Similarities
Rev. Ogbarmey-Tetteh noted that the IPF would operate like the Ghana Deposit Protection Scheme (GDPS), which protects small depositors against losses incurred as a result of the occurrence of an insured event.
The fund is at the infant stage, but the idea is that the industry needs a support scheme that is broader and can cover the entire securities industry with a minimum protection.
“So we have successfully developed the concept paper and we intend to engage a consultant to structure the fund; we will also raise some capital to provide some form of protection for depositors,” he said.
Positive move
In the interview, Nelson Jr, who is also the Chief Executive Officer of Amber Securities Limited, said the initiative was a positive one that would help strengthen the capital market.
It is a confidence booster. Investment is always about taking risks and the more you bring mitigation measures into that process, the more appealing it is for investors to go out there and patronise.“So, I think it will be important to the market,” he said.
Funding
Nelson Jr also mentioned the sources of funding for the fund as one critical issue that should be properly explored to help make it sustainable.
Although the Securities Industry Act, 2016, (Act 929) makes provision for the Fidelity Fund, its scope is limited to equity investors on the Ghana Stock Exchange (GSE) only.
The investment expert, therefore, proposed that instead of establishing a new fund, the Fidelity Fund could be expanded to cover the entire securities market.
That, he said, would address the potential fragmentation of insurance schemes for investors, make the proposed fund more liquid and increase its depth and ability to cover significant losses arising from defaults.
I generally think that if we have one fund covering the entire industry, it will be better because more people will contribute.“It will give it more solid base because once you start segmenting, the less effective it will be,” he said.
“It is like insurance; the more people contribute, the more the fund becomes more functional. In other words, the bigger the pool, the better it is for everybody,” he said.
Timelines
On the structure of the fund, Mr Nelson Jr said the country should learn from global best practices. He urged the SEC to study from the world’s best investor funds to help make Ghana’s more solid and responsive to the peculiar needs of the market.
On when his outfit expected the fund to be operational, the GSIA President said emphasis must be on setting it up properly.“If we are doing it, we must do it well.
I do not think we should rush to get it done and I also do not think we should walk around it leisurely and say that we can do it in five years’ time.“It is an important infrastructure in the market and so there must be some priority on it.
“For example, we can say that before the end of the year, we should all be able to look at the draft and give our comments,” he said.
