KARACHI: A high-powered body of two apex financial and banking regulators — the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan — on Wednesday decided to seek cooperation of law enforcement agencies in curbing unregulated lending operations, particularly at the country’s stock exchange where certain brokers are said to use investors’ money in illegal badla financing.

Analysts, however, considered it an uphill task for the two regulators to take to task those brokers, or other individuals, involved in the illegal business of providing a fixed return to their clients on their investment and using their money for notorious badla financing.

The unregulated lending operations recently came under the spotlight after the owner of a Lahore-based brokerage firm — M.R. Securities — disappeared with investors’ cash and shares worth millions of rupees. The Pakistan Stock Exchange recently informed the SECP that it received a total of 485 claims, amounting to Rs1.2 billion, against the brokerage house.

A spokesman for the SECP confirmed to Dawn that the decisions pertaining to the unregulated lending operations at the meeting of the coordination committee of the SECP and SBP were taken against the backdrop of the Lahore brokerage firm episode.

The quarterly meeting, which was held at the SECP head office in Islamabad, was attended by SBP Governor Ashraf Mahmood Wathra and SECP chairman Zafar Hijazi.

According to a statement, “the forum viewed with concern the history of financial scams and fraudulent financial activities as well as illegal liquidity mobilisation schemes and unregulated lending operations.

“It was decided to pay special attention to these areas by adopting a joint approach aimed at eradicating such practices, seeking the cooperation of law enforcement agencies to catch the culprits and ensuring that such people are denied access to the formal financial sector, by imposing restrictions and information sharing among all stakeholders.”

Explaining the unregulated lending operations, SECP spokesman Bilal Rasool said that it was illegal for brokers to offer their clients a fixed return on their investment, take clients’ money for providing badla and buy shares from their clients’ money but not in their name.

A senior executive of a brokerage firm told Dawn that the only job of a stockbroker was to sell or purchase shares for his clients and nothing else. “The brokerage house in Lahore was offering fixed return to its clients instead of purchasing shares for them. What the notorious Double Shah was doing also falls within the category of unregulated lending operation.”

He said that previously some brokerage firms engaged in illegal business defaulted and after some time their owners or directors resumed their operations with some other name and started fleecing people. “Now it appears that it will not be easy for such persons to reopen another bank account, set up another brokerage firm, etc, as SECP and SBP appear committed in tightening noose around them.”

According to the statement, during the meeting numerous initiatives were discussed that shall lead to the development of a bond market, ease of doing business, strict enforcement of financial laws, collective action against those involved in financial malpractices and improving financial inclusion in the country by promoting housing finance and encouraging the expansion of access to finance.

The SECP chairman reiterated the need for collaboration between financial sector regulators for effective implementation of rules and regulations as well as development of efficient financial markets.

The SBP governor stated that regulatory objectives of the two regulators were being served well through ongoing consultative process between the two regulators.

There was a broad consensus on approaching the systemic risk and financial stability issues in close collaboration between the two regulators.

Published in Dawn, February 23rd, 2017