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How financial advisors and firms mislead investors

Financial Standard

By Brian Ngugi | Nov 12, 2024

A growing number of Kenyans are falling victim to deceptive sales tactics employed by financial advisors and firms, Financial Standard has established.

These unscrupulous practices, often referred to as “mis-selling,” involve misleading investors into purchasing unsuitable investment products.

This often involves providing inaccurate or incomplete information, or outright deception, for example, financial advisors recommending a high-risk investment to conservative investors without fully explaining the risks involved.

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Victims of these schemes have reported significant financial losses after being lured by promises of high returns and low risk, Financial Standard has established. Some clients who spoke on condition of anonymity for fear of victimisation raised concerns against asset management firms and agents, alleging that they were steered toward high-risk investments inappropriate for their financial situations.

In many cases, the investors said they were pressured into high-risk investments that did not align with their financial goals or risk tolerance.

Many investors said they were enticed by promises of guaranteed returns and were not adequately informed about the risks. Consequently, these investors faced or have already incurred substantial losses due to fluctuations in asset values and other unfavourable market conditions.

Some customers said they purchased policies believing them to be simple savings plans, only to find out later about substantial penalties for early withdrawal and exaggerated returns.

A trend we studied showed that increasingly, insurance agents are venturing into selling investment products, often without the proper qualifications.

Analysts who we interviewed warned mis-selling can have serious consequences for both the consumer and the business, as it erodes investor trust and can lead to financial loss, damage to reputation, and even legal action.

To combat this issue, regulatory authorities like the Capital Markets Authority (CMA) and the Insurance Regulatory Authority (IRA) are now stepping up efforts to protect consumers and have moved to implement stricter regulations, including mandatory certification for financial advisors and have issued warnings against fraudulent schemes.

These authorities are now implementing stricter regulations and increasing oversight of financial institutions.

CMA emphasised last week in interviews with Financial Standard the importance of working with licensed entities and approved products to protect investors. The insurance sector has also been affected by mis-selling practices. Some individuals have inadvertently purchased life insurance policies believing them to be simple savings plans. While many hold the Certificate of Proficiency (COP) for insurance sales, few possess the CMA certification required for investment products.

IRA is understood to be working to address this rising menace through stricter regulations and increased consumer awareness.

The Fund Managers Association (FMA) in response to concerns about this vice has now called for heightened industry standards and investor education.

Fred Mburu, the CEO of FMA, which represents fund managers in Kenya, said in an interview: “Adherence to best practices and keeping consumers well-informed is essential for building trust and advancing Kenya’s capital markets. This is critical for our economy’s growth.”

Despite FMA members committing themselves to a code of conduct aligned with industry best practices, prioritising transparency and investor protection, Kenya’s investment landscape is currently facing challenges from the mis-selling of investment products or services. Like in many other markets, mis-selling in Kenya has grown across various financial products, including insurance, mutual funds, stocks, bonds, and retirement savings plans.

CMA said it has taken steps to counter mis-selling by issuing public warnings about fraudulent schemes and enforcing regulations. A CMA spokesperson said in an interview Kenya’s regulatory framework is robust, aiming to prevent mis-selling and ensure all fund managers and customer-facing employees are properly qualified and trained.

These employees are required to complete a Securities Industry Certification Program, offered in collaboration with the UK-based Chartered Institute for Securities & Investment (CISI), within 12 months of appointment. For specific job functions, membership with the Institute of Certified Investment and Financial Analysts (ICIFA) is also mandatory.

To protect investors further, CMA advises the public to work only with licensed entities and approved products, listing all licensed entities on its website.

“The Capital Markets (Collective Investment Schemes) Regulations, 2023 and the Conduct of Business (Market Intermediaries) Regulations, 2011 establish robust frameworks to prevent mis-selling in Kenya’s capital markets. These regulations ensure that fund managers and market intermediaries uphold ethical standards and maintain transparency in their interactions with clients,” said the regulator.

To further protect investors, the Capital Markets Authority said it “urges the investing public to only invest through licensed entities and approved products. A regularly updated list of licensed entities is available on the Authority’s website.”