Rules for Strengthening Consumer Pr

On 16 May 2017, a decision by the Egyptian Financial Supervisory Authority (“EFSA”) was published in the Egyptian Gazette containing updated rules that relate to consumer protection for consumers of securities companies (the “Decision”).[1] The updated rules include prohibiting securities companies from using proxies which are more than 5 years old, rules to custodians on the distribution of returns to consumers, protections specific to minors, and controls for dormant accounts. The Decision also prohibits the opening of accounts for natural persons by way of proxy, and mandates that a natural person makes direct contact in order to open an account with a securities company. The result of this Decision is that all current proxies or power of attorney for natural persons will be deemed null as of 1 January 2018. All brokerage and portfolio management companies, and authorized custodians must bring themselves to be fully compliant with the rest of the provisions of this Decision by 1 July 2017.

Background

EFSA’s regulatory role with respect to the trading of securities is defined in the Capital Market Law[2] as well as the 2009 Law on the Oversight of Non-Banking Financial Markets and Instruments.[3] These legislative instruments in effect place two sets of distinct responsibilities on EFSA: the protection of the rights of those who trade on the securities market (consumers), and the regulation of the overall non-bank financial system in a manner which ensures its stability, including working for protecting shareholders rights and promoting sound financial practices. EFSA’s role is thus a balancing act which entails it to take any necessary measures to effectively supervise the securities market and guarantee that transactions are free from fraud, exploitation, or speculative trading. EFSA has been actively exercising this consumer protection aspect of its role through many of the decisions it issues, and this is the framework which underlies this recent Decision.

The Current Decision

Decision No. 61 of 2017, published on 16 May promulgates an EFSA Board of Director’s Decision which took place on 19 April 2017. The Decision comes into force on the day of its publication in the Egyptian Gazette. The following is a summary of the Decision’s most significant provisions.

• Limitations Concerning Proxies and Power of Attorney

Brokerage companies, portfolio managers, and authorized custodians are prohibited from using proxies that have been issued, or last updated more than five years ago. If a proxy is not renewed prior to the lapse of that period, all operations on the concerned client’s account must be suspended and the company must notify the client whose proxy has expired within one week at most. The company must also submit to EFSA at the end of each month a list of all accounts for which operations have been suspended. Brokerage companies, portfolio managers, and custodians are also prohibited from entering into contracts or opening accounts for natural persons except directly through the customer. Proxies and power of attorney may not be used to open accounts, regardless of their legal form. It is worth clarifying here that the prohibition is only with regards to concluding contracts and opening accounts. Companies may effect transactions for the sale and purchase of securities, deposits and withdrawals, determining the validity of transactions and ratifying account balances by way of a special or general power of attorney as long as it contains a phrase which allows acting on the client’s account before securities companies. In either event, buy on margin and transactions conducted in stock exchange sessions may not be effected by way of proxy.

• Custodian Rules

All EFSA authorized custodians must now enter into direct contracts with their clients prior to holding any of the client’s securities. In addition, custodians may not freeze or defreeze securities through brokerage companies unless after confirming that the customer consents to their securities being transacted by the brokerage company in question.

• Limitation on the Distribution of Returns

Central depository companies will only distribute returns to shareholders or owners of securities in the manner that the client determines, given it must be one of three ways:

1. Bank transfer to client’s account.
2. Issuing a bank cheque in the client’s name which may only be drawn by the first beneficiary.
3. An ATM card specific to the securities distributions.

This is with the exception that returns may be distributed to the accounts of companies authorized to practice the activity of buying on margin, subject to certain listed conditions.

• Protections for Minors

The Decision places an obligation on brokerage companies, portfolio managers, and authorized custodians to obtain all necessary documentation which ensures the soundness of contracts and transactions in relation to securities, balances, or accounts that are owned by minors, in accordance with the applicable laws in that respect, and especially ensure that all orders or contracts issued by a guardian of a minor contain the specialized court’s seal, or that of the custody prosecution.

• Dormant Accounts

For brokerage companies and custodians, an account will be deemed dormant upon the lapse of a 12-month period without any deposits, withdrawals, or sale and purchase of securities being made. For portfolio management companies, a customer’s account will be deemed dormant upon the lapse of one month from the end of the term of the customer’s portfolio management contract with the company. Brokerage, portfolio management companies, and custodians are obliged by virtue of this Decision to create a paper or electronic record containing all dormant accounts which the company has by the end of each month. A dormant account may not be reactivated except by the client or his/her agent subject to specific conditions that are set out in Article 9 of the Decision, and which include presenting a “reactivation form” (attached to the Decision) that is certified by special agents to be appointed by the boards of directors of each company. A list of the agents appointed by each company to authorize reactivation must be sent to the central depository agency. In essence, the Decision places the burden of establishing identity and capacity at account reactivation on the securities companies.

• Central Depository Agency

Finally, the Decision obligates the central depository company to submit an electronic record to EFSA on the first week of every month containing dormant accounts, and those reactivated within the past preceding month. The record must be classified by brokerage company or custodian and must contain details such as the client’s code, name, and date of account activation, as well as the value of all transactions that have been conducted on the account.   [1] EFSA Board of Directors’ Decision No. 61/2017 on Strengthening Protections for the Consumers of Securities Companies, Egyptian Gazette, Issue No. 112, 16 May 2017. [2] Law No. 95/1992 on the Capital Market, Official Gazette, Issue No. 25 (bis), 22 June 1992. [3] Law No. 10/2009 on the Oversight of Non-Banking Financial Markets and Instruments Law, Official Gazette, Issue No. 9 (bis), 1 March 2009.