Brokerage firms to get 75% of investors’ deposit interest

Infographic: TBS

Brokerage firms will receive 75% of the interest earned in the Consolidated Customer Account, while the remaining 25% must be deposited to the Investors' Protection Fund, which will be used to safeguard investors.

To enforce the decision, the relevant regulations will be amended following legal procedures.

The decision was made recently with the consent of the DSE Brokers Association of Bangladesh and a taskforce formed by the Bangladesh Securities and Exchange Commission (BSEC).

This measure aims to enhance the protection of investors and strengthen the overall regulatory framework. 

Although there was previously a directive to distribute the interest proportionally among investors, brokerage firms did not comply with it. 

They had sought a waiver from the BSEC, citing reasons such as the Covid-19 pandemic, economic downturn, and the slowdown in the stock market. However, based on the recommendations of the DSE Brokers Association of Bangladesh and the taskforce, the BSEC has now made the decision.

If the relevant rules are amended, brokerage houses may be entitled to 75% of the interest earned from the maintenance accounts and other related others, whereas they previously received 100% of the interest.

In August 2014, the Investors' Protection Fund was formed to protect the interest of investors in case of any default by brokerage firms.

A Consolidated Customers' Account is a separate bank account maintained by stockbrokers to hold unused funds from their clients' beneficiary owner accounts. 

These funds are strictly to be used only for paying for securities purchased by the client or collecting commissions or fees owed by the client. Any unauthorised use of the funds from the Consolidated Customer Account results in a deficit. 

Saiful Islam, president of the DSE Brokers Association of Bangladesh, told TBS, "We have learned that 25% of the interest earned from the Consolidated Customers' Account will be deposited to the Investor Protection Fund, while the remaining 75% can be utilised by brokerage houses to cover operational expenses. We have also been informed that a formal letter will be issued after amending the necessary regulations."

He further said, "We agreed to this proposal as it provides a win-win solution. The proper utilisation of the Consolidated Customer Account interest will help protect investors' interests. The Investors' Protection Fund will be used exclusively for investor protection, and this will, in turn, support the market. This fund will play a crucial role, particularly during times of crisis." 

A BSEC official, speaking on condition of anonymity, said brokerage houses had not implemented the directive, citing complexities and the slowdown in the stock market as reasons for seeking a waiver. Additionally, the stock exchanges did not provide detailed updates to the commission.

To protect investors' interests and consider the consent of the DSE Brokers Association of Bangladesh and the taskforce, the commission made the decision. However, the official added that the commission must amend the relevant rules before implementing this decision.

Normally, an investor deposits money into their own portfolio to buy shares. However, the investor is often unaware of how much money has been generated over a certain period, making it difficult for them to raise any questions regarding this. Additionally, the stock exchange has not provided detailed reports, so it becomes challenging to calculate the amount generated each year in the Consolidated Customers' Accounts. 

According to Securities and Exchange Rules, 2020, Interest earned from bank accounts opened for consolidated customers' accounts will not be considered as income of the stock broker or stock dealer. 

The net interest income, after adjusting for bank charges, if any, must be distributed proportionately among the customers. Any undistributed interest income must be transferred to the Investors' Protection Fund within 30 days of the end of each financial year. 

In case of any delay in transferring the said interest income to the Investors' Protection Fund, an additional 2% interest per month will be charged on the delayed amount, which must also be transferred to the Investors' Protection Fund. 

In June 2021, the regulator issued a directive stating that the interest earned from the Consolidated Customer Accounts held by a brokerage house in the bank must be distributed proportionately among the customers based on their share of the funds in the account. 

According to the conditions, if a customer deposits at least Tk1 lakh for a continuous period of one month during a fiscal year, they will be eligible to receive the interest. Furthermore, customers will only be entitled to the interest payment if the amount due is at least Tk500.

A brokerage house must deduct account maintenance fees and other charges from the interest earned from the consolidated customer account and then distribute the remaining amount proportionally among the respective customers.