Collective investment schemes in emerging markets: An assessment of the regulatory framework for investor protection in Uganda

Abstract

Collective Investment Schemes (CIS) exist in several markets, both emerging and developed such as the UK and most of continental Europe, the USA, Australia, China, Japan, Turkey, Greece and several other countries. The Capital Markets Authority (CMA) began licensing Collective Investment Schemes after Parliament passed the CIS Act in 2003. In Uganda, the CIS legal framework allows for both Open Ended Investment companies (OEICs) and Unit Trusts Schemes. However, the unit trusts are the only form of schemes that are currently operational.

The CIS sector is characterized by a lot of risk to the investors which include inter alia conflict of interest, weak regulators, theft, misappropriation of assets, and deliberate abuse of the law by market players. Many investors have suffered significant financial loss while they trusted their advisors to look after their investments. The victims are ordinary investors from all walks of life who believe that in our society there are rules and regulations that offer protection for the consumer or investor. However, despite the existence of the laws and regulations that have been put in place to ensure that investors participating in CIS are adequately protected it is not clear to what extent the regulator and the legal and regulatory framework afford protection to the investors.

The aim of this research paper therefore was to evaluate the effectiveness of the regulatory framework for Collective Investment Schemes in protecting investors in Uganda. Specifically, the study sought to study the legal and governance structures of the different types of CIS in Uganda, establish whether the regulatory framework for CIS adequately protects investors, and establish whether CMA adequately ensures compliance and enforcement of the regulatory framework by CIS operators and to make recommendations on the way forward in view of the findings of the study

The first chapter presented the risks that the investors participating in CIS may encounter. The chapter also spelt out the methodology employed in the research which was mainly qualitative and the data was collected through the use of interview guides. Chapter two contained the theoretical framework and literature review through an examination of relevant archival resources.

The key findings of this research are contained in chapters three and four. They revealed that the laws and regulations governing CIS afford a reasonable degree of protection to investors through various provisions regarding separation of assets from management, oversight function, professional management of the funds, diversification of investments and full disclosure. However, it was also revealed that there still exist some legal and extra challenges that hinder adequate protection to the investors and these include inter alia illiquid markets, conflict of interest, investment restrictions, pricing and valuation, populace’s lack of knowledge and operation of the capital markets industry, lack of confidence by the public in the capital markets, lack of experience by some of the operators of the CIS, deliberate abuse of the regulations, inadequate supervisory capacity by CMA.

Recommendations to address the legal and extra-legal factors inhibiting the efficiency of the law governing CIS have been given in chapter five.