The securities regulator, on Monday, has finally issued an order to the bourses in a move to prevent further embezzlement of investors' funds by brokerage houses using back-office software.
The back-office software of a brokerage firm is where information on investors' money, shares, transactions, cash balance and deposit balance are preserved.
Tamha Securities, Banco Securities, Crest Securities are the three brokerage houses that have been on the news for embezzling investors' money through back-office software. Other brokers in the list of embezzlers include Shah Mohammad Sagir Securities, Dawn Securities, Sylhet Metro City Securities, Trendset Securities, and Moharram Securities Limited.
In its order, the Bangladesh Securities and Exchange Commission (BSEC) said that the back-office software most brokerage firms use are editable.
This makes it easy for unscrupulous brokers to provide misleading information to their clients by editing the information before sending them.
Moreover, brokerage firms often connive with the software providers to carry out such malfeasance. And, because the audit trail is not saved in the overall system, these wrongdoings generally stay under the radar.
The BSEC has directed both the stock exchanges to formulate a guideline to bring the software vendors under regulation, and form a panel having the vendors by 31 December this year.
As per the BSEC directives, the vendors have to provide uneditable back-office software to brokerage houses so that no information can be changed in any way.
Also, the brokers have to ensure their use of the uneditable software by 31 March, 2024. The ones who are already using uneditable software must obtain the certificate as per guidelines of the stock exchanges.
Furthermore, the BSEC said after 31 March next year, the commission will inspect brokerage firms from time to time to see if they are using the uneditable software. Those who will fail to comply shall not get any dividend out of their holdings at the stock exchanges. What's more, their initial public offering quota and the facility of opening new branches and booths will remain suspended.
The system loopholes
Ashequr Rahman, managing director of Midway Securities Limited, told The Business Standard, "As a result of this BSEC directive, the entire software system will come under regulation and the brokers will not be able to siphon investors' money."
According to the top officials at several brokerage houses, shares could be traded from investors' beneficiary owners (BO) accounts without them knowing beforehand.
At present, it's difficult to do so as the Central Depository Bangladesh Limited (CDBL) keeps track of all the shares. The CDBL has the mobile number and email address of all BO account holders. When any share transaction happens, a text message goes to the BO account holder's mobile phone.
Unscrupulous brokerage houses mainly target investors who do not update their contact information with the CDBL. Investors need to be more aware
However, no one except the respective brokerage house have records of the investor's money that is kept in the brokerage firm's consolidated customer account. As a result, fraudulent brokerage firms take advantage of this loophole and steal from the BO accounts, and then edit information on portfolio statements keeping their clients in the dark.
Ashequr Rahman said the mobile numbers of all BO account holders are not updated with CDBL as many of them do not provide updated information.
"They are the ones whom unscrupulous brokerage houses target. Investors need to be more aware," he added.