International Organisation of Securities Commissions (IOSCO) has conveyed to the Securities and Exchange Commission of Pakistan (SECP) that there is no system of inspection of the members of the stock exchanges in place whereby inspections are conducted based upon a risk assessment.
According to the country-report of the IOSCO for 2015 on SECP assessment, the regulatory division/department at the SECP responsible for reviewing the disclosures and reports of members/broker is the Securities Markets Division. During surveillance and inspection of the members of the exchanges the SECP checks the compliance of applicable rules and regulations by the members/brokers including the conduct of business, accuracy of calculation of capital adequacy, disclosure and segregation of clients' assets.
During the past two years only approximately 10 percent of the total number of brokerage houses were inspected on an annual basis although this number is expected to increase in future with enhanced capacity of the relevant department. In addition, as referred above, there is a mechanism in place in the form of the system audit (for compliance with applicable rules and regulations, segregation of clients' assets, etc) whereby compliance by market intermediaries is audited by an independent auditor. With regard to investment advisors, Specialised Company Division (SCD) performs licensing, registration, regulation, on-site inspection, off-site surveillance and enforcement for the NBFC Sector. SCD carries out on-going monitoring of the regulated entities under an annual plan devised at the start of each year.
There is no system of inspection in place whereby inspections are conducted based upon a risk assessment, although under the annual inspection plan entities to be inspected in each quarter are identified. The inspection plan is designed to ensure that major entities (ie entities with larger asset bases and/or higher level of deposits) are inspected every year.
Exchanges also supervise broker members through the System Audits, NCB reporting and RMR margining system. However, System Audits are outsourced and done by an external auditor. Selection of Broker/TREC holder for
audit is done through a biannual balloting. Further, NCB reports are not detailed and risk based, but just a submission of the capital (as a number), the report added.