NSE’S Exposure Draft of the Proposed Rules for Broker to FinTech Collaboration – a Quick Review


In July 2020, the Nigerian Stock Exchange (“NSE”) released a set of proposed rules to guide business collaboration—between a Dealing Member and a financial technology (“FinTech”) firm—that is aimed at providing financial product or service to end users including (but not limited to) the Dealing Member’s clients.

To provide some context, a ‘Dealing Member’ is defined in Rule 169(ix) of the Rules and Regulations Governing Dealing Members as “a Member company who has been granted licence by the NSE as a Dealer in securities”. The Proposed Rules synonymizes Dealing Members as (securities) brokers. On the flip side, a FinTech firm include every entity that leverages technology to deliver financial services—in the most inclusive sense, this would typically include not only technology startups but also established financial institutions that leverage financial technology.

Notable Provisions in the Proposed Rules

A.         A Dealing Member’s collaboration with a FinTech firm now requires the NSE’s No-objection Letter

Before entering any collaboration agreement with a FinTech firm, a Dealing Member will now be required to obtain a No-objection Letter—a sort of regulatory certificate—from the NSE and will have to submit a formal request to the NSE for that purpose.

The request is to be accompanied with a defined list of documents, which includes, but is not limited to: (x) the corporate profile of the FinTech firm, (y) the list of products and services intended to be offered via the collaboration to end users, and (z) a summary of the proposed arrangements with the FinTech firm. The final step in the approval process entails the making of a presentation by the Dealing Member to the NSE—the presentation must include the details of the ongoing/prospective collaboration, with respect to operational modalities, products/services being offered, safety features, among other things.

Where a collaboration arrangement between a Dealing Member and a FinTech firm is in place before the Proposed Rules comes into effect, the Dealing Member must—within two months—disclose the nature of its collaboration with the FinTech firm, make a formal presentation covering the same details required for a No-objection request (stated above), and comply with all mandatory regulatory requirements as stipulated under the Proposed Rules. Failure to make this disclosure attracts heavy sanctions, ranging from: (x) a fine to be determined by NSE based on the circumstances of the case which in any case shall not be less than ₦250,000; and/or (y) temporary suspension of the Dealing Member.

Finally, where a collaboration arrangement is varied or terminated, notice must be given to the NSE, explaining the reason(s) and details of the variation or outlining the process designed to ensure that the termination does not affect end users. A notice of termination must be sent to the NSE and the ceasing of users onboarding must be triggered at least 14 days before the termination.

B.         Mandatory and other regulatory requirements under the Proposed Rules

Besides the minimum internal control standards prescribed by the NSE’s Rules and Regulations GoverningDealing Members (and its various amendments), Dealing Members will now be obligated to comply with certain regulatory requirement set out in the Proposed Rules where they decide to offer financial products or services to end users in collaboration with a FinTech firm. These obligations range from the commonplace (including acting at all times in accordance with applicable law and conducting due diligence on the FinTech firm with which the Dealing Member wishes to partner) to the delicate (including complying with anti-money laundering and countering the financing of terrorism laws and data protection laws).

The Proposed Rules also contain consumer protection measures, such as those mandating a Dealing Member collaborating with a FinTech firm to: (x) ensure that end users are adequately educated on the features of the products/services being offered and provide necessary disclosures, including but not limited to costs to end users; (y) ensure that accurate information is provided to end users at all times and take steps to guarantee that users are adequately educated on the risks of the products/services being offered; and (z) adhere to The Exchange’s Rule prohibiting guaranteed returns and guarantees against loss in all communications to users and prospective users.

All disclaimers regarding the products/services being offered by a Dealing Member must be placed in conspicuous parts of the platform deployed by such Dealing Member.

C.         Sanctions for non-compliance with the provisions of the Proposed Rules

Where the Proposed Rules are violated, a Dealing Member may, depending on the severity and frequency of the violation: (x) be issued a formal warning letter; (y) be issued a cease and desist letter; and (z) have its No-objection Letter revoked. Where a No-objection Letter is revoked, a Dealing Member must immediately cease all activities on the platform being used to offer its products/services and must communicate the revocation to all clients previously on-boarded on such platform within fourteen (14) working days of receiving the letter revoking the No-objection. Failure to do this attract further sanctions, ranging from fine to suspension.

Our Thoughts

The Proposed Rules highlight the increasing focus on the Nigeria FinTech industry and indicates some measures of proactiveness from the key regulator of the securities and financial market in Nigeria. Asides from the cost implications that the consent requirement proposed in the Rules might entail, we suppose that there is the overall benefit of boosting both end users’ and investors’ confidence in financial products and services deployed via collaborations with FinTech platforms.

We also think that the Proposed Rules serves as some sort of validation and positive signals for FinTech firms looking to play in the Nigerian capital market space—through the Proposed Rules, the NSE is essentially encouraging collaborations and synergy between FinTech firms and Dealing Members, presumably with the intention that such collaborations would boost participation and activities in the local market and foster healthy competition, a prerequisite for growth.

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