Economy, Business And Markets

Broker Liability Insurance Introduced

Broker Liability  Insurance IntroducedBroker Liability  Insurance Introduced

Commission brokers on Tehran Stock Exchange trading floor can now insure against liabilities incurred from trading. A new policy will compensate losses inflicted by brokers on clients by placing wrong orders.

Pars Gostar Khobre Brokerage is offering the policy in conjunction with Mihan Insurance for the first time in Iran to help commission brokers manage their job risk.

"We will insure brokers to control human error during trading," said the Abdollah Rahimlou Benis, the brokerage's chief executive.

Brokers face considerable losses if they misplace client orders. They would have to compensate their client's losses from their own pockets, as brokerage houses hold employees responsible for their errors.

The risk mainly comes from obscure laws dealing with such cases. Furthermore, brokers are hard pressed for providing evidence of systemic problems, such as hang-ups in trading software and server, and Internet breakdowns—a very common phenomenon in Iran.

The most important source of contention is deals done over the phone. Clients can deny giving wrong information or deny having made a mistake, and often brokers don’t have any proof that the fault lies with the client.

"These problems arise from the difference in the interpretation of conversations between clients and brokers, and client's unfamiliarity with market mechanisms," said the chief executive. "Although brokerages have tried to minimize this issue by recording calls and using call centers, the problem still exists."

That is not to say brokers do not make mistakes. They do. Brokers with outside work problems cannot concentrate on their jobs during trading hours, so they make mistakes.

"Now our colleagues in the brokerage industry can insure themselves against such risks," said the executive.

Trade volume in the $95 billion TSE has fallen markedly during the past two years as political uncertainty, financial sanctions and recession have hit stock performance.

Prolonged nuclear negotiations between Iran and the six world powers—the United States, Britain, France, Russia, China and Germany—over the scope of Iran's nuclear activities weighed on stocks, especially banking and oil industries, which were directly targeted by sanctions.

Company performance was also suffocated as inflation hit historic highs and consumer spending fell to record lows, as a direct result of profligate government spending, leading to a steep two-year contraction in domestic output.

Now that nuclear talks between Iran and six have concluded in a historic deal that would see the end of sanctions in exchange for curbs on Iran's nuclear works, the economy is recovering and trading is expected to pick up. Hence, insurance policies for brokers will be in high demand.