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Following is the full text (English only) of a speech by the Financial Secretary, Mr Donald Tsang, at the Conference on Professional Ethics today (Friday):

Alec, ladies and gentlemen,

With the events of the past few weeks, I am delighted that so many of you were able to take time out from your busy schedule to be at this lunch and at the conference. It is a measure of the importance we all place on professional ethics in the industry. And what foresight. Members of the Organising Committee must have been tuned into their 'futures' radar screen when they first started arranging this conference.

Who would have imagined back last April of the unprecedented steps we have had to take in the past few weeks to maintain market stability and to protect our linked exchange rate from the rapacious appetite of the market manipulators.

If only those manipulators had taken Mark Twain's advice when he wrote a century ago - "There are two times in a man's life when he should not speculate: when he can't afford it, and when he can." - I don't think the global village would have been in any difficulties today. But then we may not have had a global village at all, and been much the worse for it.

Which leads me into the reason why we are all here today. The recent market activities, particularly of some of the 'unknown' manipulators, does raise the question of ethics.

As you know, we are facing a financial crisis unprecedented in recent history. The prosperity we have seen in recent decades appears to be slipping away. People have reason to be pessimistic. But you won't be surprised when I tell you that is not how I look at the future.

There is no doubt we are going through difficult times, but the conditions which have made Hong Kong into a leading international financial centre remain. We have a sound economic base with no external debt, strong reserves, a stable currency, a robust banking system, liquid and effective financial markets, skilled professionals, and a regulatory system that compares well with, and in some instances leads, world standards.

Most important of all, we have a hardworking and confident population determined to weather the storm. And let me assure you that all of us in the public service are fully committed to steer our community into safe harbours, and when we do, we will emerge leaner, stronger and more competitive than ever before.

It has been an unchanging feature of history that in every crisis there lies in the human spirit the ability to capture the embedded opportunity. The ultimate winners are always those who can capitalise on adverse circumstances and equip themselves with better skills and courage that enable them to withstand future challenges more effectively.

The Professional Ethics Programme, to me, is another step and an important step in the continuing process of community renewal. And that's why I find the launching of this programme so timely as we prepare for the recovery from the present crisis. It may not be just around the corner, but we're doing our best to steer the economy in the right direction of recovery.

Some people may think that 'ethics' is a rather spiritual matter, a topic that is not really related to the business world. This in my view is very wrong. Ethics represents the correct way of human behaviour in dealing with others and it is a vital element in the conduct of business, whether in the public or private sectors.

Ethics helps, not hinders, business

It has been said that finance is the child of positive economics. It is value-free and focuses on 'opportunities' rather than the public interest or the common good. Indeed, Adam Smith suggested that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, we address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages".

I would beg to differ somewhat from Adam Smith. But it is a fact of life that we may also from time to time hear people declaring how they have made their fortune by catching the right 'wave' in the markets, but seldom has any praise been expressed of good, honest services provided by their brokers. On the contrary, brokers tend to be blamed for having advised clients to buy or sell when the market moves against their clients' positions in the short term, and the honest efforts of these brokers are forgotten. The instant gratification that short-term gains provide makes it difficult for practitioners and their clients to place high but deserved value on, and appreciate, honesty and effort which, after all, are intangible and not immediately reflected in monthly account statements.

This is no incentive for ethical conduct as one may argue. Indeed, in the financial world where profits are captured in the differences and movements in prices between places and times, there is fertile ground to succumb to temptation by using the tricks of the trade in the pursuit of easy money. We so often hear of complaints about rat trading and rumour spreading by brokers in favour of their own positions. In other instances, brokers may have discharged their obligations to their clients in less than a professional manner.

Hong Kong is a professional market, and we have reason to demand a higher standard of our practitioners in respect of their advice to their clients. And we expect that strenuous efforts are made to verify the substance of hearsay before it is repeated as confirmed market information. Ill-intended rumour is not acceptable in the professional conduct of market intermediaries. I have no doubt in the integrity of the majority of market practitioners. However, a single incident could well throw the hard-earned reputation of the whole industry down the drain and the damage would be difficult and costly to repair.

At the house level, we have also seen the consequence of dishonesty and cynicism. Some brokerages have failed in the last 10 months or so because of dishonesty and the cynical view that immediate profits are to be preferred to the hard work of good supervision, good risk management and good, honest service to clients. These failures have brought a crisis of confidence into our markets and no single sector can avoid its impact.

To restore this confidence, we must always temper the so-called value-free opportunities of the markets with the practice of high ethical standards based on attaining the common good of society. And, as the American essayist, Henry Thoreau, once noted, "Goodness is the only investment that never fails." We thus for example look to the leaders of the Futures Exchange and others in achieving the higher goal of wider public good and fair play, while they are mulling over the reforms recently proposed by the administration. We need their support.

Ethics supplementary to rules and regulations

Rules and regulations, no matter how tight, will not deliver a clean market without an ethical mind. A set of rules will never be able to cover the entire spectrum of activities in any financial market. No matter how detailed they are, there is always a residual area that requires an intermediary to use common sense and a sense of honesty and fairness. In Hong Kong, we have opted to regulate the conduct of intermediaries with less detailed rules than, for example, the United States, but with clear general principles of conduct developed by the International Organisations of Securities Commissions and accepted internationally.

These principles, seven in all, are set out in the opening chapter of Hong Kong's Code of Conduct for persons registered with the Securities and Futures Commission. The first principle - "honesty and fairness", says: "In conducting its business activities, a registered person should act honestly, fairly and in the best interests of its clients and the integrity of the market". The Code goes on to provide more detailed guide-lines as to the seven principles, but since no amount of detail can cover all situations, it is finally left to the broker to bring to his work the sense of justice, honesty and fairness, expected of a person who acts for a client and who also has a responsibility to the market. He must therefore act in the best interests of his client and the integrity of the market. Sometimes no easy feat, as recent events have shown.

It follows that if we are, as a community, to rely on the common sense and the sense of fair play of an intermediary to his client and to the market, it is important that there should be a culture of ethics and compliance in generally accepted market principles. Confucius has recorded in the analects to have said: "If one leads society by legislation and orders society by punishment, the people may not stray, yet they are not ashamed of straying. But if one leads by moral example and orders by ethics, then not only will the people stay on the right path, but they shall be ashamed of straying". I see the Programme on Ethics as an undertaking to establish the culture of ethics that Confucius speaks about, and that is why, it is so worthy an undertaking.

Can ethical behaviour bring us out of our economic woes? Ethics alone clearly would not, but it would be an important driving force. As ethical principles are designed to establish the common good, a community which practices them will work together to find prosperity. I see the Programme on Ethics as a declaration by the financial industry that it places great value on honesty and fairness. And a timely one, too, after the turmoil of the past 10 months. I am sure it is a declaration which will stand the industry in good stead in the long term.

In closing, I would like to ask you to consider the two-stepped approach propounded by Sir Adrian Cadbury (who chaired the Committee on Corporate Governance and produced the well known Cadbury Report) in considering ethical questions in business: the first is to determine, as precisely as we can, what our corporate or personal rules of conduct are. And Sir Adrian emphasised that such conduct should be reflected in our past actions rather than empty statements. The second step is to consider who will be affected by our decisions and to weigh their interests in such a decision.

As our economy adjusts, we will see better days and I look forward to greeting a stronger financial industry, imbued with an even stronger sense of fairness and justice to all who seek to prosper in the commercial life of this great community of ours. Indeed, some 20 years ago we not only discovered collective pride and dignity when the ICAC bravely became our treasured institution. We also saw how a clean government that resulted gave birth to the most phenomenal economic success in the history of Hong Kong in the twentieth century. In much the same way, strong professional ethics in our financial industry could well define our cutting edge among our neighbours and a new era of prosperity for Hong Kong in the new decades ahead.

Thank you.

End/Friday, September 11, 1998

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