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Following is the speech by the Secretary for Financial Services, Mr Stephen Ip, in moving the second reading of the Securities and Futures Bill in the Legislative Council today (November 29):
Madam President,
I move the second reading of the Securities and Futures Bill.
Today I am glad to introduce the Securities and Futures Bill into the Legislative Council. The Bill is important as it represents a new milestone for our work to reform the securities and futures market.
The Financial Secretary announced in his Budget Speech in March 1999 that the Administration would implement a three-prong reform for the securities and futures market of Hong Kong. As at today, the merger of the exchanges and clearing houses and the listing of the new company so merged has been completed. Various proposals relating to the enhancement of the financial infrastructure in Hong Kong and the establishment of a fully electronic securities and futures market are currently underway. After a year-long consultation, the part of the reform involving changes to the regulatory regime is now enshrined in the Securities and Futures Bill. I hope Members would accord priority to scrutinizing the Bill so that the overall reform could be accomplished as soon as possible.
Objectives and major proposals of the Bill
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There are currently 10 Ordinances governing the securities and futures market, as follows:
Securities and Futures Commission Ordinance;
Commodities Trading Ordinance;
Securities Ordinance;
Protection of Investors Ordinance;
Stock Exchanges Unification Ordinance;
Securities (Insider Dealing) Ordinance;
Securities (Disclosure of Interests) Ordinance;
Securities and Futures (Clearing Houses) Ordinance;
Leveraged Foreign Exchange Trading Ordinance; and
Exchanges and Clearing Houses (Merger) Ordinance.
The purpose of the Securities and Futures Bill is to consolidate and modernise the above legislation relating to financial and investment products, regulation of the securities and futures market, and the protection of investors.
The main objective of the Bill is to set up an effective regulatory regime for the development of a fair, orderly and transparent market to promote market confidence, secure appropriate investor protection, reduce market malpractice and financial crimes, and facilitate innovation and competition.
In finalizing the relevant proposals and drafting the provisions, we have followed the following principles:
First, the new regime should be on par with international standards and compatible with international practices, with necessary adjustments to address local characteristics;
Second, a reasonable balance should be struck between protecting investors and facilitating market development;
Third, procedures and processes should be simplified and made user-friendly wherever possible to minimize the regulatory burden;
Fourth, the exercise of regulatory powers should be subject to adequate checks and balances;
Lastly, there should be a smooth transition from the existing to the new regulatory framework.
The Securities and Futures Bill is divided into 17 Parts. It establishes the regulatory objectives, functions and the constitutional framework of the Securities and Futures Commission (SFC); stipulates the regulatory and investigative powers and operational procedures of the SFC; specifies the regulatory framework covering, among other things, the exchanges, clearing houses, investment products and intermediaries. The Bill also empowers the SFC to take disciplinary actions against licensees and exempt persons; establishes the Securities and Futures Appeals Tribunal; sets up a framework for investor compensation; establishes a Market Misconduct Tribunal and criminalizes market misconduct; and upgrades the regime for disclosure of securities interests.
We have published the Securities and Futures Bill in the form of a White Bill in April for public consultation. The response has been most positive. Respondents generally recognize the need for reform and support its broad direction, including:
*the introduction of a single licensing regime to streamline the regulatory framework for intermediaries and to upgrade the quality of intermediary services for better protection of investors;
*levelling the playing field for SFC-licensed brokers and the securities arms of exempt banking institutions;
*establishing the Market Misconduct Tribunal to maintain the order of financial markets; and
*upgrading the regime for disclosure of securities interests to enhance the quality of information disclosed and market transparency.
Respondents also welcome the proposed safeguards, including the establishment of the Securities and Futures Appeals Tribunal and the Process Review Panel.
Improving the regulation of market intermediaries
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The Bill sets up a single licensing regime, under which an intermediary will need only one single licence to engage in activities concerning securities, futures contracts and other investment products regulated by the SFC. This proposal will help reduce administrative costs and burdens, and meet the needs of future market developments. Existing registered persons will have two years to migrate to the new licensing regime on commencement of the new legislation.
Furthermore, to enhance investor protection, we have introduced into the Bill a "management responsibility" concept and specified the persons who are required to apply to the SFC to become "responsible officers". Without affecting the overall effectiveness of the regulatory regime, we have adjusted the penalty maxima for a number of offences under the licensing regime. In the light of practical constraints faced by intermediaries, we have also extended the statutory time limits for compliance with certain licensing requirements.
Furthermore, the Bill empowers the SFC to impose civil fines to punish improper conduct by intermediaries. This will provide the SFC with an alternative means of disciplinary action to reflect in a more proportionate manner the severity of the misconduct. The maximum fines will be $10 million or three times the amount gained or loss avoided.
Establishing a level playing field
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At present, authorized institutions such as banks, which conduct securities businesses, are already supervised by the Hong Kong Monetary Authority (HKMA) under the Banking Ordinance (BO). Under the Bill, the SFC will act on the advice of the HKMA in deciding whether or not to continue to grant the exempt status to these authorized institutions. The HKMA will also introduce new measures to strengthen the regulation of the securities arms of banks. This will better protect investors, minimize regulatory overlap thereby reducing unnecessary regulatory costs, and level the playing field between the securities arms of banks and SFC licensees.
The HKMA will remain the front-line regulator and will perform its regulatory functions, in relation to the securities arms of banks, in a manner and according to standards that are consistent with those applied by the SFC to its licensees. In this respect, the Bill vests in the HKMA necessary powers for the day-to-day supervision of the securities arms of banks. Necessary amendments will also be made to the BO to enable the HKMA to perform relevant regulatory functions. When I move the second reading of the Banking (Amendment) Bill later, I will highlight its major provisions.
The new regulatory framework will be underpinned by a revised Memorandum of Understanding to be drawn up between the SFC and the HKMA.
Combating market misconduct
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The Bill creates an alternative civil route to the existing criminal route for dealing with certain forms of market misconduct. It will build on the strength of the Insider Dealing Tribunal which already provides a means of dealing with insider dealing, and expand it into a Market Misconduct Tribunal (MMT) to handle, in addition to insider dealing, five other types of market misconduct, including price rigging in securities or futures contracts and stock market manipulation, on the civil standard of proof and using civil procedures. The MMT may, by way of civil sanctions, order payment of the profit gained or loss avoided, restrict a person's access to the markets, and disqualify a person from being a director or other officer of any corporation, etc.
As an increased deterrent and to punish market misconduct, the Bill will retain, modernize and expand the existing criminal regime to deal with market misconduct where there is sufficient evidence that a criminal offence has been committed by an identifiable person, that there is a reasonable prospect of a conviction, and that it is in the public interest to bring a prosecution. Insider dealing and five other types of market misconduct will be made criminal offences. The Bill sets the maximum penalty for criminal offences of market misconduct at a fine of $10 million and 10 years' imprisonment. In response to comments from the Legislative Council Subcommittee on the White Bill, we have, where appropriate, extended the civil sanctions to the criminal regime to better protect investors and market participants.
Enhancing market transparency
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The Bill seeks to enhance market transparency by promoting timely and accurate disclosure by listed corporations of price sensitive information to assist investors in assessing risks and returns and making informed investment decisions.
Specifically, to bring Hong Kong in line with international standards, the Bill will lower the initial shareholding disclosure threshold for persons other than directors and chief executives from 10% to 5%; and shorten the disclosure notification period in most cases from five days to three business days. These proposals are welcomed by the market.
In response to calls from listed corporations in the light of their past market experience and to cater for local characteristics, the Bill also proposes to extend certain disclosure requirements to short positions, unissued shares and cash-settled derivative products to provide investors with more complete market information.
Through in-depth discussions with market participants, we have struck a reasonable balance between enhancing market transparency and facilitating market development. The Bill compresses the level of details to be disclosed and provides exemptions under certain circumstances, but preserves the requirements to disclose essential data to enable investors to have a clearer picture of the major shareholding positions in listed corporations.
Investor compensation
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The existing compensation funds for the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange respectively are derived partly from deposits paid by the exchange participants and partly from statutory transaction levies. The compensation ceilings are set at a per broker level. Individual investors are not certain of the level of protection for them.
We have included in the Bill a flexible framework for the establishment of a new investor compensation scheme. The SFC has commissioned a consultancy study and will put forward detailed proposals for public consultation. Detailed rules for the operation of the new compensation scheme, including the per investor compensation ceiling, will be stipulated in subsidiary legislation.
Transparency and accountability of the SFC
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The Bill has preserved all existing accountability arrangements and created additional checks and balances to guard against possible abuse of powers. One notable measure of accountability is the inclusion of SFC's regulatory objectives in the Bill, which will serve as benchmarks by which the public and the industry will be able to measure the SFC's performance.
Other safeguard measures include the establishment of a Securities and Futures Appeals Tribunal and a Process Review Panel. In particular, the Process Review Panel was established earlier this month. Membership of the Panel is drawn from experienced brokers, listed companies, the academia, banks, and the legal and accountancy professions. We believe that the Panel is broadly represented and is well placed to review the operational procedures of the SFC.
Preparation of subsidiary legislation
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The Bill provides for a framework of regulatory arrangements that are flexible enough to meet changing market needs. Relevant subsidiary legislation, codes and guidelines are being prepared in parallel and will be released for public consultation while the Bill is being examined by this Council.
Urgency for reform
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With the globalization of financial services, there is an imminent need for reform to meet the challenges brought by increasing competition. We have indeed travelled a long way here -
*in 1996, SFC published a draft bill for public consultation, but there was then no market consensus;
*in mid 1999, we started a new round of consultation on the major policy proposals of the Bill; and
*in early April this year, we published the Securities and Futures Bill as a White Bill to consult the market on the detailed provisions of the Bill. The intensive consultation exercise has proven to be very useful as it helps ensure that the proposals in the Bill are practical and would not impose a heavy compliance burden on market practitioners.
Discussions on the legislative reform are now rather advanced. We will continue our dialogue with the market on the detailed provisions of the Bill. The Administration is determined to proceed with the reform and there is general consensus in the market. I look forward to Members' support for the Bill, so that the reform proposals could be put into operation as soon as possible.
Conclusion
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Madam President, early enactment of the Securities and Futures Bill would help the securities and futures market to fully perform its capital markets function, and consolidate Hong Kong's position as an international financial centre and the premier capital formation centre for the Mainland of China. To maintain Hong Kong's competitiveness as an international financial centre and to better protect investors, I sincerely appeal for Members' support to pass the Bill as quickly as possible.
Thank you, Madam President.
End/Wednesday, November 29, 2000
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