Report of the Working Group on the Business Environment of the Stockbroking Industry

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The Working Group on the Business Environment of the Stockbroking Industry (the Working Group), tasked to examine with the local stockbroking industry ways to enhance the competitiveness of the small and medium sized brokerage firms, has submitted its Report to the Secretary for Financial Services and the Treasury, Mr Frederick Ma, after three months of extensive consultation and deliberations.

In releasing the Report received from the Working Group yesterday (April 15), Mr Ma said today (April 16): "I thank the Working Group for its dedicated efforts and more importantly, the stockbroking industry associations for sharing with the Working Group their useful comments and constructive suggestions."

"The Working Group has put forward a number of recommendations to enhance transparency of fees and charges for stockbrokerage services, promote image building and market awareness of brokerage firms, level the playing field between brokers and banks, rationalise HKEx fees for brokers, minimise compliance burden, upgrade market infrastructure, enable brokers to diversify their product range, and improve training opportunities for brokers," Mr Ma said.

"I hope these recommendations together would help improve the business environment of the stockbroking industry, in particular for the small and medium sized brokers.

"A lot, of course, will have to rely on the hard work of members of the industry in upgrading their skill set and competing by offering quality services. The government stands ready to provide a conducive environment for the industry to operate."

After deliberations with members of the stockbroking industry, as represented by the industry associations, and other relevant organisations, the Working Group has made 23 recommendations whose implementation would require the joint efforts of the regulators including the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA); the market operator, namely Hong Kong Exchanges and Clearing Ltd (HKEx); and most importantly, the stockbroking industry.

"These are positive steps in helping the industry. Some of the initiatives are originated from the useful comments made by the industry, whereas others are initiatives which the Working Group has proposed to the industry associations for taking forward with their members," Mr Ma said.

"I have invited the relevant parties, including the SFC, HKEx and the HKMA, to take forward the relevant recommendations as soon as possible. I would also appeal to the stockbroking industry for their continued support and collaboration which is critical to the successful implementation of the recommendations."

The Working Group's recommendations can be broadly categorised into eight major categories -

(a) to enhance transparency of fees and charges imposed by banks and brokers, including efforts to group the existing 70-plus fee items into broad categories, in order to discourage any anti-competitive pricing behaviour and assist brokers in explaining their fees and charges to their clients;

(b) to promote image building of brokers and market awareness amongst investors;

(c) to level the playing field between brokers and banks through effective enforcement of "cold calling" regulation and rationalisation of regulatory fees paid by banks for conducting securities business;

(d) to rationalise HKEx fees that are duplicative with those of SFC, including removal of 10 fee items imposed on brokers ranging from $100 to $12,000 per item;

(e) to minimise compliance burden on the small and medium sized brokers through a flexible and pro-compliance approach adopted by the SFC in enforcing the Securities and Futures Ordinance, and re-entry arrangements for stockbrokers;

(f) to expedite work on the enhanced IP account model so that smaller brokers can be better positioned to compete with larger players, including efforts to be made by the SFC to lower the capital requirements for brokers opting for the model, and by the HKMA to promote fair and transparent pricing for effecting money transfers to IP accounts by banks;

(g) to promote diversification of products offered by smaller brokers, including partnerships between the Hong Kong Securities Institute, Hong Kong Investment Funds Association, stockbroking associations and the SFC on retail funds; and

(h) to enhance training opportunities of brokers, including efforts made by the HKSI, SFC and HKEx, and promoting brokers' use of funds available through the various Small and Medium Enterprises (SME) funding schemes administered by government.

On the suggestion of a two-tier commission system raised by some members of the stockbroking industry, the Working Group has fully considered and analysed the pros and cons from the practical, economic, competition policy and protection of investors perspective. It was considered that such a system would not be conducive to improving the competitiveness of the stockbroking industry, especially the small and medium sized brokerage firms. Besides, the system would be against the interest of the investing public and the spirit of competition in a free market.

The Working Group comprises representatives from the Financial Services and the Treasury Bureau, the Securities and Futures Commission, and the Hong Kong Exchanges and Clearing Ltd.

The Report is published today. It can be downloaded from the web-site of the Financial Services and the Treasury Bureau at www.info.gov.hk/fstb/fsb, the Securities and Futures Commission at www.hksfc.org.hk, and Hong Kong Exchanges and Clearing Limited at www.hkex.com.hk.

Note: Executive Summary of the Report is attached.

End/Wednesday, April 16, 2003

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EXECUTIVE SUMMARY

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SUMMARY

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1. On 15 January 2003, the Secretary for Financial Services and the Treasury announced the establishment of the Working Group on the Business Environment of the Stockbroking Industry ("the Working Group") to examine with the local stockbroking industry ways to enhance the competitiveness of the small and medium sized brokerage firms, and asked the Working Group to submit to him a report in three months' time.

2. The Working Group comprises representatives from the Financial Services and the Treasury Bureau, the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Ltd (HKEx).

3. The Working Group attached great importance to engaging the stockbroking industry and listening to the industry's views in examining proposals to improve the business environment and enhance competitiveness of the industry, in particular the small and medium sized brokerage firms. The Working Group met with members of the industry, including the five industry associations, namely, the Hong Kong Association of Online Brokers, the Hong Kong Securities Professionals Association, the Hong Kong Stockbrokers Association, the Hong Kong Securities and Futures Industry Staff Union and the Institute of Securities Dealers. To take forward the industry's views and suggestions and explore ways to improve the business environment of the stockbroking industry, the Working Group has engaged relevant parties, including the regulators, government departments and industry organisations to address the issues of concern and consider possible solutions.

4. Major issues raised by the stockbroking industry include, amongst other things, maintaining the 0.25% minimum commission rate; concern about predatory pricing; proposing a system of two-tier commission rate; leveling the playing field with banks, particularly in the areas of unsolicited calls in relation to securities and futures contracts and licensing fees for securities activities; rationalising HKEx's obsolete regulatory requirements and fees; and supervision by the SFC.

5. The Working Group also took the opportunity to put forward initiatives to the industry associations, which may help enhance the competitiveness of brokers, especially the small and medium sized players. These initiatives include enhancing the transparency of services provided by the intermediaries and their related charges; early implementation of the enhanced IP account model with straight-through processing capability; promoting SME funding schemes; diversifying brokers' product range to include retail bonds and investment funds; and promoting continuous training to facilitate re-entry of intermediaries into the industry, training and re-training of brokers, and "portability" of qualifications.

6. Having considered the views and suggestions from the industry, and input from relevant organisations, the Working Group puts forward recommendations which seek in the main to enhance transparency of fees and charges, promote image building and market awareness of brokerage firms, level the playing field between brokers and banks, rationalise HKEx fees for brokers, minimise compliance burden, upgrade market infrastructure, enable brokers to diversify their product range, and improve training opportunities for brokers. The recommendations are outlined in the ensuing paragraphs.

RECOMMENDATIONS

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7. To achieve fair competition, the Working Group supports enhancing transparency of fees and charges imposed by brokers and banks. This will also enable investors making more informed choices as well. The Working Group recommends that -

(a) the SFC and the Hong Kong Monetary Authority (HKMA) should continue to monitor rigorously the disclosure by brokers and banks of the fees and charges imposed by them on their securities trading services;

(b) both the SFC and HKMA should accord priority to the brokerage fee catergorisation exercise and the stockbroking industry should contribute their views actively to the SFC for early completion of this exercise; and

(c) the SFC should step up its publicity efforts to educate the investors to enable them to understand the services provided by intermediaries and compare the various fees and charges where necessary.

8. To promote image building for the brokers and market awareness of both the brokers and investors, the Working Group recommends that -

(a) the stockbroking industry associations should consider setting up an electronic information directory for their members to promote their image and market awareness among clients; and

(b) the HKEx should accord priority to hyperlink its web-site to those of its participants in order to provide a seamless information platform where investors and market participants alike will have free and unobstructed access to information on SEHK Participants.

9. To level the playing field between brokers and banks, the Working Group recommends that -

(a) the HKMA should continue to ensure effective enforcement of its cold calling guidelines issued in January 2003 and to work closely with the SFC to ensure consistency in their regulatory approach towards banks and brokers; and

(b) the HKMA should explore with the SFC the possibility of rationalising the relevant regulatory fees imposed on banks for conducting securities business, with a view to introducing a sliding scale of fees reflecting the size of the securities business of a bank.

10. On the rationalisation of HKEx regulatory requirements and the associated fees for brokers, the Working Group endorses the positive moves taken by the HKEx to abolish a number of regulatory requirements and the associated 10 fee items on brokers, ranging from $100 to $12,000 per fee item, with effect from 1 April and 2 May 2003 respectively. In relation to this, the Working Group recommends that the HKEx and the SFC should accord priority to the review of fees inherited by the HKEx from the pre-merger entities, with a view to rationalising and simplifying them for Exchange users.

11. To minimise compliance burden on the small and medium sized brokers in light of the new regulatory regime introduced by the new Securities and Futures Ordinance (SFO), the Working Group recommends that -

(a) the SFC should endeavour to adopt a pro-compliance approach in facilitating brokers' compliance with the new SFO and avoid any unnecessary regulatory burden for firms with good internal controls and good risk management and practice. The Working Group supports the flexible approach adopted by the SFC in calibrating regulatory action against brokers on minor, inadvertent or technical first-time breaches of new requirements under the SFO. In general, the SFC should continue to engage the industry in streamlining regulatory requirements;

(b) the stockbroking industry, while continue to focus on compliance, should maintain dialogue with the SFC on any difficulties they experience in complying with the new requirements under the SFO and forward their suggestions for improvement to the SFC;

(c) the SFC should consider, and work closely with the Hong Kong Securities Institute (HKSI) in developing, alternative means to satisfy the licensing competence requirements for re-entry seekers; and

(d) the HKEx should consider possible areas for streamlining and rationalising the regulatory requirements in relation to SEHK Participants under the Rules of the Exchange.

12. To upgrade the market infrastructure so that the smaller brokers will be better positioned to compete with larger players, the Working Group recommends that -

(a) the SFC and the HKEx should accord priority to the development of a user-friendly and cost-effective Investor Participant (IP) account model with straight-through processing capability;

(b) the industry associations should participate actively in the design and set up of the IP account model by offering their views to the IP Account Task Force of the SFC;

(d) the SFC should examine the possibility of lowering capital requirement for brokers who do not hold client assets and tiering capital requirements according to risk and nature of business; and

(e) the HKMA should make every effort to persuade banks to adopt a fair and transparent pricing structure for arranging money transfers to IP accounts and if necessary, to seek to provide the basis for such a structure through a code of conduct for the banking sector.

13. To enable brokers to diversify their product range to include retail bonds and funds, the Working Group -

(a) supports the fostering of business partnership between the Hong Kong Investment Funds Associatioin (HKIFA) and brokers, in particular small and medium sized brokers, and encourages collaboration between the HKIFA, the HKSI and other relevant groups in organising more training courses to enhance brokers' knowledge in new products; and

(b) recommends the SFC and the HKEx to further facilitate straight-through listing of the SFC authorised funds including, in particular, Exchange-Traded Funds, Real Estate Investment Trusts and bonds.

14. To improve training opportunities whereby the competitiveness of brokers will be enhanced, the Working Group recommends that -

(a) the HKSI should continue to provide courses widening the skill set of brokers to enable them to provide new services, such as financial planning, and continue its efforts in taking forward its various initiatives, such as portability of qualifications;

(b) the SFC should continue to play a supportive role in facilitating brokers meeting the continuous professional training (CPT) requirement such as providing speakers for CPT programmes organised by stockbroking industry associations;

(c) the HKEx should extend education seminars to stockbroking industry associations to increase the infiltration of product knowledge and investment/trading strategies to their members, and to the investing public; and

(d) the stockbroking industry associations should disseminate to their members information on the SME funding schemes and forward their views, if any, to the relevant government departments on ways to further improve the operation of these schemes.