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SFST's speech at CFO Forum

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Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Chief Financial Officers Forum today (June 24) (English only):

Distinguished Guests, Ladies and Gentlemen,

I am honoured to be invited here this afternoon to address such a distinguished audience of Chief Financial Officers (CFOs). Let me first of all welcome you to post-SARS Hong Kong. As you know, the World Health Organization removed Hong Kong from its list of SARS-affected areas yesterday. The Government and the community welcome this decision. It bears testimony to our concerted efforts in fighting the disease. It also means that we need to face our next challenge of revitalising our economy and restore business activity to pre-SARS levels and beyond. On behalf of the Administration, I particularly want to thank those of you who come from overseas because you made the decision before we were removed from the list of SARS - affected areas. Thank you very much.

The theme of today's Forum, Trusting Finance, Financing Trust: Balancing Accounting and Accountability, is most suitable, for, as the old saying goes, those who manage banks, corporations or agencies handling or using other people's money are only trustees acting for others. Trust is cardinal to the system.

I have a special attachment to the CFO profession. Not so much because I was from among the profession, nor because I find some similarity between my previous profession and my present position. The attachment stems from the fact that CFOs have an important role in the context of fostering corporate accountability and disclosure. These two elements are particularly relevant to my policy agenda on financial services, for in these turbulent times, good corporate governance is the key to sustainable success. As CFOs, you all know that good corporate governance also could translate into higher P/E ratios for your companies.

Earlier this year, in order to upgrade the quality of the equity market with a view to maintaining our competitiveness as an international financial centre, I drew up a Corporate Governance Action Plan for 2003. The Action Plan, prepared jointly with the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEx), identifies priority areas, assigns ownership and sets out a timeframe for implementation. I am glad to say that good progress has been made to bring the initiatives to fruition. Let me give you the highlight.

One of the initiatives in the Action Plan relates to the Securities and Futures Ordinance. In April this year, we saw the effective roll out of this Ordinance, which consolidates and modernises ten pieces of legislation made over the past 28 years. It aims to bring about a fair, efficient and transparent regulatory regime that inspires confidence, facilitates market innovation and development, and is on par with prevailing international standards.

Two consultation papers which contain proposals to enhance our investor protection regime were issued in May. Both were highlighted in the Action Plan. The first jointly published by SFC and HKEx on the regulation of sponsors and independent financial advisers; and the second jointly by the Administration and SFC on the proposal to empower SFC to take derivative actions for minority shareholders of a listed company. We look forward to receiving public comments on the proposals.

Another priority in the Action Plan is the early implementation of the recommendations of the Standing Committee on Company Law Reform made in its Phase I Corporate Governance Review. Towards this end, we have included some key proposals to improve shareholder remedies in the Companies (Amendment) Bill 2003, which I will introduce into the Legislative Council tomorrow.

These proposals include providing for a statutory derivative action that may be taken on behalf of a company by a member of the company. This would help to clarify the common law position and thereby remove uncertainties and provide an effective mechanism by which shareholders can protect themselves. In addition, the amendments would also provide that the court may award damages to the members of a company where it is found that their interests have been unfairly prejudiced.

I believe that these proposals, once implemented, will go a considerable way to enhancing shareholder remedies under the law. However, this is not the end of the story. About 2 weeks ago, the Standing Committee completed Phase II of its Corporate Governance Review and issued a further consultation paper. The paper sets out recommendations in respect of, amongst others, disinterested shareholders' approval for connected party transactions, guidelines on directors' duties, board procedures, disclosure of directors' compensation packages, directors' training, mandatory rotation of the lead and concurring audit partners every five years, and statutory backing for the Listing Rules. Publication of this paper is one of the targets in the Action Plan. The Standing Committee will listen to public views on the various proposals before putting forward their final recommendations to the Administration. With your experience in the corporate world, I am sure all of you would find the proposals relevant. I urge you to make your considered views known to the Standing Committee.

I am very much aware that corporate governance is not solely a matter for policy makers and regulators. Our professionals feature prominently in the regime. In this connection, accountants, accounting and auditing standards have all come under sharp focus in the light of recent corporate failures. To me, the policy requirement is very clear: the regime regulating accountants must be effective, transparent, accountable and in line with international developments.

In response to public concern about the regulation of the accountancy profession, I initiated discussion last December with the accounting profession on possible enhancement of the regulatory regime for the profession. The Hong Kong Society of Accountants (HKSA) responded positively in January 2003 and put forward proposals to enhance the independent oversight of the auditing profession by increasing the number of lay members on its Council, Disciplinary and Investigation Committees. HKSA also proposed the establishment of an Independent Investigation Board (IIB) which would deal with alleged accounting, auditing and ethics irregularities related to listed companies. To take the matter forward as quickly as possible, HKSA announced earlier this month that it would pursue the proposals to enhance transparency and accountability of the Society by introducing a Member's Bill into the Legislative Council.

We support the HKSA's proposals as they are in line with international developments of independent oversight of the profession. They are also conducive to fostering confidence in the profession. We expect to issue a consultation paper in July/August 2003 covering the IIB proposal and the proposal to establish a Financial Reporting Review Panel to consider whether the annual financial statements of companies comply with the requirements of the Ordinance including applicable accounting standards. Such reform of the accounting profession is also highlighted in the Action Plan.

This leads me to the last point I wish to make on our efforts to enhance corporate governance. Good corporate governance is not premised solely on a comprehensive set of rules and regulations, for recent experience has shown that rules and regulations are only as good as the people seeking to apply and enforce them. Hence, I appeal to the professionals in Hong Kong to continue to seek improvements and uphold the highest professional ethics and integrity.

I would now like to turn to another topical subject which is very dear to my heart and very relevant to CFOs, whose everyday tasks are to manage cash flows and risks: that is, bonds. The Hong Kong dollar bond market has seen impressive growth in recent years. In terms of the outstanding amount of Hong Kong Dollar Debt Instruments, the figure was $544 billion when compared with $472 billion in 2000. But corporate bonds are still a small segment of our bond market, and of which, retail bonds are only a tiny portion.

Public sector corporations have all along been leading the development of our bond market. The first retail bond was issued by the Hong Kong Mortgage Corporation Limited in 2001. Notwithstanding this, the Administration is committed to encouraging the development of the bond market. Other public sector issuers like the Mass Transit Railway Corporation, Airport Authority, and Kowloon-Canton Railway Corporation have come to the market since the beginning of this year with long-dated issues of maturity of seven and ten years. They have been very well received by both institutional and retail investors. The Mass Transit Railway Corporation even issued a 15-year Hong Kong dollar bond, which was first in Hong Kong, and it was very well received by institutional investors.

This is an important milestone for the development of our bond market, helping to provide a complete benchmark yield curve for non-Exchange Fund papers.

So far so good, but I have to acknowledge that this is no more than the beginning of a long journey. Public sector corporations seem to be the main players in the HK dollar bond market. I would encourage both public and private sector corporations to seriously consider issuing Hong Kong dollar bonds as a means for raising capital.

I have seen encouraging development recently from private sector issuers, with China Light & Power issuing a 10-year HKD bond recently, but it was targeted only at institutional investors. I hope that the enthusiastic response to some of the recent issues of retail bonds will provide a demonstration effect for private sector issuers. There is clearly a demand for stable income instruments in Hong Kong. Bond issuance is a win-win proposition for both issuers and investors - providing stable funding cost to corporates and stable income to investors. I am sure seasoned CFOs such as yourselves, are perfectly familiar with the instrument.

How to raise capital is of course a commercial decision for the corporates, who must carefully compare the costs of bond issuance vis-j-vis other financing options. Whether or not to invest in bonds is also an investment decision for investors. The Government has no wish to interfere with those decisions.

However, I see a role for the Government as a facilitator. It should provide a suitable environment which is conducive to the development of bond market. The approach adopted is three-pronged, namely, removing any unnecessary impediments to market development (such as the three-phase plan for rationalisation of the regulatory requirements on public offering of bonds); providing tax concessions for qualified debt instruments; and ensuring the necessary infrastructure is in place (such as an efficient payment system and clearing and settlement system for debt securities).

Efforts on the part of Government alone are not enough. There must be concerted efforts from the private sector to promote the bond market, particularly at the retail end. I appeal to the market participants to provide retail investors with greater and more convenient access to bonds. It is also important to make price information on bonds more readily available to investors through various channels. Greater price transparency could lead to more competition, narrower bid-ask price spread, and eventually greater investor demand.

Here I would like to take the opportunity to thank the Hong Kong Capital Markets Association for its initiative with five major banks to provide price information on selected bonds on its website, which, I understand, is expected to be implemented soon. Investor education on bonds is also important, and the industry is best placed to take up this challenge.

Ladies and Gentlemen, trust is never an accident. It is built upon a good corporate governance system, coupled with concerted perseverance and hard work. In our small but meaningful ways, we all contribute to the cardinal element of good corporate governance in sustaining Hong Kong's position as an international financial centre. I would therefore look to all of you for continued support for our efforts to further enhance our position.

Thank you.

End/Tuesday, June 24, 2003

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