Major reforms to regulatory structure of securities and futures markets
The expert group appointed by the government to review the regulatory regime of Hong Kong's securities and futures markets has recommended sweeping changes to the existing structure.
The recommendations include :
* Removing the listing functions of Hong Kong Exchanges and Clearing Limited (HKEx) and transferring them to a new division of the Securities and Futures Commission (SFC) to be known as the Hong Kong Listing Authority (HKLA). The HKLA should be accountable for both regulation and market development.
* The SFC should be the statutory regulator of listed companies and sufficient resources should be provided to enable it to perform its functions properly.
* As a matter of urgency, consideration should be given to raising entry levels for new listings and the SFC should have full investigative power to establish the genuineness of initial placements.
* And regulation of intermediaries by the SFC should be strengthened and sanctions on wrongdoers should be toughened to deter violations.
The recommendations are contained in the expert group's report which was released today (March 21). The three-person group was headed by former chairman of the Australian Securities and Investments Commission, Mr Alan Cameron.
The Financial Secretary, Mr Antony Leung, welcomed the publication of the report and said he looked forward to the implementation of the recommendations in respect of listing matters in 18 months.
Mr Cameron said that after widespread consultation during the past six months, the group had found overwhelming support for significant reform of the current regulatory structure.
"Our work has confirmed that Hong Kong's legal, business and technological infrastructure is widely respected by market participants both in Hong Kong and in the international community," he said.
"During the past decade, the Stock Exchange of Hong Kong has established itself as the venue of choice for leading Mainland enterprises wishing to tap the international capital markets.
"However, a number of trends have emerged which if not addressed, could undermine the market's reputation and long-term development."
The expert group identified five major issues:
Quality of the Market
There has been rising concern both in Hong Kong and overseas about the quality of some of the new listings in Hong Kong. It is widely felt that in the attempt to build critical mass, the quantity of listings has been emphasised over the quality of those listings.
Conflict of Interests
It is widely felt that the HKEx has an irreconcilable conflict of interests as both a listed company and the primary regulator of companies seeking listing. Notwithstanding the efforts of the HKEx to manage this conflict, the existence of such a conflict is, in itself, not conducive to the development of Hong Kong as an international financial centre.
Regulation of Listed Companies
Many respondents feel that the current regulatory regime as it relates to listed corporations is inefficient and lacks effectiveness. In particular, the shared regulatory roles of the HKEx and the SFC lead to confusion and need to be clarified.
Regulation of Intermediaries
Recent corporate scandals have highlighted deficiencies in the standards of professional intermediaries, not just among investment banks and sponsors but also with auditors, accountants and valuers. Market participants felt that there must be more effective regulation of intermediaries with the threat of meaningful sanctions to deal with misconduct.
Roles and Responsibilities of the Three Tiers
Hong Kong's three-tier regulatory structure involving the government, SFC and HKEx while acceptable in principle has led in practice to uncertainty, overlap and in some cases friction. Most respondents feel that the government should be the facilitator and overall policy setter, but should otherwise not be involved in the detail of regulation. The SFC should be recognised as the corporate regulator of listed companies and the HKEx should be relieved of the burden of regulation and allowed to concentrate on its commercial objectives with minimal government involvement.
Mr Cameron said that to address these issues, which have important implications for corporate governance and investor protection, the group's main recommendations to the government are -
(a) The listing function must be removed from the HKEx and performed by a new division of the SFC to be known as the Hong Kong Listing Authority (HKLA). The HKLA should be accountable for both regulation and market development.
(b) The HKLA should be led by an Executive Director of the Commission and be staffed by highly skilled and experienced market professionals. As far as possible, staff of the HKEx's Listing Division should be offered employment in the HKLA.
(c) Decisions of the HKLA should be subject to appeal to a Listing Panel which should also function as an advisory body providing guidance, in particular practitioner and investor input, on listing policies. The Listing Panel should comprise some of the existing Listing Committee members plus a number of investor representatives. As a transitional arrangement to allow sufficient time for the HKLA to establish professional credibility, the Panel should during the first 18 months of its inception remain involved in approving or rejecting listing applications, just as the Listing Committees are at present.
(d) The Listing Rules should have statutory backing to ensure their effectiveness but should remain non-statutory and not subject to legislative vetting, in order to maintain flexibility.
(e) The HKEx should be allowed to set its own entry and exit criteria, as well as conduct codes or rules, for companies wishing to trade on its exchange but these criteria, codes and rules cannot override the rules made by the HKLA.
(f) The HKEx, relieved of its regulatory burden, should be allowed to operate as a commercial entity with minimal Government influence and less SFC involvement than at present. In turn, the SFC should focus its attention on the synergies that integration of the listing function will bring.
(g) The HKLA should levy listing fees, both for IPOs and maintaining listing status, on a cost-recovery basis. The HKEx can also charge initial and continuing fees on companies which trade on its exchange at levels that should render the transfer of the listing function bottom line neutral at the time of transfer. To preserve Hong Kong's competitive position, the effect of the combined charges should be as close to price neutral to issuers as possible.
(h) The SFC should be the statutory regulator of listed companies and sufficient resources should be provided to enable it to perform its functions properly.
(i) As a matter of urgency, consideration should be given to raising entry levels for new listings and the SFC should have full investigative power to establish the genuineness of initial placements.
(j) Regulation of intermediaries by the SFC should be strengthened and sanctions on wrongdoers should be toughened to deter violations.
(k) Given the increasing number of Mainland companies being listed in Hong Kong, there should be closer and more effective regulatory cooperation between the SFC and the China Securities and Regulatory Commission.
Mr Cameron said: "The Group is strongly of the view that the interests of Hong Kong will be best served by the government taking an early decision to implement these proposals. There has already been widespread consultation and we are confident that our recommendations will receive broad support."
In commenting on the recommendations, the Financial Secretary said the expert group had set out its views on the direction for the future development of the regulatory regime, in particular with regard to the roles of the SFC and HKEx on listing matters.
"We believe that the direction recommended is appropriate and will enhance the quality of our market. Our regulatory regime must evolve in tandem with new market developments if Hong Kong is to strengthen its competitiveness as an international financial centre and the premier fund raising centre for our country," he said.
Mr Leung said the government would work with the relevant parties to draw up a programme for implementing the recommendations for the transfer of listing functions with a proposal being submitted to the Executive Council as soon as possible.
"We are fully aware of the implications of the expert group's recommendations on the future roles of the SFC and HKEx. We will, in conjunction with other parties, endeavour to ensure that the changes will be bottom-line neutral to HKEx as a listed company at the time of transfer," he said.
"We are also sensitive to the needs of the market and will take every possible step to ensure that the transition is smooth, that the new listing regime has an appropriate balance of market savvy and regulatory expertise, and that the new listing arrangements will be both user-friendly and conducive to healthy market development," said Mr Leung.
Ends/Friday, March 21, 2003
