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Report on review of HK's regulatory structure regarding listing of securities submitted to HKSAR Government


The following is issued on behalf of the Expert Group to Review the Operation of the Securities and Futures Market Regulatory Structure:

The Expert Group to Review the Operation of the Securities and Futures Market Regulatory Structure today delivered its Report to the Financial Secretary of the HKSAR Government.

The Chairman of the three member Group Mr Alan Cameron said: "After widespread consultation during the past six months, we have 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. 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.

"Our recommendations to the Government attempt to address all the issues identified as effectively as possible, in order to help maintain and enhance Hong Kong's position as an international financial centre."

Five major issues have been identified -

1. Quality of 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.

2. Conflict of Interests

It is widely felt that the Hong Kong Exchanges and Clearing Limited (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.

3. 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 Securities and Futures Commission (SFC) lead to confusion and need to be clarified.

4. 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.

5. 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.


To address the above 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 added: "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."

Note: The Expert Group comprises Mr Alan Cameron as Chairman, and Dr Raymond Ch'ien and Mr Peter Clarke as Members. The full text of the Report is available at the Government's website:

End/Friday, March 21, 2003


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