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Speech by FS at SFC Regulatory Forum 2014 (English only) (with photo)

     Following is the speech delivered by the Financial Secretary, Mr John C Tsang, at the SFC (Securities and Futures Commission) Regulatory Forum 2014 this morning (January 24):

Thank you. Carlson (Tong), distinguished guests, ladies and gentlemen,

     Good morning, and a warm welcome to everyone, especially to our guests from the Mainland and overseas.

     Congratulations also to SFC on successfully hosting the IOSCO (International Organization of Securities Commissions) Asia-Pacific Regional Committee meeting this week. And thank you for according me this opportunity to speak with you all today.

     It is often said that those who forget the past are doomed to repeat it.

     It is unlikely that any of us will forget the impact of the recent global financial crisis. The big question today is this: Are we doomed to repeat these difficult financial times?

     With this in mind, allow me to share with you some of the areas where Hong Kong has learned important lessons, and the measures that we have taken, and shall continue to take, in the aftermath of the global financial crisis.

     Since the onset of the financial crisis in 2007, the Hong Kong Government, together with our regulators, have worked hard to limit fallout from the financial and economic turmoil while we strengthen our regulatory framework. Our efforts have been broadly based on key areas of financial selling practices, business conduct of intermediaries as well as investor education.

     To strengthen the regulatory regime of publicly offered investment products in Hong Kong, SFC published a Handbook in June 2010 covering the product codes for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes (ILAS) and Unlisted Structured Investment Products. The Handbook helps enhance the transparency for various types of investment products and promote investor protection. SFC has also imposed new business conduct requirements on intermediaries under its supervision. The measures include client assessment before the sale of derivative products, timely disclosure of sales-related information, and restrictions against offering gifts as inducements to clients.

     In parallel, our banking regulator, the Hong Kong Monetary Authority, has imposed new requirements on banks in respect of their securities business. These include audio recordings of sales process of investment products in branches, clear segregation between general banking business and securities-related activities in branches, enhanced product disclosure and a pre-investment cool-off period to allow less sophisticated customers more time to understand certain investment products.

     Reinforcing consumer education and providing effective dispute resolution mechanisms are equally important for improving our market. This led to the launch of the Investor Education Centre and the Financial Dispute Resolution Centre in 2012. With the full support of our financial regulators in Hong Kong, the Investor Education Centre aims to enhance the financial literacy of customers in a broad range of financial products and services. As a result, the general public hopefully will be in a stronger position to make informed financial decisions and manage their money more wisely. When things do go wrong, the Financial Dispute Resolution Centre provides consumers with an independent and affordable alternative avenue for resolving monetary disputes with financial institutions under the principle of "mediation first, arbitration next".

     We are also striving to improve our regulatory regime further in view of the rapid market development. For example, we have strengthened the reporting requirement in relation to short selling activities and also provided statutory backing to the obligation of disclosure of price sensitive, or so-called "inside", information.

     On the international front, ongoing efforts have been made in implementing various fundamental policy reforms to rebuild the global financial system as a safer and more resilient one since the outbreak of the global financial crisis. They cover mainly three areas.

     First, strengthening the resilience of the global banking system through implementation of Basel III, which serves as a fundamental overhaul of the international regulatory standards for banks through substantially enhancing the requirements on the quantity as well as quality of their capital and liquidity.

     Second, implementing reforms of the over-the-counter (OTC) derivative market with a focus on central clearing, exchange and electronic platform trading, reporting to trade repositories, margining requirements for non-centrally cleared transaction derivatives, capital requirements and standardisation. These reforms have helped improve the transparency and reduce counterparty risks in the OTC derivative markets.

     Third, introducing measures to end the "too big to fail" phenomenon associated with SIFIs, the systemically important financial institutions. Measures include additional capital surcharges, more intensive and effective supervisory oversight to reduce the likelihood of failure and the development of a regime to resolve cases of non-viable SIFIs.

     As an international financial centre, Hong Kong has made every effort to keep pace with new global regulatory benchmarks and regulations. Through Hong Kong's participation in the FSB, the Financial Stability Board, the IOSCO, as well as international standard-setting bodies, such as the Basel Committee on Banking Supervision, Hong Kong also contributes to the development of global financial regulatory reforms and is committed to implementing these reforms in accordance with internationally agreed timetables, having regard to local circumstances.

     On Basel III implementation, the first phase of Basel III capital standards was brought into effect in Hong Kong on January 1, 2013, covering three new risk-weighted capital adequacy ratios computed with more stringent definition of capital and enhanced counterparty credit risk coverage. The disclosure standards associated with the new capital standards were implemented in Hong Kong on June 30, 2013. Meanwhile, we are preparing for the implementation of the capital buffer requirements contained in the next phase of Basel III capital standards, and also the Basel III liquidity standards in order to meet with the Basel Committee's implementation timetable.

     On OTC derivative regulation, we introduced an amendment bill into our legislature last summer to enable the imposition of mandatory obligations on reporting, clearing and trading of specified OTC derivative transactions. Scrutiny of this bill is at its final stage. On the development of the necessary infrastructure, the reporting function of the local trade repository was launched in August 2013 to support reporting of OTC derivative transactions, whereas OTC Clear, the local central counterparty, commenced operation in November last year.

     On the development of SIFI resolution regimes, we are taking steps to implement the Key Attributes of Effective Resolution Regimes for Financial Institutions, which is the new international standards endorsed by the FSB for an effective resolution regime. We launched the first stage of public consultation earlier this month on our initial thinking and proposals for establishing an effective resolution regime for financial institutions in Hong Kong. We shall analyse the views and comments received in order to further develop the proposals for the second stage of public consultation later this year.

     We are also taking forward two major financial regulatory reforms to keep Hong Kong's regulatory regime aligned with international standards.

     The first ongoing reform is to establish an independent Insurance Authority that is both financially and operationally independent of Government. The new independent Insurance Authority would take over the work of the current Office of the Commissioner of Insurance, which is a government department. This would help modernise the insurance industry's regulatory infrastructure to facilitate development of the insurance industry and provide better protection for policyholders. We aim to introduce the relevant enabling legislation into our legislature this year with a view to setting up the independent Insurance Authority in 2015.

     The second ongoing initiative aims to strengthen auditor oversight. Auditors perform a crucial role in corporate governance of listed companies by providing assurance for the integrity and accuracy of the companies' financial reports. The Government has been working closely with relevant parties to develop proposals on enhancing the independence of our auditor regulatory regime in line with international trends. We plan to consult the public later on this year on a package of reform proposals.

     Ladies and gentlemen, I have mentioned some of our recent regulatory reforms that are either directly or indirectly related to the impact of the global financial crisis. However, as policymakers, we also need to ask ourselves whether or not these reforms in response to a past crisis can really prevent a future crisis. Have the reform measures really made our financial market more resilient to future crises? Or do they simply provide us with a false sense of security?

     It is also timely for us to review and reflect on where the balance is for financial regulation: Have we done too little to guard against future crises? Or have we done too much to stifle market innovation and development? If we believe that the pendulum has swung too far to the regulatory side, is it time for us to adjust the pendulum? And if we are really going to let the pendulum swing back in the other direction, how can we prevent it from swinging back too much to the other extreme?

     The best answer I have to these questions is that I think we have been able to achieve the proper balance but only time will tell. However, I shall be interested to learn about discussions in the first panel today under the title "Is regulation working after Lehman?" I am sure Ashley would provide us with more insights on this topic after the panel discussion.

     Over the years, our market has been manufacturing increasingly complex financial products that cut across the traditional boundaries of our banking, insurance and securities sectors. It is believed that investors have different risk appetites and investment goals, depending on their own circumstances such as age, life plans, income and education levels, and perhaps personalities too. We have, indeed, seen the growing participation of retail investors in these products. We have been practising a largely disclosure-based regime for investment product authorisation. As such, we seek to ensure that the regime will allow investors equal and timely access to all relevant information so that investors can make their own decisions wisely.

     The events of the global financial crisis showed that over-reliance on the principle of caveat emptor might not be ideal. In the aftermath of the global financial crisis, some jurisdictions have opted for an interventionist approach by introducing new measures to control investment products, such that products which may put investors at unreasonable level of risk could not find their way to the market. So would this result in better investor protection? Some question whether the regulators are in the best position to decide what's good for investors. Others worry that this new approach would lead to moral hazard and put investors at a disadvantage. Some caution that this may even stifle market innovation and narrow the choices for investors. Others consider this more a defensive measure for the benefit of regulators against political risks.

     I trust that the second panel discussion today under the title "Investment product design and intervention" will shed more light on these complex issues.

     But one thing is certain: we are all part of a highly interconnected global economy. The global financial crisis, and the painful recession that followed, clearly demonstrates that virtually no single economy can be spared from problems of its neighbours in our global village. And as such, it is increasingly important for us to foster even closer international and regional co-operation.
     Hong Kong has been working closely with our regional and international regulatory counterparts to discuss issues of common interest or matters that need collaboration. As part of the global and regional efforts, we have also been actively contributing to the international standard-setting process through our participation in the alphabet soup of task forces and committees of various multilateral institutions and forums including, just to name a few, IOSCO, G20, FSB, Basel, ADB, APEC and EMEAP.

     Regardless of the choice of acronyms, collaboration is an indispensable component for effective regulation. And effective regulation, which promotes competition, quality, trust and confidence, are in turn essential to the sustainable development of the entire financial services industry. We all benefit from an exchange of views in a regional and global context, not least at this Forum today.

     We also look forward to the APEC Finance Ministers' Meeting which will take place here in Hong Kong in September. It will provide another opportunity for us to share experiences and work together with our partners and peers in the region to avoid a repeat of the global financial crisis.

     Finally, as Carlson has mentioned earlier, we prepare to celebrate the Chinese New Year next week. It just remains for me to wish you all a successful Forum, and a happy and prosperous Year of the Horse.

     Thank you very much.

Ends/Friday, January 24, 2014
Issued at HKT 13:32


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