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LCQ8: Promoting development of financial investment market
     Following is a question by the Hon Robert Lee and a written reply by the Acting Secretary for Financial Services and the Treasury, Mr Joseph Chan, in the Legislative Council today (February 8):
     Currently, debt securities under Chapter 37 of the Main Board Listing Rules, shares of special purpose acquisition companies (SPAC shares), and trading activities of virtual asset service providers to be regulated by a licensing regime, are all subject to a "professional investors only" requirement. There are views that the requirement concerned not only reduces the choices available to retail investors, but also restricts the scope of business of financial intermediaries, hindering the comprehensive development of the financial services industry. In this connection, will the Government inform this Council:
(1) in order to promote the development of the financial retail investment market, whether it knows if the regulators will gradually relax the requirement that trading of the aforesaid debt securities and SPAC shares is limited to professional investors only, so as to increase market liquidity; if they will, of the implementation timetable; if not, the reasons for that;
(2) given that some members of the financial sector have repeatedly relayed that the regulators should re-examine the definition of "professional investor", and they considered that apart from investors' total amount of net assets, professional investment knowledge and experience may also be taken into account to determine the qualification of professional investors, whether the Government knows the progress of the regulators' re-examination of the relevant definition, and if there is any implementation timetable; and
(3) apart from enhancing investor education, what measures the Government has put in place to enhance the participation of retail investors in the trading of debt securities, SPAC shares and virtual assets?
     Under the Securities and Futures Ordinance (Cap. 571), professional investors (PIs) include individuals, corporations and partnerships having a portfolio of not less than $8 million; and corporations, partnerships and trusts having total assets of not less than $40 million. The PI regime has an important function of protecting investors.
     In consultation with the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority, my reply to the three parts of the question is as follows.
(1) and (3) Chaired by the Financial Secretary, the Steering Committee on Bond Market Development in Hong Kong reviewed the situation of the local bond market and released a report in August 2022. The report has put forward a number of recommendations including facilitating participation of retail investors. We will progressively implement the recommendations, such as exploring ways to enhance the prospectus requirements, and facilitating retail investors to participate in the bond market under due investor protection.
     For special purpose acquisition companies (SPACs), since a SPAC is a cash company without business prior to merger and acquisition with a company with substantive business operations (a De-SPAC transaction), the price of its securities may be relatively sensitive to speculative activities and market rumours. Considering that PIs can better assess and manage risks associated with SPACs, SPACs' securities can only be traded by PIs prior to a De-SPAC transaction. As the successor company following completion of a De-SPAC transaction has substantive business operations, its securities can be traded by retail investors according to their investment choices. Such arrangements afford appropriate investor protection and has received general support during public consultation.
     In December 2022, the Legislative Council (LegCo) passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022, introducing a licensing regime for virtual asset service providers. The licensing regime will commence operation in June 2023. We are closely monitoring the latest developments of virtual assets, and adopt an open attitude in considering relevant circumstances including different views on the PI requirement. The SFC is formulating detailed regulatory requirements of the licensing regime, and plans to consult the public in the first quarter of 2023. The SFC will consider response and views of the industry and the public.
(2) The Code of Conduct for Persons Licensed by or Registered with the SFC requires intermediaries to ensure the suitability of recommendations/solicitations to clients through procedures such as suitability assessment and risk disclosure. This requirement applies to both individual and corporate PIs. Corporate PIs satisfying the criteria on corporate structure, investment process and controls, and professional management may be exempted.
     The relevant requirement is the cornerstone of investor protection. Exemption from the requirement cannot be solely based on the wealth, knowledge and experience of an individual or a delegate. Factors including corporate structure and governance, investment process and controls also need to be considered to ensure that investors can make informed investment decisions and manage the risks of their investment portfolio.
     The SFC last reviewed the Securities and Futures (Professional Investor) Rules between 2018 and 2020, and the review outcome was submitted to the LegCo Panel on Financial Affairs in July 2020. The SFC considered the existing definition of PIs suitably reflects an investor's loss absorption ability and is in line with those in major jurisdictions (e.g. the US, the UK, Singapore and Australia).
     At present, the knowledge and experience of investors have already been factored into the suitability assessment and risk disclosure process. For example, product explanation could be concise for clients with ample knowledge and experience. Regulators are discussing with the industry how to streamline the assessment and compliance process, rendering it more risk-based and tailored to the circumstances of sophisticated or ultra-high-net-worth clients.
     The Government and regulators strive to strengthen and protect the integrity and soundness of Hong Kong's securities and futures markets and achieve a proper balance in regulation, so as to ensure suitable investor protection, good business practices, market confidence as well as a regulatory environment promoting market development.
Ends/Wednesday, February 8, 2023
Issued at HKT 11:30
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