Reforms overdue

PUBLISHED : Tuesday, 04 June, 2002, 12:00am
UPDATED : Tuesday, 04 June, 2002, 12:00am

Buyer beware has always been the Hong Kong investment motto. But when for the third time this year employees of a local brokerage have been charged with siphoning off client funds, that maxim looks to have lost its meaning.

There can, of course, be no full protection against such rip-offs. Financial custodians have a duty of trust, and breach it at the risk of criminal sanctions. The last two cases were uncovered by spot checks of firms' internal controls by the Securities and Futures Commission, indicating the system is working.

Yet, Hong Kong is almost unique among developed markets in having hundreds of small brokerage firms. Most other centres have seen competition force an industry consolidation. That does not always mean investors get the best advice, as shown by recent scandals involving biased research in the United States. But they at least don't have their funds stolen.

So long as the fragmented industry structure remains, the kind of thefts alleged to have been committed by the two Lawsons Securities Company employees will be repeated.

Unfortunately, the Government insists on trying to stall the inevitable. It has delayed the introduction of fully negotiated commissions until next April and reduced the planned extension of trading hours following protests by small firms.

This not only retards Hong Kong's development as a financial centre but means client funds will continue to be at risk. Small brokerages have already had a spectacular pay-out through the demutualisation and public share offering by the Stock Exchange. It is time to stop pussy footing and put the conditions in place for a rapid industry consolidation.