HKEx's defence ignores key criticism
Hong Kong Exchanges and Clearing (HKEx) was quick to defend itself from this week's broadside by a former Securities and Futures Commission (SFC) official. We notice, however, that the defence completely ignored one of the key criticisms.
Former SFC executive director Alex Pang blamed conflict of interest for the deteriorating quality of listed companies.
Clearly, a listed for-profit exchange could not effectively regulate a market and should hand over that burden to the SFC, he said in a letter to the financial secretary which was published in the Chinese press on Tuesday.
The exchange took the unusual step of issuing an announcement on the same night, saying it would not approve a listing applicant that did not meet its requirements.
Unintentionally or deliberately, the rebuttal ignored another concern which Mr Pang raised in his letter - the exchange's proposed dismissal of its long-running listing committee system.
It is not an issue which should be ignored.
At present, the listing committee comprises 25 members, of whom 24 are external market professionals who do not work for the exchange.
The independent committee is vested with the power to make final decisions on listing matters. That means it decides whether to approve the listing applications referred from the listing division (which is run by exchange officials).
The non-exchange authorities, however, could soon be removed from the process. Under the proposed restructuring, the committee will be dismissed this year and the listing division will take over its role.
While HKEx believes the new structure will create a more efficient, one-stop decision-making mechanism, Mr Pang thinks otherwise.
In his letter to the financial secretary, Mr Pang wrote: '[The scrapping of the listing committee] will result in a high concentration of [regulatory] power on the HKEx.'
He warned of terrible consequences to the quality of the exchange if the existing check-and-balance mechanism was scrapped. This was one key argument in suggesting the exchange's regulatory role be surrendered to the SFC.
Mr Pang is not alone in his fears. We spoke to a non-exchange member of the listing committee, who said such a plan would set the exchange on course for a deterioration in company quality.
He also said the varied professional backgrounds of the independent members promoted the ability to scrutinise listing applications. These skills had helped them uncover financial irregularities which led to rejections.
The member was worried that the exchange would not be able to offer as thorough an investigation. As a bureaucratic department, he said, it would look at whether procedures were followed on the surface. It would not know how to uncover financial smoke, mirrors and other tricks.
Despite such concerns, the committee member said the exchange had not approached him, or his colleagues, to discuss procedures after the change. Such a dictatorial attitude is not surprising. The restructuring is in fact part of the market reform blueprint issued by the Government in 1999.
In this blueprint, HKEx will replace the existing listing body with two committees - one for listing matters and another for user appeals.
The new committees will consist of external professionals, handling appeals against decisions on listing and disciplinary-related matters.
Nevertheless, the system will eliminate external participation in the approval process of new listings.
Based on related market capitalisation, HKEx charges a listing fee of HK$150,000 to $650,000 for a new main board listing. It also charges companies an annual fee of $145,000 to $1.18 million.