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Watchdog to be kept on short leash

Frederick Ma Si-hang was the picture of chirpiness as he briefed lawmakers on Monday. It was, however, not to be his finest hour.

Just days after the government had purposely leaked a key policy decision to the press, the Secretary for Financial Services and the Treasury was in denial mode.

Few seemed convinced of his insistence that the administration had an open mind on a topic that had triggered a rare standoff with the securities regulator.

Late last week, the government made it clear that it was not in favour of arming the Securities and Futures Commission (SFC) with fining powers to enforce listing rules that would in future be given statutory backing.

To many, Mr Ma's attempt at a neutral stance was little more than window dressing, the history of securities regulatory reform in Hong Kong being steeped in policy flip-flops and compromise, rather than a concise effort to give the regulator sharper teeth.

At this penultimate stage - the bill enshrining the listing rules in law is expected to be unveiled in June - there is scant optimism among corporate governance advocates that the government will reverse its position.

They fear the end result will be a band-aid approach to market reform, leaving regulators with slightly more bite, but still dogged by fundamental shortcomings.

Fining powers over statutory listing rules was an issue over which, Mr Ma was fast to note, the market was 'very much divided'.

Proposed by the government in a January consultation, the SFC was to have the ability to impose fines of up to $5 million on anyone breaching the listing rules.

The SFC's case is that this power is one of the most realistic ways of dealing with small to medium-sized breaches, with the hardier ones to be passed to the Market Misconduct Tribunal (MMT) or criminal courts.

As Peter Au-yang Cheong-yan, the SFC's chief operating officer, told legislators: 'The position of the SFC is based on the experience of law enforcement ...'

Without fining powers, the regulator is left with the option of public reprimands, disgorgement orders or banning directors.

Given the time, effort and cost of court hearings and market misconduct tribunals, fining powers give the regulator a clean, swift edge.

Such is the strength of its conviction that the SFC fired a salvo on Friday against the government's decision to scrap the fining powers, a rare show of defiance.

'The SFC came out fighting,' says Webb-site.com editor David Webb. 'I can't remember a time when the SFC came out publicly and objected to something the administration wants to do.'

SFC chairman Andrew Sheng may feel he has little to lose, as he plans to step down in September.

Moreover, plans are afoot to split his job into those of non-executive chairman and chief executive, a move seen by many as an attempt to keep the regulator in check.

Several lawmakers at Monday's financial affairs panel hearing on the fining powers seemed wary of the government's reticence to further arm the SFC.

'Without the (fining) power, the SFC is a toothless tiger,' noted pro-democracy legislator Ronny Tong Ka-wah.

Support also came from Mandy Tam Heung-man, and even legendary SFC sparring partner Chim Pui-chung.

With submissions to the government's consultation equally split on the topic, the government has found itself in a sticky situation where it cannot point to overwhelming support or objections for a fast solution to the matter.

Mr Ma's parting shot at Monday's meeting was a non-committal: 'We have to find a suitable balance. We want to balance everything before we state a position.'

Critics, however, point to the government's reluctance to make decisions that are unpopular in some camps - in particular, those with vested interests.

'It's not an opinion poll,' notes Mr Webb.

And, as legislator Emily Lau Wai-hing stresses: 'If everybody is praising the SFC then there is a problem, because the SFC is the regulator.'

Mr Webb also sees wider policy implications. 'I think it will be a bit of a litmus test for Donald Tsang,' former chief executive Tung Chee-hwa's recent replacement.

In Mr Tsang's 2001 budget speech - as the then financial secretary - he sought to position Hong Kong as a paragon of corporate governance.

'If he allows himself then to be driven by tycoons and contradict what they have already proposed ... I will have to take the view he is no better than the last one (chief executive),' says Mr Webb.

Jamie Allen, secretary-general of the Asian Corporate Governance Association, is also alert to the bigger picture.

'If companies object to higher standards, it gives a low market standard overall,' he said.

One of the arguments being put forward by opponents to more potent SFC powers is that it could be confusing to the market - some enforcement to be done by the regulator, other non-statutory ones by the stock exchange. 'It again raises the question of shouldn't you have a single-regulator model in Hong Kong, I think,' Mr Allen said.

This is something that was initially proposed by an expert group in 2002, but had fallen foul of a government U-turn when various vested interests made their opposition known.

In what was seen as a compromise, the SFC itself retreated from the idea of being a single regulator.

The suspicion was that the government would then further water down the SFC's proposal to enforce statutory listing rules.

The regulator had produced a plan it thought would give it what it wanted in the end, said Mr Webb.

'As a consequence (of compromising), they got less and less ... it was just a tactical error.'

Mr Allen dubbed it a 'poor compromise from an enforcement perspective', the road map ahead now looking fairly confusing as a result. He said: 'Unless we resolve this issue of a divided regulatory structure, I think we are always going to have these battles in Hong Kong.'

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