If dividing by two is difficult, can dividing by three be any easier? This is a question the chief executive of the Securities and Futures Commission, Martin Wheatley, should ponder.
Wheatley is of the common view that separating investors into two categories, professional and retail, did little to stop the sharks of the financial markets from selling complicated derivative instruments to people who had no understanding of what they had bought and should not really have been sold these things.
He is absolutely right, of course. This division of investors has indeed failed. He has therefore come up with a brilliant solution to the problem - let's have more of the same. Instead of two categories, he now proposes that we have three - professional, sophisticated and retail. The idea is just as sure to fail. What, for instance, might be the distinction between a sophisticated and a professional investor? If we wish to be literal and say that the professional makes his or her living from investment, then we must include in the ranks of the professionals all those harridans of the private client fishbowls whom I tried to avoid when I was a stockbroker and who would buy anything if the sum of the stock code and the chairman's licence plate number was 888.
If we say, instead, that the test should be how frequently the investor deals, then once again we get all the residents of the fishbowl while excluding some very professional investors who only make a serious move in or out of the market once every few years.
So perhaps we can distinguish them by wealth - retail investors have a net worth of up to HK$10 million, sophisticated investors are to be worth between HK$10 million and HK$100 million, and professional investors must be worth more than HK$100 million. Adjust these parameters as you will.
But, then, how do we assess such wealth? Do we require an audited balance sheet from each individual seeking classification? Shall that be value on the basis of cost or of present market prices at current exchange rates? If we choose cost, and the professional investor wipes out in Japanese Reits, is he still a professional?
And if we do it on the basis of market value, and the professional is demoted to retail, do we allow him to demand his money back from his financial adviser because a retail investor should not be allowed to hold Japanese reits? Can we classify him as a professional for the purpose of investment in derivatives when his wealth is entirely in property?