Jake's View

SFC not so good at practising what it preaches

Judging from its income deficit, the regulator fails to manage its own financial affairs

PUBLISHED : Tuesday, 03 September, 2013, 12:00am
UPDATED : Tuesday, 03 September, 2013, 3:37am

A war of words has broken out between the Securities and Futures Commission and the Department of Justice over the handling of market manipulation cases.

SCMP, August 31

Let's start this one out from a financial angle, as finance is what the SFC is meant to regulate and as this regulator is, sadly, not quite as good at managing its own financial affairs as it is at preaching to others about theirs.

The SFC has built up HK$7.5 billion from this levy … And it is spending it like water

The SFC funds itself from a stock exchange levy of 0.003 per cent on both sides of every transaction except for what market makers toss back and forth to each other. This may not seem like much, but with annual market turnover at almost HK$15 trillion, the levy will bring in about HK$1 billion this year.

The SFC has built up a miser's hoard of HK$7.5 billion from this levy. It is rolling in money and it is spending it like water.

It has increased its staff numbers by more than 50 per cent to 678 people over the past five years and it pays them each an average of HK$1.17 million a year. I repeat. This is the average pay. Find me any other employer of almost 700 people who pays an average of more than HK$1 million a year.

It also now keeps its landlord very happy. It has moved to the swankiest office block in town, Cheung Kong Center, with the result that its rent bill in the latest financial year more than doubled to HK$167 million plus an additional HK$48 million for rates, management fees and other premises costs.

The result of all this high living is that the SFC can no longer balance its incomings and outgoings despite the torrent of cash coming in from the stock exchange levy. Its latest annual accounts show an income deficit of HK$14 million.

This is, admittedly, not a big loss and largely the result of a one-off technical accounting matter involving currency translation of debt securities. But the report for the three months to June indicates that the income deficit is growing.

Now let's look into the future. I see nothing to suggest that the hiring binge at fat salary levels will suddenly stop. It's a safe bet that these costs will continue rising.

But it is not a safe bet that market turnover will continue to be steady at HK$15 trillion or more a year. Markets move in cycles and, with rumblings from the United States of tighter monetary policy, it may be wisest to prepare for a more difficult time on the market. Turnover will then decline.

And the wolf could be at the SFC's door. As the income deficit blows out, the savings will evaporate. What will the SFC do then?

My guess is that it will ask the government for additional sources of revenue and, when asked to justify this demand, will exaggerate its importance to society.

But how can a securities regulator demonstrate that society is notably better off for its services? It is a very difficult, if not impossible, task. What the SFC has tended to do in its reports is point to its record of new rules adopted and number of malefactors' scalps hanging from the teepee pole.

This starts to get dangerous because the SFC has a way of seeing misdeeds where others see none. In the Tiger Asia case, for instance, it accuses a reputable fund manager of insider dealing for basing a sell decision on information that it says could only be used to make a buy decision.

It is a finding that has investment professionals scratching their heads, and this is not the only instance in which normal market understanding has differed from regulatory thinking.

Thus when the soon-to-retire Director of Public Prosecutions, Kevin Zervos, says that the SFC should be placed under more oversight by his office, I think he is absolutely right and the SFC should listen rather than react in a fit of pique, as it did.

And I think it is particularly so, as there is reason to worry that the trend of the SFC's finances may soon start to make some of its less appealing tendencies more pronounced. These people need to get a grip on themselves.