White Collar

Consolidation the way forward for Hong Kong's brokerage sector

Mergers will help the sector fight competition from retail banks and enhance efficiency

PUBLISHED : Monday, 14 July, 2014, 11:59am
UPDATED : Tuesday, 15 July, 2014, 12:14am

Brokers are complaining that government policy has caused them to lose out to fund houses, which have done well in recent years.

It is true that the government has made policy changes to help fund houses grow. Financial Secretary John Tsang Chun-wah announced plans last year to change the law to allow them to set up as companies rather than trusts.

The government also helped the Securities and Futures Commission lobby Beijing to introduce the mutual recognition scheme to allow Hong Kong funds to be sold on the mainland and vice versa.

The friendly policy environment may well be a factor in the 3 per cent growth in the number of fund houses in the city to 978 at the end of May from the end of last year, according to figures released by the commission last week.

Traditional brokers can still survive because they have many die-hard customers

In contrast, the number of licensed securities brokerages, which used to dominate the investment sector, grew only 1.25 per cent to 969 at the end of May.

However, it is not fair to say the government has done nothing to help brokers. Together with the commission, it worked hard to establish the through train scheme to allow retail investors on the mainland to trade stocks in Hong Kong and those in the city to trade stocks in Shanghai from October.

This should bring more business to Hong Kong brokers from clients who want to trade Shanghai-listed A shares.

Fund houses are, in fact, not the major competitors for brokers. There are retail investors who like to make their own investment choices and pick their own stocks, and these are loyal clients for brokers.

Also, some fund houses employ brokerage firms to execute trades for them.

The greatest competition for brokers comes from retail banks. Many banks have expanded their internet securities trading services, which charge clients very low fees.

The younger generation of investors who use the internet for everything are their primary targets.

Some discount brokers also charge low fees, which they trumpet through big advertising campaigns, to compete for business.

Traditional brokers can still survive because they have many die-hard customers. But the SFC figures should alert them to a need for change.

As the commission points out, while the number of brokerage firms has grown, the rate of growth is slower than that for the number of fund houses.

Mergers among brokerages would be one way to make the sector more competitive.

There are 450 retail brokers in the city that belong to the stock exchange, and many of them are very small. They would find it hard to afford to develop an internet trading platform or do much advertising.

Consolidation of the sector might be inevitable and make for greater efficiency.

The government and the SFC need to make it easier for brokers to consolidate.