Expanded powers sought for regulators

Government will seek law change next year to allow watchdogs to unilaterally take control of troubled financial giants to pre-empt bailouts

PUBLISHED : Wednesday, 08 January, 2014, 3:42am
UPDATED : Wednesday, 08 January, 2014, 3:42am

The government will seek amendments next year to expand the powers of regulators so that they can unilaterally take control of giant financial firms, including international ones, to pre-empt government bailouts.

The proposal to seek law change, laid out in a consultation paper released yesterday to collect the public's views over the next three months, is aimed to bring Hong Kong in line with the new international rules brought in by the Financial Stability Board formed by the leaders of the Group of 20 developing economies.

Under this new international regime, all major markets are required to empower regulators to handle big financial firms' failures speedily without resorting to taxpayers' money.

"Using public funds to bail out financial firms that are supposedly to be too big to fail is giving their shareholders and creditors a free ride and creates moral hazard," a government source told the South China Morning Post.

"The proposed law change will reduce such risks and establish an effective resolution regime to allow rapid intervention by regulators. It would ensure the shareholders and creditors of the financial firms concerned, rather than the general public, foot the bill."

The source said the new law would also help the local regulators defend customers' interests by blocking any asset transfers out of the city in the event of a crisis in a multinational firm.

The government will have a second consultation over the details of the regulation later this year before a bill is submitted to the Legislative Council for approval next year.

The proposed law change would add to the powers of the Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority, allowing them to override the property rights of the shareholders or creditors of troubled firms and intervene without having to wait for their consent.

The expanded powers would mean the regulators can order the compulsory transfer of ownership of the failing financial institutions - banks, brokers, fund companies, insurance firms or clearing houses - to another financial firm to protect depositors, investors or policyholders.

Alternatively, the regulators would be able to transfer the assets or operations of the failing institutions to a new "bridge institution" controlled by the government or the regulators.

Another option would be to force shareholders and creditors to inject money into the troubled firms to bail them out in a debt-for-equity swap arrangement.

As a last resort, the government would assume temporary ownership of a firm.

Christopher Cheung Wah-fung, the legislator for brokers, said he supported the proposed move provided the regulators used the new powers judiciously.

"No taxpayers would like their money to be used to bail out firms that are too big to fail. The proposed law change, if it can reduce the need for bailouts, should be introduced in Hong Kong," Cheung said.