Concerns grow over powers of regulators

Financial firms and some lawmakers are worried that a proposed law change may give watchdogs too much say in handling troubled firms

PUBLISHED : Monday, 20 January, 2014, 12:20am
UPDATED : Monday, 20 January, 2014, 12:20am

Financial firms and some lawmakers expressed worry that a government-proposed law next year may give too much power to the regulators.

The proposal unveiled in a consultation paper last week is aimed at ensuring Hong Kong complies with the new international rules brought in by the Financial Stability Board formed by the leaders of the Group of 20 developing economies. Hong Kong is a member on the board.

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 shareholders or creditors of troubled firms and intervene without having to wait for their consent.

This would allow for a speedy rescue and prevent the need for a government bailout as what happened in the 2008 financial crisis when many governments in the West were forced to use billions of dollars in taxpayer money to rescue failing financial conglomerates.

A banker from a European bank, who did not want to be identified, opposed the proposal.

The proposed new powers are intended for use only in the extreme

"We have to worry if the proposal would add a power too wide-ranging for regulators if they can force financial firms to be sold to anyone they like," the banker said. "It's a big question mark when regulators can trigger such power and why regulators pick particular firms as the buyers."

Democratic legislator Sin Chung-kai also worried about giving too much power in the proposed law to regulators.

"We want the new law to be very carefully drafted so as to make sure the regulators would only be able to exercise such powers in extreme cases," Sin said.

"We, however, support the overall direction of the reform to prevent a government bailout. We would not want to a situation where the government uses taxpayers' money to rescue failing financial firms."

Royce Miller, partner and head of the financial services practice in Asia of international legal firm Freshfields Bruckhaus Deringer, said it made sense for the Hong Kong regulators to have broadly the same resolution powers as other financial centres. He was not worried that regulators would have too much power.

"The proposed new regulatory powers are intended for use only in the extreme," he said. "Ultimately, the expanded powers would be used to ensure the critical functions of a non-viable financial institution can continue operating if a crisis emerges. There are also safeguards in the proposal to ensure no creditors are worse off than how they would be treated in the case of liquidation under the existing insolvency regime."

Miller said that while many countries did not have comparable laws in place yet, the leading financial jurisdictions had been all aiming to have similar laws in place by the end of next year. As such, Hong Kong should follow the same timetable.

Clement Chan Kam-wing, president of the Hong Kong Institute of Certified Public Accountants, said that even if the regulators got the expanded power, the rescue plan might not work.

"If a financial firm has financial troubles, its staff will leave while the customers may not want to continue to use the firm's services. Just getting another firm to buy it out may not solve the reputation problem of the troubled firm," Chan said.

Jeffrey Chan Lap-tak, chairman of the Hong Kong Securities Association, said it would be good to have a standard to handle the collapse of financial firms. "But as usual, we need to wait for the details to see if such a proposal would work well," he said.

A Zurich Insurance spokesperson said: "The proposed regulation change is trying to enhance the compliance of financial firms with increased expectation on their responsibilities. As a customer-centric firm, Zurich Insurance supports changes that benefit consumers."

Mark Konyn, chief executive of Cathay Conning Asset Management, said it would be controversial to determine who was the "lender of last resort" in an economy and whether certain firms were entitled to government support in difficult times.

He said the current proposal to allow the regulator to transfer ownership of failing firms was based on the assumption that another firm would take care of the liabilities and that this was in the best interests of the depositors or policyholders.

"These are huge assumptions, and under unknown circumstances, that provide the government and the regulators with the means to overcome any disagreement with shareholders over what is in the best interests of all stakeholders at that time," Konyn said.

"As we learned in the United States, there are times when there is more at stake than the saving of a single institution. This is certainly worthy of public consultation and this consultation process supports good governance."