Tribunals handing out demerit points could protect investors

Incompetence is as dangerous as fraud, and could be handled in same way as bad driving

PUBLISHED : Thursday, 15 May, 2014, 1:24pm
UPDATED : Friday, 16 May, 2014, 12:30am

In 1770, the British executed Admiral John Byng for losing a battle against the French.

Voltaire said about the case: "It is wise to kill an admiral from time to time to encourage the others." The British won the next battle.

Financial market regulators haven't gone quite so far as to use capital punishment as an enforcement tool, although it would undoubtedly be as effective.

Persistent bad behaviour in any walk of life quickly leads to deeper and more corrosive corruption. Regulators exist to ensure good conduct, which they can only do if they discipline offenders using the full legal arsenal at their disposal, be it courts, tribunals or their own powers.

Which is why anybody who breaches the key rule that is universally accepted in modern markets - that insider dealing is not acceptable - must always be pursued to the fullest extent that regulations allow.

Demerit points for different incompetencies ... would lead up to a market ban

Making a lot of money by dealing on the back of non-public information acquired by being in a privileged position is just too easy. Insider dealing goes against the principle that all investors are treated fairly and equally.

One misguided academic argued in The Wall Street Journal last week that we should not try to stop insider dealing, because it is too hard.

This is not the spirit that put man on the moon and ignores the fact that regulators have been successful in both prosecuting and controlling insiders.

Those like the academic say insider traders bring information to the markets more quickly, making markets more efficient. They justify those who illicitly or illegally uncover non-public news as providing a service. Well, so do people traffickers, and it is still unacceptable.

Markets become unattractive if investors sense they are rigged. This has a negative impact on liquidity and cuts across the whole reason for a stock market.

All of which makes the high-profile Securities and Futures Commission (SFC) insider dealing case against US-based hedge fund Tiger Asia Management particularly important.

Some commentators argue the SFC is being unnecessarily heavy-handed in its pursuit of Tiger Asia, and in its bid to have the firm and its two senior executives barred from trading in the market here for five years.

The SFC is seeking this penalty in the wake of two charges of insider dealing in 2008 and 2009, over which the fund and its executives were ordered by the Hong Kong courts in December to pay HK$45.27 million in compensation to 1,800 investors.

What makes this case especially interesting is that a February ruling by the Court of Appeal set a precedent by allowing the SFC to seek remedies from Tiger Asia in Hong Kong for insider dealing even though Tiger has not been found guilty in a local court or tribunal - although such action could still come.

The appeals judge made it easier to prosecute insider dealers by ruling that seeking further penalties will provide "much needed ammunition to the commission to protect investors".

Some commentators question how a judge can be expected to understand the details of a complex financial case.

But the court can bridge the gap between the law and the markets by seeking advice from strictly independent financial experts. I have acted in this role myself, giving evidence for both the defence and the prosecution.

In my experience, the legal process regarding market offences is going in the right direction. In general, though, the real problem for investors is not always wilful illegality but plain old incompetence.

I have seen financial advisers whose clients lose money holding the wrong investment, high-commission products, non-diversified portfolios or too much debt. All of these advisers are fully trained and licensed and can be very experienced, but they can still lose their heads in the red mist of a bull market.

And that makes me believe we should have more tribunals, not fewer. A series of lesser tribunals could work like the driving-offence points system, adding demerit points for different incompetencies that would lead up to a market ban.

Such a trade-off should enable the SFC to relax its attempts to control matters through approvals and licensing, which is often restrictive on the industry, with the deterrent: "We'll give you the rope - and if you cross the mark, you will certainly hang yourself."

Richard Harris has built investment businesses across Asia and is the founder of Port Shelter Investment Management in Hong Kong