Investors need tough securities laws to criminalise offences

PUBLISHED : Saturday, 15 December, 2012, 12:00am
UPDATED : Saturday, 15 December, 2012, 3:49am


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No matter how vigilant the Securities and Futures Commission is as gatekeeper of Hong Kong's securities market, investors must also be able to rely on listing sponsors being diligent and responsible. That is not always the case, as evidenced in recent times by profit warnings, audit problems, trading suspensions and de-listings that do nothing for confidence. It is, therefore, good news for investors that the SFC has adopted proposals for tougher regulation of sponsors in a consultation paper released to the market in May.

The key reform is making sponsors criminally liable when they knowingly or recklessly approve a prospectus containing an untrue statement, or omission, materially adverse from an investor's perspective; this exposes sponsors to jail terms as well as heavy fines. Experience has shown that fines alone are not a sufficient deterrent, which is not surprising given the fees to be earned from listing deals and the competition for a piece of the action. Bankers opposed criminalisation. However, financial services sector lawmaker Christopher Cheung Wah-fung has acknowledged that the reforms would enhance the quality of new listings and investor protection. Generally the reforms seek to clarify sponsors' responsibilities, and include responsibility for checking that other professionals, such as auditors and asset valuers, have done their jobs properly.

The regulator says that if the government adopts the proposed reforms and lawmakers approve, they should be enforced from October 1 next year. That will not be a moment too soon. The SFC's latest update on listing applications reveals continuing problems, such as optimistic assumptions about the sustainability of the applicants' businesses, the absence of minimum information and documents required under the rules, and the lack of meaningful disclosures of risks, historical financial performance and future plans.

A reputation for safeguarding investors by providing a level playing field is crucial to Hong Kong's standing as a financial and money-raising centre.