White Collar

SFC suffers wider loss, but still a rich regulator

With reserves inflated by income linked to turnover, it should switch to more stable source

PUBLISHED : Monday, 25 August, 2014, 9:40am
UPDATED : Monday, 25 August, 2014, 11:32pm

The Securities and Futures Commission may have seen its loss widen last quarter but it is still too rich as a regulator.

It needs to think of a better way to resolve the "rich" problem and change its financial model completely.

When the SFC reported its second-quarter result last Wednesday it revealed a loss of HK$52.3 million, 30 per cent more than in the first quarter. The wider loss was due to a 17 per cent quarter-on-quarter fall in average daily turnover to HK$60 billion that saw the SFC's levy income also fall 17 per cent, to HK$231 million.

But there's no need to worry too much because the loss-making SFC still has huge reserves of HK$7.26 billion - enough to finance its operations for five years.

As a regulator, the SFC needs money to get its job done. But it's fair to question whether it needs to keep so much money.

The SFC should consider levying a fixed fee on Hong Kong Exchanges and Clearing

The reason it has done so is down to its financial model. A major income source is a transaction levy collected from investors based on the volume of their trading.

That levy is now set at 0.003 per cent but will go down to 0.0027 per cent from October as part of an SFC slimming exercise designed to trim excessive income.

It will also waive a further two fiscal years of licensing fees for brokers, fund managers and financial advisers, up to March 2016.

Those measures are not bad ideas but they do not cure the real problem, which is that the SFC's income is linked to market turnover.

That's a bad idea because turnover is full of uncertainty and something totally out of the SFC's control.

A reason behind the build-up of such high reserves is the strong market bull run between 2006 and 2008, when daily turnover occasionally hit more than HK$200 billion a day.

The financial crisis in late 2008 led turnover down to a lower level of about HK$60 billion, which is about the average these days.

However, we are now seeing the market rally once again. High hopes for the stock through-train scheme starting in October, which will allow mainland and Hong Kong investors to conduct cross-border trading, has seen local market turnover rise to almost HK$100 billion a day.

This means the SFC's income will increase again, putting an end to losses and carrying the risk that its reserves will balloon again.

As a regulator, the SFC should not be wasting its time thinking of ways to reduce its income. A more stable income source would be a better option.

Instead of charging investors based on market turnover, the SFC should consider levying a fixed fee on Hong Kong Exchanges and Clearing, which it regulates, or on the more than 1,600 listed companies. That would provide a more certain income source.

A major part of the SFC's role is the regulation of dodgy companies. It makes sense for listed companies to pay the price and resolve the commission's wealth problem.