A Legco report has laid some of the blame for the Lehman Brothers minibond fiasco at the door of the city's officials, principally former Hong Kong Monetary Authority chief Joseph Yam Chi-kwong. Their defenders have cried foul, with one saying Yam should not take the blame for the global financial crisis.
Even before the crisis began, however, our top financial officials and regulators had fallen behind the pace of the financial products market. A light regulatory touch can enhance free markets. A hands-off approach can bring its own problems. Regulatory myopia contributed to the minibonds affair. Some progress has been made in closing loopholes and oversights that were exposed. But there remains room to develop a regulatory system that functions better.
The Legco subcommittee rightly cited a division of authority between the Securities and Futures Commission and the HKMA for an inadequate response to irregularities in the selling of minibonds and structured financial products. It also laid ultimate responsibility at Yam's door as chief bank watchdog, and expressed disappointment in former SFC chief Martin Wheatley, Financial Secretary John Tsang Chun-wah and Secretary for Financial Services and the Treasury Professor Chan Ka-keung. It says something about the complexity of the issue, involving officials, bank executives and investors, that lawmakers took three years to complete their inquiry and issue a report, at a cost of HK$28 million. If the government adopts the suggestion of bringing all regulation of securities business under the SFC it would be time and money well spent.
The HKMA oversees banks and their stability; the SFC regulates brokerages and fund houses - a division of labour creating cracks through which complex structured financial products and derivatives fell. For example, minibonds were issued without the SFC's approval, and banks sold them without being supervised by the SFC.
Since banking, securities and insurance are now linked, a single regulator should have the authority to supervise a whole spectrum of investment products and the way they are sold.
The key issue is disclosure, or making sure investors are given enough information to have an adequate understanding of financial products. Some progress has been made, for example in separating deposit-taking bank staff from those who sell investment products, and introducing cooling-off periods for investors who buy complex or long-dated products. Chief executive-elect Leung Chun-ying has pledged to set up a Financial Development Council to enhance the development of the financial industry. This may well lead to broader markets and greater choices for investors. The job of a regulator is to ensure investors have the information they need to make sound use of them.