The Government will release a consultation paper this month outlining measures to close a regulatory loophole concerning margin finance firms operated by brokers, according to Secretary for Financial Services Rafael Hui Si-yan.
Mr Hui said it was likely the Government would seek rule changes to allow the Securities and Futures Commission to regulate margin finance companies operated by brokers in the wake of the collapse of CA Pacific in January.
'Stock brokers are regulated by the SFC; it is natural that the finance companies run by brokers should also come under the supervision of the securities watchdog,' Mr Hui added.
If the finance companies are regulated by the SFC, they would need to have proper capital and financial resources requirements, in addition to adequate lending and risk management measures in line with the brokers.
The SFC would also monitor the activities of these companies to allow the commission to take action should they find any problems with the companies.
The Government has set up a working group headed by Deputy Secretary for Financial Services Rebecca Lai Ko Wing-yee with other regulators' representatives to study how to close the regulatory loopholes concerning the brokers' margin finance companies, which are presently unregulated.
CA Pacific was brought down by three loans made by its finance arm.
CA Pacific's finance unit provided a loan for a property investment which resulted in huge losses for the company due to the slump in the property market in October.
The finance company also suffered losses incurred by then Leading Spirit chairman Wong Shi-ling, to whom it had lent heavily on margin.
Wong failed to repay margin loans collateralised by Leading Spirit (Holdings) shares, which collapsed in value before being suspended at the firm's request in January.
In addition to CA Pacific, there are about 170 Hong Kong brokers that offer margin lending facilities to clients via their own finance firms.
The finance companies are run with a money lending licence, meaning they are not regulated by the commission or the Hong Kong Monetary Authority.
Since the SFC has no power to monitor the accounts of these finance companies, the regulator is unable to check on their loan exposure or risk-management techniques.
The stock exchange has also set up a sub-committee to study the regulation of margin finance companies and the margin financing of brokers.
A member of the sub-committee said they had finished the review, and would propose the Government should restrict loans to stock trading only.
The sub-committee also suggested the companies should not commit more than 10 per cent of their overall lending to a single client or use more than this as collateral for the purchase of a single stock, sources said.
The exchange had also considered banning the pooled finance method used by many brokers, which involves brokers combining shares of margin-trading clients to obtain bank financing.
The proposal was shelved after strong opposition from brokers.
The Hong Kong Stockbrokers Association chairman Dannis Lee Jor-hung welcomed the tightening of margin financing offered by the brokers.
'It is important that brokers should not concentrate their risk to a single client,' Mr Lee said.