Self-regulation set to become an issue

SELF regulation in the securities industry is due to become a debating point in the territory.

The stock exchange's consultancy report, The Way Forward, deals with the subject, asking whether a United States-style self-certification system might not be appropriate for Hong Kong.

The issue has been stirred a little by the controversy surrounding the involvement or lack of involvement of Interform Ceramics International in mainland joint ventures.

Allegations from outside parties argue the company has not disclosed interests in two joint ventures in China.

The company eventually denied the allegations by issuing a press statement in the early hours of yesterday morning.

Regulators have come in for some flak for not intervening in the situation.

So far, there has been no direct intervention. However, the chairman of Interform has indemnified the company against any losses arising from the controversy.

The affair raises the question of who was responsible for ensuring the integrity of the new listing candidate.

These have to be the professionals involved; from the accountants through to the financial advisers.

Too often, there is the feeling among some investors that as long as a deal can be pushed through, regardless of the regulations, and as long as no one asks too many questions, anything can get approved.

Reforms widening the membership of the exchange council and the exchange listing committee in 1991 have altered this somewhat, by making it more difficult for cosy deals to go through with a wink and a nod.

Some investors argue for a change of attitude among some professionals, whereby the onus of responsibility for thorough vetting is on them and not the regulator.

Of course, many professionals throw their hands up in despair saying they do vet thoroughly, and indicate that if investors and regulators saw some of the rubbish professionals see every day they might be a bit more understanding.

How far do we want the regulators to get involved in qualitative, judgmental issues, or merit regulation? The answer has to be very little. This is especially the case in the light of forthcoming political changes. The Hong Kong stock market and securities industry want the bureaucrats of the future Special Administrative Region as far away from regulation as possible.

Regng market participants take responsibility for their own announcements and documents.

A form of self-regulation by the issuers and professional advisers should be pressed for. But do we trust them? At present, given the state of some of the accounts and statements passing this desk, no. But this should not be seen as the end of the road in the debate.

What The Way Forward stresses is that the US system of self-regulation by professionals relies on a high degree of disclosure. It also imposes some pretty hefty sanctions against those who do not appear to come up to standard.

The Way Forward says: ''The philosophy is backed by strong sanctions for improper disclosure and high probability - given the vigorous prosecution policies of the US SEC [Securities Exchange Commission] and the litigious environment in the US - that violators will be caught and penalised.'' This is definitely not an environment that exists in Hong Kong, although the environment is a lot better for minority shareholders than it was four years ago.

Given the small town atmosphere of Hong Kong, are the forces independent from the controlling shareholders strong enough to make self-regulation a reality? The answer to this is probably not yet, but growing international participation in Hong Kong and the increasing activity of the territory's corporates in international capital markets make self-regulation more likely than four years ago.