Securities and Futures Commission runs up deficit

Poor market sentiment has hit not only the earnings of listed firms, especially those in the financial sector, it has also hammered their regulator, costing stock investors the break on fees some had hoped for.

The Securities and Futures Commission (SFC) has run up a deficit in recent months and expects worse in this quarter, according to people close to the watchdog.

The SFC has been in the red in the past few months because lower market turnover has cut income from a levy investors pay on share transactions, a person familiar with the situation said. The charge, 0.003 per cent of the value of the transaction, is a major source of the commission's funds.

Average daily turnover on the Hong Kong stock exchange in the first nine months was HK$53.14 billion, down 27 per cent on the same period last year.

The situation is set to worsen this quarter because the commission's rent is expected to soar after it moves to the Cheung Kong Center from Li Po Chun Chambers and Charter House. The SFC expects rental expenses to double to HK$200 million for the financial year to the end of March next year.

"Under these circumstances, the SFC board has recently concluded that it would not propose to waive or scrap the transaction levy paid by investors in the next financial year to the end of March 2014," the person said.

The SFC came under fire by lawmakers in February when it refused to cut the levy on stock trades despite its massive cash reserves of HK$7.4 billion, which would be enough cover its expenses for seven years. The law requires the regulator to consider a cut in the levy once reserves can support two years of operation.

The people with knowledge of the matter said if the levy was trimmed from 0.003 per cent to 0.0025 per cent, it would erode a third of the SFC's reserves over a 10-year period.

"If the SFC cut the levy from 0.003 per cent to 0.0025 per cent, investors would only save HK$5 on every HK$1 million worth of stock transaction. This would not mean anything to the investors, but the cut would mean a lot of money for the SFC in the long term," one of the people said.

"The market this year has shown turnover can go down substantially, which is exactly why the SFC has to keep the reserve for a rainy day."

The SFC might also be earmarking part of its reserves to hire more people to handle the proposed tightened regulations on listing sponsors and over-the-counter clearing.

In May, the SFC proposed adding civil and criminal liability to listing sponsors, who face up to three years in jail if they mislead investors. The SFC will announce details in December.

In April, the SFC waived the licence fees paid by brokers, fund managers and financial advisers for two years, a move that will reduce its revenue by HK$332.4 million.

The SFC is still considering buying its own office to lower rental costs, but a person close to the SFC says it will not make a decision soon, as the Cheung Kong Center lease is for five years.

"The option of acquiring an office would result in an annual saving of roughly HK$180 million in rental expenses," the SFC said in a paper posted on the Legislative Council's website in March.