Can the proposed listing reform improve the quality of the market?

The long-awaited listing reform consultation was released last Friday andthe big question if it can help improve the quality of the market.

The proposal-- jointly issued by the HKEX and the SFC for a three-month consultation -- appears to address the conflict of interest issues but it’s not clear how much headway it can make on market quality.

For example, the changes would mean that Hong Kong Exchanges and Clearing Chief Executive Charles Li Xiaojia will no longer be a member of the listing committee which oversees new listings. This proposal is designed to address issues of conflict of interest, but won’t do much to improve market quality.

HKEX since listing in 2000 has become a profit driven company while maintaining its role as a regulator with the power to approve new listings and set listing policies. Critics have said the dual roles raise concerns that the exchange may be tempted to approve new listings to boost fee income.

To remove Li as a member of the HKEX listing committee would help resolve conflict of interest concerns. However, the proposal still retains the role of HKEX as a frontline regulator of listed companies and allows its listing department and listing committee to operate as normal. It thus has not gone as far as overseas markets such as Britain where an independent body vets new listings. The conflicting role of the HKEX as a regulator and a profit making company remains.

Other changes would mainly limit HKEX’s powers on listing matters and shifts some of these to the Securities and Futures Commission.

There is little doubt the exchange’s listing committee would be the biggest loser as it would no longer be the one to set listing policy, with the power to be shifted to a new listing policy committee to be equally formed by representatives of HKEX and the SFC.

These proposals mean the SFC has more say but we have to wonder if this is good enough to improve market quality.

At present, the SFC as the ultimate market regulator, already has the power to reject any HKEX proposed listing policies. The reform means the SFC will be able to set policy alongside the stock exchange. However, this is streamlining the process instead of adding new power to the SFC.

The SFC under the dual filing system has worked with the stock exchange in the vetting of new listings. Any poor quality listings seen to date are partly the responsibility of the SFC, as it has already played a role in the approval process.

The proposed reform, will thus only be seen as a new power division between the stock exchange and the SFC in handling listing matters and has little to do with market quality.

HKEX chief regulatory officer David Graham has said there would be another consultation on how to reform the Growth Enterprise Market and other listing issues, which should yield additional proposals to address the market quality issue.