The Government and stock exchange are seeking ways to close a regulatory loophole that allows brokers to run margin finance companies with a money lender's licence, leaving them virtually unregulated. The move follows the collapse of securities firm CA Pacific which was brought down by three loans made by its finance company. About 170 brokers in Hong Kong offer margin lending facilities to clients through their own finance companies. The finance companies are run with a money lending licence, meaning they are not regulated by the Securities and Futures Commission or the Hong Kong Monetary Authority. Former commission deputy chairman Michael Wu Wai-chung urged the Government to close the loophole at the end of last year but no immediate action was taken. Financial Secretary Sir Donald Tsang Yam-kuen said the Government had been aware of the problem for some time and admitted there were loopholes in the system that meant margin financing companies were not subject to control. Sir Donald said a committee had been set up - headed by the Secretary for Financial Services Rafael Hui Si-yan - to look into the matter, although many exchange members said it was unnecessary. He said the collapse of CA Pacific highlighted the importance of supervision. 'The CA Pacific case has reinforced our determination to introduce proper regulatory regime to those companies as quickly as possible,' he said. Stock exchange council member Syed Bokhary suggested the council review regulations governing margin lending by brokers. 'The collapse of CA Pacific revealed the risks involved in margin lending and the lack of regulation of finance companies operated by some brokers,' he said. 'In the interests of all brokers, the exchange should have more regulation of these companies and tighten control on margin lending to eliminate risk in the market,' he said. 'There are no rules on margin lending and some brokers only receive a 30 per cent deposit from clients, which is too risky,' he said. He proposed the exchange require brokers to only lend on margin to clients who invest in high-quality stocks and should make no margin loans to finance trading in certain small stocks. The exchange should also prohibit brokers from having large exposures to a single clients or single stocks to diversify their risk. 'It should set up a cap on brokers that they must not lend more than 2 or 3 per cent of total assets to a single client,' he said.