The Hong Kong Government at times seems to operate on a cardinal principle of reactive management - The Squeaky Wheel Gets The Grease. I am thinking here of finance companies operated by stockbrokers. They are very much in the news, with two of them having failed, unspecified others in trouble and unhappy clients parading in front of the television cameras with placards to demand their money back. It has happened because there has long been a big hole in the coverage of regulatory authorities. Banks are regulated by the Commissioner of Banking, stockbrokers by the stock exchange along with the Securities and Futures Commission, and the finance companies by . . . Well, yes, good question. They come under the Moneylenders Ordinance and the Registrar of Companies perhaps, but no-one so far has devoted much attention to them. There are bigger fish to fry. So for many years Joe Stockbroker has got away with cajoling his retail clients to open margin accounts with an affiliated finance company. Note here that these accounts are not directly with the stockbroker. This would threaten to put the accounts within the ambit of the regulatory authorities that cover stockbrokers. What the stockbroker wants is clients who will sign a lengthy document in English permitting him to put their money or stock into a finance company and allowing him to pool that money or stock and use it for his own purposes. He can then pledge the stock as collateral to raise more money and he has the funds to offer margin financing and approach some of the big boys in the market with enough money to entice them as clients. Joe Stockbroker is a fierce proponent of his right to pool clients' assets this way. It works well, as long as he keeps a close eye on his credit risk. But then temptation beckons. Why not use the money to take a punt on some high-flying speculative issue or even put it in the property market? The profit will be all his, and no regulator is watching him closely enough to see him do it. Then it goes all wrong, as it has done in recent months. Out come the placards and the TV clips on the evening news and out comes the Government's oil can. The squeaky wheel gets the grease at last. Measures are afoot to put stockbrokers' finance companies under the SFC. But why has it taken so many years to fix this obvious fault in the system? I was discussing it with some people from the SFC the other day and suggested using the word scandal to describe it. They disagreed. They point out that the system has worked well for many years in facilitating the investment requirements of retail investors, and it took one of the biggest crashes of the market's history to expose what has only been a limited misuse of it. They don't sanction that misuse, but they argue that there are many regulatory matters that are equally, or more, pressing; that they have to assign priorities in bringing investment disciplines up to modern standards, and that the Government has a role in providing a lead here too. These are fair points, and they introduce another one which I think is critical. In a full democracy, an elected government has the clout to come in and demand that sweeping changes be made quickly. If it encounters resistance, it can point to the ballot box and insist. But in a not quite full democracy, a government that is so forceful runs the risk of making itself a dictatorship. This sort of government has to tread more carefully if it wishes to ensure that it represents the wishes of the people, and Hong Kong's does. It means building a consensus, a lengthy and tedious process vulnerable to squeaky-wheel policies. So perhaps scandal is indeed too strong a word. But it is still a mighty ramshackle way of getting things done, and people have been hurt by it in this finance-company matter.