bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

helpersCheckIsPostiesArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

moreOnThisArticles

urlAlias

commentCount

sponsorType

authorLocations

authors

paywallTypes

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

socialHeadline

headline

flag

firstTopic

glossary

flattenTypeIds

publishedDate

additionalInfoBoxes

images

image

relatedLinks

relatedNewsletters

__typename

createdDate

sponsor

factSheets

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

copyrighted

customTimezone

liveContents

SCMP Reporter

Proposals to empower investors to defend their own interests through the courts mark a coming of age for Hong Kong's securities markets.

 Until now, the Securities and Futures Commission has served as the guardian of individual investors' interests, charged with taking action on their behalf against market malpractices.

 Under the proposed Composite Securities and Futures Bill, investors will be given the power to sue for compensation those who cause them losses through market manipulation, insider dealing, fraud or other malpractices.

 They will also be able to sue those responsible for issuing misleading information, if this results in losses.

 While the Government considers the move would enhance investor protection, Hong Kong Stockbrokers Association chairman Paul Fan Chor-ho is worried it puts too much of a burden on brokers.

 'After the proposed law changes, brokers may face the civil liabilities of their clients in addition to penalties resulting from regulators' actions,' Mr Fan said.

 It would be possible, he said, that some investors may abuse such a situation, and brokers would have to pay huge legal fees to defend civil actions.

 But the Government argues the change is needed.

 'The local market has become more and more sophisticated. Some investors may want the power to take legal action to protect their own rights,' Deputy Secretary for Financial Services Au King-chi said.

 SFC chief counsel Alexa Lam said common law already allowed investors to take civil action, but in practice this was difficult due to the many limitations in place.

 Enactment of the composite bill would make taking action much easier, she said.

 The change would bring Hong Kong into line with leading overseas markets, such as the United States, Britain and Australia. However, it raises questions over whether all SAR investors are ready to assume their extra rights.

 Unlike in the US and Britain, the Hong Kong public has no culture of taking court action in defence of consumer or investor rights.

 It is also debatable whether SAR retail investors have the necessary resources to launch court proceedings.

 However, the composite bill is aimed at creating a framework for the market environment in the 21st century, and the SFC clearly sees the investor-protection component as preparing for the future.

 'Investors may not be ready to use this new power now, but they may like to when they become more sophisticated,' Ms Lam said.

 Ms Au said the Government also was unsure whether investors would use their new powers, but still supported their introduction.

 'Even if only one out of 100 investors takes civil action, the bill will achieve its goal of enabling them to protect their rights,' she said.

 'We cannot wait until all investors are ready to take such action before we change the law.'  Beefing up individual investor rights would also compensate for the Government's decision not to add statutory backing to the listing rules and takeover codes.

 A proposal to do so, put forward during an earlier consultation period on the bill, was dropped for fear of reducing the market's flexibility.

 'Giving investors the power to take action over misleading public information will act as an alternative way of enhancing market transparency and corporate governance of listed companies,' Ms Au said.

 Another important investor-protection measure in the bill is the creation of a new insurance-based compensation arrangement for investors who suffer losses when brokerages collapse.

 The present system is seen as outdated and inadequate, since it provides for maximum compensation of only HK$8 million to all clients of a brokerage which defaults, regardless of its size or number of clients.

 The figure is HK$2 million for a futures broker.

 The bill suggests the introduction of a new compensation company to be run by independent members. Money from the compensation funds of the stock and futures exchanges would be used to buy an insurance scheme.

 Under this system, each investor would be assured of receiving a certain amount of compensation, although the ceiling has not yet been fixed.

 This is similar to the US system, where the United States Securities Investor Protection Corp protects clients against losses of up to US$500,000 when a broker becomes insolvent.

 The composite bill also aims to crack down on market malpractice.

 One significant proposal is to turn insider dealing into a criminal offence. This will see those found guilty face much heavier penalties - maximum imprisonment of 10 years and a fine of up to HK$10 million. At present, insider dealing is only a civil offence. This means the stiffest action the insider dealing tribunal can take is to impose a fine of up to three times the profit earned or losses avoided, and to ban suspects from acting as listed company directors for five years.

 Yue Wai-keung, Luen Fat Securities dealing director and a director of Hong Kong Exchanges and Clearing, said the insider dealing proposal was too harsh.

 'Of course insider dealing is the kind of market malpractice which should not be tolerated,' Mr Yue said.

 'I however wonder whether such behaviour is so bad that it deserves to have 10 years imprisonment.

 'I think it is just too harsh.'  However Ms Au argues that such a severe penalty is needed to send a strong message to the market that the Government and SFC is not prepared to tolerate market malpractice.

 At the same time, the bill suggests the use of civil action in market manipulation cases.

 These are now classed as criminal offences and thus require a heavy burden of evidence.

 As a result, only four such cases have been prosecuted in the past 25 years.

 Under the bill, the insider dealing tribunal would be widened to become a market misconduct tribunal, chaired by a judge and two lay members.

 This tribunal would hear all malpractice cases, including insider dealing, deception, and 'bucketing' (a type of fraudulent scheme where brokers receive money from clients after falsely claiming they are executing futures contracts for them).

 These changes would effectively allow the SFC the choice of a dual route - criminal or civil - to handle all kinds of malpractice.

 They would also bring Hong Kong into line with the practices in the US, Britain and Australia.



More power to the people