The passage of the Securities and Futures Bill through the Legislative Council yesterday puts to rest years of wrangling over a vast and complex piece of legislation. The bill, a decade in the making, updates and consolidates a fragmented body of securities legislation into a modernised and coherent whole. That, in any event, was the aim. The Government, legislators and regulators must hope they have got it right. Much is at stake: the bill sets a 21st century template for Hong Kong's regulatory system, and may do much to define its effectiveness as an international financial centre in the era of borderless electronic trading and heightened global competition. That no one is completely happy with the bill probably speaks in its favour. With such diverse constituencies to satisfy, trade-offs were inevitable and the widespread tone of grudging acceptance may signal an appropriate balance has been struck. Yet concerns remain. The most significant of these is the decision to retain the Chief Executive's power to direct the Securities and Futures Commission (SFC), in contrast to overseas practice and in defiance of opposition in Legco. Twenty legislators voted against the provision last night. Writing in the South China Morning Post last year, Margaret Ng Ngoi-yee, who represents the legal profession in Legco, argued this power would undermine the independence of the SFC. 'Such power of direction is incompatible with an independent authority . . . it will be assumed by the public that the SFC will refrain from doing anything of which the Chief Executive might not approve.' In the British and United States systems, the independence of the regulator and his ability to act without reference to the executive was 'implicitly held to be vital', Ms Ng wrote. The Government has argued it needs the reserve power as a check and balance against the powers of the SFC, which are greatly enhanced by the bill. But the Chief Executive already appoints the chairman and members of the SFC and can remove them. Safeguards against misuse of power should be built into the legislation and supporting institutions, in Ms Ng's view. Indeed, it is hard to imagine circumstances in which this power might be exercised without causing huge collateral damage to the credibility of the Hong Kong regulatory system. The bill covers a vast array of other issues, from market misconduct to regulation of brokers, Internet trading, disclosure of share interests, auditors' immunity when reporting fraud and investor compensation. It has been attacked as too harsh - by a powerful group of 10 international investment banks - and, following amendments, pilloried as too lax. One of the most bitter wrangles centred on the status of banks' securities operations. After heavy lobbying by the brokerage community, the bill was amended to make banks subject to regulation by the SFC (previously they were 'exempt dealers' regulated only by the Hong Kong Monetary Authority). The arguments in favour of a level playing field were strong, but the Government's acquiescence creates an unfortunate impression - emphasising once again the political power of the brokerage lobby. In other areas, doubts remain over the effectiveness of the Market Misconduct Tribunal, which will replace the Insider Dealing Tribunal, while the new share disclosure provisions are felt by some institutions to be onerous. Regulators have spoken repeatedly of the need to strike a balance between conflicting interests and between market development and adequate law enforcement. Only time will tell if they have got the balance right. The proof of the pudding will be in the eating.
