The stock market reforms announced last week represent a small improvement on the status quo - but only a small step. They fall far short of what is needed to clear up the regulatory muddle keeping the markets from functioning as well as they might.
A year ago, a panel of outside experts recommended moving the frontline regulation and vetting of listed companies from the stock exchange to the statute-backed Securities and Futures Commission (SFC). This option had the appeal of eliminating in one step the market's greatest potential source of administrative gridlock and conflict of interest.
The government quickly embraced the recommendation - and then almost as quickly pushed it into the background when the exchange, and business interests which benefited from the existing arrangements, cried foul.
The final decision to shift some of the exchange's listing rules to the SFC and give them legal authority is better than nothing. These rules concern connected transactions and financial disclosure, areas where some of the worst violations are seen. Recourse under the current arrangement would have been either a reprimand or delisting, steps the HKEx rarely took. But in enforcing the few areas under its authority, the SFC will still have to work with the HKEx within a complex arrangement that lends itself to the risk of bureaucratic entanglement and oversights.
The vetting of new listings, most importantly, will remain primarily the responsibility of the HKEx. The HKEx derives much of its income from such listings and this means the system favours weak regulation. As the outside experts pointed out, conflict of interest is inherent and irreconcilable. The dual filing system established last year gives the SFC a chance to be involved in the vetting process but the flaws in the system are glaring. Documents are collected by the HKEx on behalf of the SFC, and contact with listing candidates is the responsibility of the exchange. The SFC is in this process an observer - and not the powerful regulator it should be.
No solution is perfect and there are valid concerns about shifting the listing functions entirely to the SFC. Some say that while the current arrangement allows some dubious companies to occasionally slip through, the market can be depended upon to weed them out - eventually. They argue that there is a danger of killing the market through over-regulation and undue caution on the part of SFC lawyers. Such fears are real, but they can certainly be dealt with.
