SFC to spend $212m in 1994-95

HONG Kong's key company watchdog, the Securities and Futures Commission (SFC), expects to spend more than $200 million policing the corporate sector in the next financial year.

Its latest budget estimates reveal it expects recurrent operating expenditures to jump 19.6 per cent to $212.7 million in 1994-95.

The rising cost of regulation is blamed on a 12 per cent rise in average salaries and the addition of 11 new employees.

For the current financial year, the SFC expects revenues of $198.5 million, four per cent above its original projection, thanks to higher-than-expected transaction-levy income generated by booming market turnover.

The SFC had originally budgeted for the levies on securities and futures transactions being slashed by 40 and 50 per cent respectively on January 1.

It had also been assumed that the SFC would not receive its 50 per cent share of levy income from securities transactions for the six months following this date.

Although this failed to materialise, SFC chairman Robert Nottle announced last December that the regulatory body had made a recommendation to Financial Secretary Hamish Macleod to reduce the transaction levy by 40 per cent to 0.012 per cent.

Mr Nottle said that when this rate became effective, the SFC would not receive levy income for six months.

The SFC's recommendation quickly drew strong opposition from Stock Exchange of Hong Kong chairman Charles Lee Yeh-kwong, who claimed the exchange needed the money to cover increasing operating expenses and expansion costs.

In preparing its 1994-95 budget, the SFC is now assuming the transaction levy will be cut by 40 and 50 per cent respectively on March 1, and that it will not receive its share of levy income from securities transactions for four months from that date.

The budget document revealed that the SFC expected receipts from securities and futures contracts levies for 1993-94 to jump by 118 per cent and 57.7 per cent respectively because of increased stock and futures exchange turnover.

The higher-than-expected levy revenue generated greater cash flow for the SFC, accounting for a 44.2 per cent jump in its investment income.

Receipts from fees and charges were expected to be 10.6 per cent above the approved estimate because of a larger-than-expected increase in the number of registrants and applications from intermediaries, and revenue from corporate finance.

The SFC proposed a 21.5 per cent increase in personnel expenses for 1994-95 to increase the number of its employees from 223 to 232.

This includes five employees to regulate leverage foreign-exchange trading and four for corporate finance and enforcement functions.

Information and systems services expenses are to climb by a proposed 12 per cent; general office and insurance expenses by 12.1 per cent; training and development expenses by 11.2 per cent.

A proposal to increase professional and other charges by 53.5 per cent was made mainly to cover expenses linked to the new responsibility of regulating leveraged foreign-exchange trading, a higher budget for the Securities and Futures Appeals Panel, expenses connected with recruitment needs and expected increased staff turnover.

The SFC also made a proposal for capital expenditures of $7.92 billion, including $3.7 million for the replacement of obsolete computer hardware and the acquisition of software for new computers.

A $2 million provision will also be needed for external consultants to conduct an information strategic planning project and other system enhancements.

The document said the Government had examined the 1994-95 budget and considered it reasonable.

Projections show that corporate watchdog is barking up the right tree Operating expenditures to jump 19.7 per cent to $212.7 million in 1994-95.

Revenue for 1993-94 estimated at $198.5 million - four per cent above the approved figure due to strong market turnover.

Average salaries to climb by 12 per cent and number of employees to increase by 11 positions to 232.

Transaction levy on securities and futures transactions expected to be slashed by 40 and 50 per cent respectively on March 1, 1994. SFC will not receive its shares of levy income for four months following that date.

Securities and futures contracts levies for 1993-94 expected to climb by 118 per cent and 57.7 per cent respectively because of increased activity on the stock exchange and futures exchange.

Investment income to balloon by 44.2 per cent.

Receipts from fees and charges to rise by 10.6 per cent.

Personnel expenses to increase by 21.2 per cent.

Professional and other expenses to jump by 53.5 per cent.

It approved the fact that the SFC had decided not to request an annual grant for the second straight year and intended to recommend the budget to Governor Chris Patten for further approval.

The SFC is willing to accept a reduction in the transaction levy, forego its share of levies for four months and sharply increase spending because the SFC Ordinance prohibits the SFC's reserves from being more than twice its operating expenses.

This has proved to be difficult to stick to. At the end of fiscal 1992-93, reserves were $251.9 million, while annual operating expenses were $162.2 million.

Given that the SFC had excess revenue of $164.4 million in 1992-93 excess revenue this year could easily top $200 million.

This would increase the reserves to more than $450 million, compared with operating expenditures of $198.5 million.