Financial regulation

Hong Kong regulator proposes tripling compensation to investors in event of brokerage collapse

Payouts could rise to HK$500,000 under the plan, while the regulator would also raise the threshold at which it imposes levies on transactions to replenish the compensation fund

PUBLISHED : Friday, 27 April, 2018, 10:20pm
UPDATED : Friday, 27 April, 2018, 11:18pm

Hong Kong’s securities regulator has begun a two-month consultation exercise on proposals to more than triple the compensation paid to investors in the event of a collapse of a brokerage.

An investor trading in securities and futures contracts would be entitled to receive a payout of up to HK$500,000 (US$63,700) – up from HK$150,000 currently – under the proposals, the Securities and Futures Commission said in a statement on Friday. 

It also made clear that trading in mainland Chinese stocks by non-mainland-based investors under the Stock Connect schemes, which link exchanges in Hong Kong and mainland China, would be covered by the compensation scheme. 

“These changes are needed as the Hong Kong market has undergone substantial changes since the last formal review of the investor compensation regime,” said the commission’s chief executive, Ashley Alder. 

“The proposed enhancements will benefit investors and the wider market and better equip the SFC to manage potential systemic risks.”

The proposals also include raising the limit at which the investor compensation fund would suspend taking levies on stock transactions to replenish its coffers, to HK$3 billion from HK$1.4 billion. The lower level that would trigger reinstating the levies would also be lifted to HK$2 billion from HK$1 billion. 

As the fund’s value currently stands at HK$2.36 billion, above the proposed HK$2 billion threshold, the current suspension on levies will remain in force even if the proposals are implemented.   

The fund incurred operating expenses of HK$5.57 million in the 12 months to March 31 last year, and made compensation payouts totalling HK$1.12 million in the period, down from HK$49.7 million in the previous financial year, according to the SFC’s latest annual report. 

Another proposal calls for empowering the SFC to make interim compensation payments in “exceptional circumstances” where delays may arouse or increase “systemic” concerns.

The investor compensation regime has been in place since April 2003. It provides a safety net for retail investors who suffer losses as a result of defaults of licensed intermediaries or authorised financial institutions that offer exchange-traded investment products in Hong Kong. 

Defaults cover insolvency, bankruptcy or winding up, breach of trust, misappropriation of funds, fraud or misfeasance – intentional incorrect action or advice.

Investors have until June 27 to submit their comments to the SFC.