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The new law will empower the Hong Kong Monetary Authority, the Securities and Futures Commission and the Office of the Commissioner of Insurance to take control of the firms within their ambit. Photo: Felix Wong

Hong Kong steps up rescue reform for financial giants

A new proposed law will empower the regulators to take control of big financial players and the stock exchange if they are in trouble

The government will submit to the Legislative Council a proposal to bring in a law by the end of this year that will give regulators the power to take control of financial giants and the stock exchange if they are in trouble.

The government yesterday issued a second round of consultation until April for the new law. The first round took place between January and April last year.

The reform is part of the new international financial regime chalked out by the Financial Stability Board, of which Hong Kong is a member.

The board seeks all major markets, including Hong Kong, to put in place a law from next year that will give regulators greater power to control rescue plans for big financial firms in emergencies without resorting to taxpayers' money.

During the 2008 financial crisis, US taxpayers spent US$75 billion to bail out giant firms, while Britain spent £130 billion (HK$1.5 trillion).

The new law would empower the Hong Kong Monetary Authority, the Securities and Futures Commission and the Office of the Commissioner of Insurance to take control of the firms within their ambit, namely banks, insurers and brokers. For those that operate multiple businesses, the lead regulator would be in charge.

Unlike other financial centres, Hong Kong has added the stock exchange regulator, the SFC, in the mix. "The US and other Western markets have several stock exchanges but Hong Kong has only one. If it's in trouble, so would be the city, which is why we have proposed to include it in this new law," a government source said.

A regulator can exercise the new power only after getting approval from the financial secretary. To qualify for a rescue, a troubled financial firm must be so important that its collapse will have knock-on effects on other such firms and endanger overall financial stability.

The regulators can use one of five options for a rescue: force-sell to a buyer; allow a bridge firm to hold it for some time so that it can carry on its business; ask existing shareholders or creditors to inject money; move some of the bad debt to an asset management company; or, only as the last resort, allow the firms to be owned by taxpayers temporarily.

The regulators can also move in before a company's problems snowball and ask it to restructure.

In the event of conflicts of interest between the Hong Kong and overseas operations of the company in trouble, the local regulator will have the right to give precedence to the interests of local customers.

The new law would also allow a regulator to collect levies from the market players after a crisis, a practice the US has been following.

Royce Miller, a partner of Freshfields Bruckhaus Deringer Hong Kong, said the reform "is an important step to end the 'too big to fail' problem".

"The legislative reforms that the Hong Kong authorities are proposing should make it significantly less likely that a government bailout would ever be needed in future. Hong Kong is ahead of the game and is being much more transparent than many other places in Asia, and I expect the rest of the region is watching developments here closely," Miller said.

This article appeared in the South China Morning Post print edition as: HK steps up financial rescue reform
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