Who should regulate new listings of companies in HK?
New proposal which gives equal powers to SFC and HKEX gets mixed response from market circles as conflict of interest issues still remain unanswered
‘Who will bell the cat’ perhaps sums up the current predicament in Hong Kong capital market circles. In this case the cat in question is approval of new listings and the much asked question is whether it should be the HKEX, or the SFC, or both?
Though heated discussions on the subject have been going on for several years, with the latest round of discussions happening last week, there are still no clear guidelines on how the exact modalities are going to be worked out.
That said, there did seem a ray of hope last week when the Securities and Futures Commission and the Hong Kong Exchanges and Clearing decided to usher in listing reforms over the next three months with some drastic proposals like reducing the HKEX’s powers in listing matters and making the SFC fully involved in the process.
Adoption of these proposals could see HKEX chief executive Charles Li Xiaojia losing his place on the committee that approves new listings, while two newly formed committees with equal representation from the SFC and HKEX would handle the listing policy and complicated new listing applications.
The latest proposals, which sound good on paper, has, however, not met with the expected response from market circles, with some experts commenting that the reforms are not enough.
“The latest proposals are not that convincing. The HKEX has been a listed company since 2000 and its main objective is to make profits. It should have nothing to do with regulation and instead transfer the powers to SFC,” said Sin Chung Kai, a lawmaker from the Democratic Party, which has been urging for the removal of HKEX from regulatory matters as it sees it as conflict of interest.
Experts like Sin argue that since the HKEX already collects listing fees, it would be profitable for it to sanction more new listings than was necessary.
David Graham, chief regulatory officer of HKEX, however, refutes such charges. He said that the objective of the latest reform, including the removal of HKEX chief from the listing approval panel, is to ensure that there are no conflicts of interest.
Kennth Leung, a lawmaker for the accountancy sector, said that the current proposal does not address the conflict of interest issue fully as it still permits the HKEX listing department to conduct the initial approval. In addition, the two new panels also include HKEX members.
“The current proposals give HKEX a lot of influence on approval of new listings and in framing listing policies. The new structure is complicated and a duplication of efforts. It is better to allow the SFC to work with some other market participants to rule on listing issues,” Leung said.
Albert Au, a non-executive director of the SFC and chairman of accounting firm BDO, however, said the current reform is more than enough.
“The new proposal allows the SFC to be more involved in new listing approvals and formulation of policies. It is better than the current model, wherein the HKEX may suggest something and the same gets rejected by the SFC,” Au said.
Last year, the SFC rejected HKEX’s draft proposals on dual class structure reform.
“If the SFC and the HKEX are involved in policy formulation from an early stage, then there is no need for the former to exercise its veto power. I believe it would help in creating a better working relationship,” Au said.
Under the three tier regulatory structure, the government’s role was to set the policy while the SFC was to supervise the HKEX as a frontline regulator. Some markets such as Britain, however, have an independent body to approve new listings to prevent conflict of interests.
The Hong Kong government had after an expert group report in 2003 decided to shift all regulatory powers to the SFC. But it made an immediate about-turn a month later and dropped the plan due to stiff opposition from the HKEX and the business sector.
Lina Lee, head of Asia at Ashurst, a law firm, feels that it would be better to let the HKEX continue as a frontline regulator. “It is better not to opt for drastic changes of the current system as it has worked well in the past,” she said.
“The removal of the HKEX chief executive from the listing committee is, however, a right step to remove concerns about the conflict of interest issue,” Lee said.
Similar sentiments are also shared Sally Wong, the chief executive of Hong Kong Investment Funds Association. She said it the reforms are helpful as it enhances the governance structure and gives greater clarity and certainty to the respective roles and responsibilities of the participants.
“It is an important step in addressing a perennial concern about the inherent conflict on the role of the HKEX,” Wong said.
Christopher Cheung Wah-fung, a lawmaker for brokers, also agrees with the current proposal.
“We should not allow the SFC to be the sole regulator for listed companies as it may make the SFC more powerful. It would be better to allow the HKEX and other market participants to also monitor listed companies. This would certainly bring more checks and balances,” Cheung said.
