White Collar
by

Time for Hong Kong’s securities regulator to diversify its income source

PUBLISHED : Monday, 12 December, 2016, 3:01pm
UPDATED : Monday, 12 December, 2016, 11:00pm

Even if the Securities and Futures Commission is in the red this year, the Hong Kong regulator should still consider ending its practice of levying trading fees on investors.

Why? Because the levy income is so unstable that the regulator’s income goes up and down depending on the market volume. The Hong Kong government should come up with a more stable income source for the commission.

The SFC last week said it posted a HK$50.58 million loss for the quarter to the end of September, compared with a loss of HK$31.46 million in the same period a year earlier. The major reason for the wider loss was a 30 per cent year-on-year decline in fee income to HK$263.76 million as market turnover slumped.

The latest loss itself is not a big worry as the SFC is a very “rich” regulator. Despite losses in the past two quarters it still has a HK$7 billion reserve.

In fact, the reserve is so high that it plans to spend HK$3 billion to buy its own offices, which would have saved rent totalling HK$52.41 million for the three months July-September.

It would be a wise move for the SFC to buy its own office, following a similar move by the Hong Kong Monetary Authority in 2001.

The regulator collects transaction fees from investors, so its income is directly linked to market turnover

HKMA spent HK$3.7 billion to buy 14 floors of Two IFC in 2001 which has saved it HK$734.4 million in annual rentals costs over the 10 year period since the purchase.

Buying its own property would thus help cut down the SFC’s expenditure and save costs in the long run and avoid loss making results during a market downturn. This move should be supported.

However, the SFC should think about diversifying its income source. The regulator collects transaction fees from investors, so its income is directly linked to market turnover. Average daily turnover in the first nine months was HK$67.8 billion, 42 per cent down year on year.

The SFC suffered a loss of HK$179.21 million for the six months to the end of September, compared with a HK$217.25 million gain in the year earlier period.

If the SFC bought its own property it could better cope with falling turnover, and it would mean higher profits when market turnover rebounds, like what happened in 2007 or last year.

If the stock market’s average daily turnover returned to record months like April last year when it hit HK$200 billion a day, the levy income for the SFC would be three time the current level. If that happens after it buys an office, its reserves would balloon at an even greater level than now.

The Hong Kong government should find a fixed income source, or at least more stable income sources, for the SFC. The regulator’s job is to crack down on market malpractices, not to balance its books.

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