Hong Kong SFC plans to get off regulatory back seat to attract New Economy startups

PUBLISHED : Tuesday, 08 November, 2016, 1:59pm
UPDATED : Tuesday, 08 November, 2016, 11:45pm

Hong Kong’s securities watchdog has signalled its intention to get off the regulatory back seat and play a more active role in reforming the city’s financial rules for attracting so-called New Economy companies to start shop and raise capital.

In a speech to 900 Asian regulators and fund managers 10 days before the deadline of a public consultation on reforming Hong Kong’s financial rules, the Securities & Futures Commission’s Chief Executive Ashley Alder rattled off a list of reforms much-needed in the city, from rules covering algorithmic trading to overhauling the outdated Growth Enterprise Market (GEM) board.

“We need to ensure that our regulatory structure is fit for 2016 and beyond, and not for 1988, when the basic blueprint for the current regulatory structure was established,” Alder said.

Hong Kong’s US$4.1 trillion stock market trails behind China and Japan as Asia’s third-largest equity market by value. While it’s still bigger than Singapore’s US$475 billion market capitalisation -- and the city remains home to the world’s largest IPOs this year -- Hong Kong has been increasingly challenged as its southern rival had done more to attract fintech companies.

A public consultation has been underway since June to reassert Hong Kong’s role as Asia’s financial hub and a place for so-called New Economy companies to raise capital.

At the centre of the debate is a plan to create two committees in the IPO approvals process, which will propel the SFC into a frontline regulator alongside the Hong Kong Stock Exchange, rather than its current role of approving or rejecting a decision by the bourse.

Supporters of the plan said it will improve the quality of the market, while opponents are concerned that having the SFC in the front seat may lead to excessive regulation.

“It’ll be good to let the SFC express its concerns on policies and any changes at an early stage with the exchange,” said Clement Chan, managing director of assurance at BDO, an accounting firm, adding that the HKEX should remain its primacy as the frontline regulator while the SFC keeps its veto power.

Having both the SFC and the HKEX in the proposed listing regulatory committee and the listing policy committee will enable them to negotiate changes in listing rules in an “efficient, accountable and transparent way,” Alder said.

A spokeswoman at the HKEX declined to comment on Alder’s speech, citing the ongoing consultation.

Last week, Alibaba Group Holding’s founder Jack Ma said Hong Kong needs to reform the city’s listing rules to attract New Economy companies and remain relevant.

Alibaba raised US$25 billion in 2014 in New York in the world’s largest IPO to date, skipping Hong Kong after the Hong Kong exchange rejected Alibaba’s partnership structure, which grants a group of founding partners the right to nominate the majority of directors subject to shareholders approval.

Ant Financial, which operates the Alipay e-payment platform for Alibaba, is poised for an IPO. The company is valued at US$60 billion, and Ma said the IPO destination depends on the willingness by Hong Kong’s regulators and bourse to embrace innovation. Alibaba owns the South China Morning Post.

“At no point did the SFC decide that some form of weighted voting rights (dual share holding structure) is totally impossible in Hong Kong,” Alder said on Tuesday.

The Hong Kong exchange had proposed in 2015 to allow companies with so-called dual-share structures to list in the city. The SFC opposed the draft proposal because there weren’t enough measures to protect investors’ interests, Alder said.

In the US, where Internet companies including Facebook Inc and Google Inc had dual-share structures, measures are in place to protect investors, including sunset clauses with expiry dates on the structure, or a moratorium on founders from transferring their special-class shares.

“If nothing is done, we will lag behind other capital markets” such as Singapore, which already approved the listing of dual-share companies in September, said the Hong Kong Securities Association’s chairman Benny Mau, who supports the SFC taking a more active role. “It makes sense for the SFC, which is a statutory body, to take the lead in carrying out reforms with measures to protect investors’ interest, since the HKEX is a listed company with commercial interests.”