Proposed changes to Hong Kong stock listings are a step in the right direction, but not enough
The bourse and market regulator will have to work together in setting listing policies, but the proposals do not remove entirely the inherent conflict that is created by the bourse being both a profit-driven monopoly and a market regulator
Two of the city’s key financial regulators have released proposals to reform stock listings. The exercise, if approved, aims to remove conflicts of interest and improve the quality of listing companies. But while any such attempt is to be welcome, it remains to be seen how effective the proposals really are. Among the suggestions is to remove the Hong Kong Exchanges and Clearing chief executive from the current listing committee that oversees new listings. Given the HKEX is both a profit-driven company and a frontline regulator, removing its chief from the committee will help enhance the perception of fairness.
But the committee which operates under the HKEX will retain some of its current functions such as approving listing applications. The listing department, also under the HKEX, will still vet listing applications at the initial stage. What the committee will lose under the new proposal is its power to set policies for listings. That power will shift to a new listing policy committee jointly represented by HKEX and the Securities and Futures Commission. Interesting enough, the HKEX chief executive will have a seat on the proposed committee to represent its own interests.
The reform means having HKEX and SFC working closely together in setting listing policies and vetting listing applicants. That will help in streamlining cooperation between the two regulatory bodies. But it does not fundamentally change the role of either body. As the ultimate regulator, the SFC already has the power to change listing policies and reject listings approved by HKEX. The inherent conflict that is created by HKEX being both a profit-driven monopoly and a market regulator is reduced but not removed. It would make more sense for the SFC to be the sole regulator, leaving HKEX to its profit-making. Such a setup is common in many jurisdictions and will remove in one fell swoop most of the problems arising from any real or perceived conflict of interest with the HKEX.
The other issue is the quality of listing applicants. There are currently many entry criteria to the main board that do not necessarily safeguard quality. Proof of profitability and minimum requirements on market capitalisation and percentage of share float, for example, are less relevant than the fullness and quality of financial disclosure by listing applicants. The proposed reform is moving in the right direction, but does not go far enough. Since it is a three-month consultation, there is still a chance to make further improvements after taking into account the public views.