No need for an overhaul of Hong Kong’s listing regulatory system

Albert Cheng says a plan for the SFC and HKEX to jointly oversee listing matters is unwise as the work of market development should remain separate from regulation

PUBLISHED : Thursday, 25 August, 2016, 5:20pm
UPDATED : Thursday, 25 August, 2016, 6:16pm

The Hong Kong stock market has, in recent years, seen new listings of varying quality and performance, particularly those on the Growth Enterprise Market board. There have been drastic share price fluctuations, companies reporting business losses right after listing, directors “jumping ship”, and back-door listings through shell companies. Consequently, the Securities and Futures Commission (SFC) and the Hong Kong Exchanges & Clearing (HKEX) have jointly launched a consultation proposing efficiency “enhancements” to listing regulation.

The three-month consultation is closing soon and market opposition to the proposed changes is fast gaining momentum.

Investor interest must come first in battle between regulators

Among the proposals is the creation of two new committees. A listing policy committee will initiate, steer and decide listing policy, while a listing regulatory committee will oversee suitability concerns of listings and broader policy implications.

The proposals evidently seek to substantially increase the SFC’s regulatory powers, prompting diverse reactions. Generally speaking, the strongest opposition has come from smaller firms. Chinese firms are sympathetic to the rationale of the proposed changes but have made counterproposals.

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The recent remark that there’s “no plan B” by SFC chief executive Ashley Alder indicated the watchdog’s determination to have the proposals adopted. This has apparently added fuel to the debate and has even prompted pro-government incumbent lawmaker Christopher Cheung Wah-fung, who represents stockbrokers and is currently seeking re-election, to join the ranks of the opposition.

The present system already provides the SFC with sufficient regulatory and veto powers

For obvious reasons, strengthening regulation and improving efficiency are the way forward for stock markets across the world. Hong Kong should not be an exception. But reforms have to be practicable, meeting the exact needs of the market. Changes must not be meant primarily for increasing the power of the regulating authorities.

Presently, the Listing Committee is responsible for all listing policy and application approval. It counts as members the HKEX’s chief executive and 27 market practitioners and investor representatives. It operates independently of the HKEX, despite being part of its organisational structure. Most importantly, the system has been in place for more than 20 years and works well. Moreover, the HKEX has not seen anything like the scandals in the US involving the delisting of Chinese companies due to accounting irregularities and corporate governance failures.

If the relevant authorities are of the view that the HKEX’s collection of listing fees may pose a conflict of interest, making it more likely for the Listing Committee to adopt a less stringent approach, the most straightforward solution is to remove the HKEX’s sole representative on the committee – that is, its CEO.

The present system already provides the SFC with sufficient regulatory and veto powers. Any additional structures as proposed would only make it more cumbersome and stymie market development.

Besides, conflict of interest is a worry. The SFC’s primary functions of regulating the market and protecting investors go against the pressing need to further develop Hong Kong’s securities market.

Market operators and regulators should be complementary. That said, the differences in their respective roles will from time to time give rise to conflicts. It is therefore in the best interests of all parties that they perform their respective functions separately. The SFC should focus on regulatory work; the HKEX on market development.

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The best way out is for the independent Listing Committee to continue taking full responsibility for approving listing applications. To avoid any possible conflicts of interest, HKEX’s CEO could stop being a member. Meanwhile, the committee, which is now under the HKEX, could come under the SFC. This would eliminate the HKEX’s intermediary role, enable the Listing Committee to directly communicate with the SFC and improve efficiency. Such changes would surely benefit the development of our financial market.

Albert Cheng King-hon is a politial commentator. [email protected]