Hong Kong’s SFC steps out from ‘behind the scenes’, pledging direct, proactive regulation

PUBLISHED : Thursday, 13 July, 2017, 8:02pm
UPDATED : Thursday, 13 July, 2017, 11:01pm

Hong Kong’s Securities and Futures Commission said Thursday that it will “no longer act behind the scenes” and will use its existing legal powers to regulate listed companies more directly and proactively, a move which marks a major change in how the city’s stock markets are supervised.

“We are no longer acting behind the scenes, but instead we are increasing our direct presence when dealing with the more crucial listing matters that fall within the scope of the SMLR (Stock Market Listing Rules) or the SFO (Securities and Futures Ordinance),” said Ashley Alder, SFC chief executive officer, in a public speech on Thursday.

It implies a change in the city’s long standing listing regulation convention, whereby the SFC has taken a back-seat in gate-keeping and deferred to Hong Kong Exchanges and Clearing (HKEX) as front-line regulator and single point of contact in all listing matters.

The new approach will be “front-loaded, transparent, and direct”, Alder said.

“This means that we are more routinely triggering our formal statutory gate-keeping and intervention powers so that we can interact directly with the market at an early stage.”

Stock exchange and regulator must find common ground

Under this approach, the SFC will have early, direct communication with the company involved, instead of routing its concerns via the exchange.

Companies that are affected can also challenge the SFC to its face and pursue statutory rights of appeal over any final decisions that the regulator makes.

“We believe this more direct presence enables the SFO to be deployed far more effectively to drive market quality and market development, while at the same time ensuring that our decisions are made in a transparent, efficient, fair and accountable manner,” Alder said

He said the SFC has discussed the changes with the HKEX and will publish a new, regular bulletin which will summarise what they have done and why they did it.

The changes come after the SFC and HKEX issued a joint public consultation last summer on how to regulate listed companies more efficiently, amid growing concerns of extreme price volatility and suspected stock manipulation of some firms trading on the exchange.

Money and power struggle behind listing reform deadlock

When the consultation ended in November, around 8,000 submissions had been received.

Alder said the SFC will function as the statutory market regulator, as distinct from the exchange’s role in administering its own non-statutory listing rules.

The exchange operator will still remain the single point of contact with the market on its own listing rules disclosure, but not in relation to concerns that the SFC raises under the SMLR.

The exchange will decide whether the listing is “suitable” by its rules, while the SFC’s SMLR are concerned with the more serious disclosure and public interest issues, Alder said.

“It would theoretically be open to the Exchange to reject an IPO as being unsuitable even if the SFC has not identified grounds for objection under the SMLR,” he said.

If the SFC is likely to raise an objection to a listing, it will issue a formal “letter of mindedness” and set out concerns in detail, while giving the company an opportunity to challenge these before any final decision is made.