A new deadly virus has affected Hong Kong's financial system. On Friday news broke of a virus that started in Exchange Square and was expected to take 12-18 months to run its course. The virus, known as the HkEx Consultation period, was said to have spread in reaction to an independent body's recommendation for the overhaul of Hong Kong's regulatory system. The symptoms of the new virus - which has spread through the Hong Kong government at a frightening speed - are thought to be:
- A deteriorating ability to make sound, rational decisions
- Clinical prevarication
- Nausea brought on by a capitulation to vested interests
Several members of the government have long been suspected of having the virus, and this was confirmed last week.
Just when everyone thought the government was set to bolster the infrastructure of the financial sector, it does a U-turn at the last minute. Not what the doctor ordered.
Indeed, what a difference a month makes. On March 21, the government accepted the recommendations of the three-man Expert Group to "Review the Operation of the Securities and Futures Market Regulatory Structure."
The panel was appointed by the government last September to try and make sense of Hong Kong's muddled regulatory framework for listed companies, particularly the conflicted relationship between the Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing (HKEx).
It has been a commonly held view that having two frontline regulators creates unnecessary costs and confusion. This confusion had enabled some company directors to abuse their positions at the expense of minority shareholders and allowed regulators to pass the buck over whose responsibility it was to prevent such acts of misconduct.
Many market practitioners hoped the Expert Group's first recommendation would be to transfer HKEx's regulatory function - the Listings Division - to the SFC. Fortunately, the Expert Group picked up on why this was vitally important to most people.
"It is widely felt that HKEx has an irreconcilable conflict of interest as both a listed company and the primary regulator of companies seeking listing," declared the chairman of the Expert Group, Alan Cameron. It recommended that a new listings division, the Hong Kong Listings Authority, should be created and housed at the SFC. The Expert Group, quite rightly, believed that HKEx should be left to focus purely on its commercial objectives, free of government influence.
Pleasingly, the government responded immediately, stating it fully accepted the Expert Group's recommendations and would begin work with the SFC and HKEx to ensure a smooth transfer of the listing function, which could have been achieved within three months. Both the SFC and HKEx said they would cooperate on the proposal and it looked like Hong Kong would finally get a sole regulator accountable for its actions.
However, it wasn't long before HKEx was trying to put a spanner in the works. Chairman Charles Lee Yeh-kwong sent a letter to Financial Secretary Anthony Leung pleading with the government to reconsider its support for the proposals on the grounds that an all-powerful SFC would not necessarily be the best regulator for Hong Kong.
Many hoped the government would resist these claims and push forward with the much needed reforms. Despite Lee's protestations, the fact remains that regardless of whether or not HKEx actually does have a vested interest in keeping the regulatory function, the perception that it does has affected its credibility and Hong Kong's claim to be a world-class financial centre.
Unfortunately, the government has yielded to the pressure and Leung announced late on Thursday that further market consultation was needed before deciding whether to implement the Expert Group's proposals. During this consultation process - which could take between a year and 18 months - the listings division will continue to be housed by HKEx.
The government's climb-down is a massive setback, and maintains the status quo: a regulatory structure that has allowed for the consistent abuse of minority shareholders by unscrupulous company directors. One has to ask the question why yet more consultation is needed. When the Expert Group was appointed, interested parties were given three months to submit suggestions on how the regulatory set-up could be improved. The group held meetings with all sections of the market and, having done that, spent the next four months weighing up different options before coming up with a detailed set of proposals.
In total, an independent panel of experts spent seven months deciding the best way forward for Hong Kong's regulatory framework. All participants, including HKEx, were consulted. The last thing Hong Kong needed on this issue was further consultation: what it needed most was decisive action.
The Hong Kong government’s climb-down defies common sense. It seems that the decision to appoint the Expert Group was a pointless exercise. The authorities seem blind to the fact that over on the mainland, the criteria for companies listing are already stricter and closer to international standards than those of "Asia's world city". If Hong Kong loses its position as the pre-eminent financial centre to Shanghai in the coming years it will be a richly deserved fate going on this latest volte face.
