Martin Wheatley, the newly appointed chairman of the Hong Kong Securities and Futures Commission (SFC) is likely to receive a friendly reception from the funds industry, but will face a number of challenging issues. The office of Donald Tsang, chief executive of the Hong Kong Special Administrative Region, formally announced Wheatley's appointment on Friday, replacing Andrew Sheng effective October 1.
Market participants in Hong Kong say the most striking thing is that the government is appointing a foreigner - a move that some investors applaud, saying it will bolster the SFC's independence, or at least the perception thereof; since Sheng announced his retirement early this year, the rumour mill had mooted several names not known for their financial expertise but who were close to Tung Chee-hwa and other pro-Beijing notables, although it is hard to tell whether these were ever serious candidates.
Wheatley had worked at the London Stock Exchange for 18 years, six on its board of directors. He does not have a background as a regulator, for he worked on the LSE's commercial side, but he did take responsibility as deputy CEO for the exchange's regulatory strategy, public policy and communications before quitting in 2004 in the aftermath of the exchange's failure to merge with its Frankfurt counterpart, and then resisting a takeover attempt by OM in Sweden. He is already serving as the SFC's executive director of market supervision.
Andrew Sheng has led the SFC for a record seven years. Among his accomplishments is the passage of the Securities and Futures Ordinance, which received a mixed reception, but represents a badly needed consolidation of laws. Effective in 2003, the SFO modernized many of Hong Kong's regulations, particularly concerning the broker/dealer community.
Market players say that overall Sheng made a good chairman at the regulator. But recently they say the organization has drifted somewhat - perhaps because of Sheng's impending retirement. The day-to-day work has continued apace, but industry participants hope the incoming Wheatley will infuse the organization with a renewed sense of purpose.
The SFC could use that, given some of the complex issues it will have to deal with. These include:
1. Creating a level playing field in how various financial institutions - banks, securities houses, fund managers and insurance companies - are regulated. A small illustration of a big problem is the sale of investment products. A fund manager wishing to issue a guaranteed fund must go through a transparent process of registration; an investment bank selling a structured note, because it is regulated by the Hong Kong Monetary Authority instead, faces only a cursory approval process - and yet they are selling similar products to the same people. Anywhere insurance, banking and securities cross paths - and the lines seem to blur by the day - one finds these issues.
2. Listing rules for companies going public in Hong Kong. There are still many players who would support giving the SFC stronger powers over companies, particularly mainland ones, that seek to list on the Hong Kong Stock Exchange. Will Wheatley have a go at this?
3. Dialogue with Chinese authorities - an ongoing project. The SFC has a good relationship with the Chinese Securities Regulatory Commission, a relationship that Wheatley must encourage. These two bodies must determine when and how to extend cooperation, and to what extent they will or can allow mutual recognition.
4. Review of the companies ordinance, which is an ongoing affair that affects listing rules, broker research, etc.
5. Dealing with Europe's new Ucits-3 code for mutual funds. Under executive director Alexa Lam, the SFC has accepted funds under the European code on an interim basis. The SFC needs to finalize approvals by the end of the year, and has indicated it will begin a review of the Hong Kong code for investment products, including topics such as distribution and intermediaries. But no details of this review are yet known.
6. Hedge funds. The SFC is gearing up in terms of staff and resources to inspect the many new hedge funds setting up shop in Hong Kong, both local start-ups as well as the recent wave of huge American players. Market participants say the SFC's process has been haphazard, partly because it has not been properly resourced, and partly because it is still climbing a steep learning curve. Wheatley will have to ensure the SFC is asking the right questions and understands the role of prime brokers, the various hedge fund strategies, and other minutia of the business.
