Focus: Hong Kong - April 2002
Regulating the financial market in Hong Kong
In this issue: Hong Kong-based AAR lawyer James Chan summarises changes under the region's controversial new financial legislation and reports on moves afoot in the corporate governance field.
'21st century legislation' now in place
Legislators in Hong Kong have enacted the Securities and Futures Bill, ending a decade of debate over one of the region's most controversial financial laws.
The new law, which was passed on 13 March 2002, is expected to come into operation over the next few months, when all 38 pieces of subsidiary legislation have been passed.
The Bill consolidates and modernises the 10 existing ordinances regulating the securities and futures markets, which were written over the past 25 years. Key features are:
- A new, streamlined, single licensing regime.
- Additional regulation on Internet trading.
- Stricter regulation of banks' securities businesses.
- New, proportionate disciplinary sanctions on licensees.
- A tighter regime for disclosure of interests in listed companies.
- A new investor compensation scheme.
- Criminal offences for insider dealing.
- Parallel civil and criminal regimes to combat market misconduct.
- The establishment of a Market Misconduct Tribunal to replace the existing Insider Dealing Tribunal.
- More checks and balances on the accountability of the Securities and Futures Commission (SFC).
The legislation aims to set a new template for Hong Kong's financial regulatory system in the 21st century. However, some critics say that too much power has been given to the SFC to regulate the market.
One of the most controversial elements of the Bill was the regulation of banks' securities businesses. Only after intensive lobbying by the brokerage community was the Bill amended to make banks subject to regulations by the SFC. Banks are currently "exempt dealers" regulated by the Hong Kong Monetary Authority (HKMA) and not the SFC.
Under the new law, the SFC will be empowered to penalise banks if their securities business breaches the regulations, while the HKMA will continue to operate as the frontline regulator. Observers are hoping that the HKMA and the SFC will soon sign a memorandum of understanding committing the watchdogs to apply the same regulatory standards to both banks and brokers.
Despite significant opposition, legislators passed the provision to allow the Hong Kong Chief Executive to give directions to the SFC. Margaret Ng, who represents the legal profession in the Legislative Council, argued that the provision was in contrast to overseas practice and would undermine the SFC's independence. The Government explained that a last-resort curb was needed, should the SFC executives act against the interests of the public.
Another criticism was that the Bill fell short of compelling auditors to report any suspected fraud involving listed companies to the regulators. In light of the Enron collapse, some legislators felt that auditors should be legally obligated to report suspected fraud. Under the new law, an auditor of a listed corporation will be immune from civil liability, whether arising in contract, tort, defamation, equity or otherwise, if he chooses to report suspected misconduct of the company to the regulators.
The enactment brings Hong Kong's securities regulatory law more in line with jurisdictions such as Australia and the United Kingdom.
Corporate governance update
Good corporate governance practice has become an increasingly important element to improve investor confidence and enhance Hong Kong's position as a leading international financial centre.
Recent moves to boost business transparency include the following measures introduced by the Hong Kong Government and by Hong Kong Exchanges and Clearing Limited.
- The Companies (Amendment) Bill (2002) seeks to improve corporate governance standards and increase the influence of shareholders.
The proposed amendments include allowing shareholders to remove a director by ordinary resolution. Currently, the law requires a special resolution to be passed (by not less than 75% of members who are entitled to vote) before a director can be removed from office.
It is also proposed that an alternate director be deemed the agent of the director who appoints him/her and the director will be vicariously liable for any tort committed by his/her alternate director, unless the articles of the company provide otherwise.
- The Hong Kong Exchanges and Clearing Limited has published a consultation paper on proposals to amend its listing rules aimed at improving corporate governance standards within listed companies.
Under the proposals, listed companies will be required to publish quarterly results (as in the US, Singapore and China). Listed companies are currently required to report their results every six months.
Other proposals include expanding the definition of the term "connected person" in the listing rules for the purpose of stricter regulation of connected transactions. Listed companies will also be required to appoint independent non-executive directors representing not less than one-third of the members of the boards.