Alder: Why CSRC-SFC policy interaction is critical

Author: | Published: 30 Jan 2012
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Hong Kong’s Securities and Futures Commission (SFC) will work to maintain a close enforcement dialogue with the China Securities Regulatory Commission (CSRC) as more small and non-state owned Chinese companies come to list in the city-state.  

The SFC’s new chief executive, Ashley Alder, told IFLR it was important for the regulators to sustain a very interactive and practical relationship with regards to ListCo enforcement.

His comments follow last week’s revelation by CSRC vice chairman Yao Gang of the agency’s plans to revise rules to enable more SME and private Chinese companies to list in Hong Kong. The CSRC also intended to encourage ChinaCos to launch renminbi-denominated share offerings in Hong Kong this year, he said.

Alder said the gradual internationalisation of RMB, and introduction of RMB-denominated products, had helped to foster a close interaction with the CSRC and led to the implementation   of a 'people exchange’ involving   secondees from each agency. "It is important to continue this level of contact both on the operational and on the policy front," he said.

He also emphasised the importance of sponsor work. "Given that private and overseas companies will now take up a greater proportion of listings in Hong Kong, in particular the onus will be on the sponsors, more so than ever, to ensure they have done the work to select the right companies to sponsor," he said.

The SFC would more closely detail its expectations regarding sponsors' obligations and financial institutions’ internal reporting systems in the revamped Code of Conduct for sponsors, which is targeted to   be published at the end of   Q1 or early Q2 this year, he said. The new code would expand on sponsors’ due diligence requirements in the current rules, and also better articulate what internal protocols should be in place to ensure sponsors’ reporting systems and internal controls were working efficiently throughout the life of a listing. 

The regulator would also work to encourage better collaboration between auditors and sponsors on initial public offerings (IPOs) so as to better guarantee good disclosure in documents and overall investor protection, he said.

But he insisted any progress on this front needed to be industry- and not regulator-led. "I hope if I talk about the need for this conversation between auditors and sponsors to take place, they themselves will start addressing the issue," he said.   "I have detected real willingness within the industry to adopt a more collaborative approach, including more information sharing."

"The reality is that, when working on a deal, reporting accountants have quite extensive insight into a business going beyond reported numbers, and they should be able to share and discuss that information with sponsors and others to ensure overall disclosure is optimal," he said.

"Too often accountants operate in an isolated, ring-fenced manner," he said. "I’d be interested in hearing from the auditing profession, and the sponsors, as to whether they are willing to come up with a new way of working together," he said.

Sidley Austin partner, and former SFC enforcement executive director, Alan Linning said it was absolutely right to revamp the sponsors code. "This has been a concern for the last decade, which Ashley knows only too well given his specialties," he said.

It was important also for the market to understand that some degree of cooperation existed between the SFC and CSRC so as to make clear there are no safe havens.

"One of the key planks to any investigation, or action that needs to be taken against dodgy initial public offering (IPO), often involves the mainland," he said. "Attaining adequate interaction with their mainland counterparts therefore remains a continuing enforcement challenge for the SFC. It’s an important practical issue that goes hand-in-hand with sponsor liability and enhancing due diligence."


Chong Hing Bank’s legal counsel Adeline Lee said all market players and legal practitioners concerned will pay due attention as to the SFC’s progress. "The key is, inter alia, policy formulation, implementation, execution and supervision."

Market criticism

But, one Hong Kong-based bankers’ counsel said he found Alder’s tough talk on sponsors odd given that the SFC had to-date provided no more guidance on the matter than thematic reviews.


"Why not issue sanctions on those found in breach of the rules so the market can react?" he asked. "The SFC’s actions in this regard have so-far amounted to mere notifications of rule violations. If nobody is forced to pay the associated fine, then nobody understands the consequences of infringement and the SFC’s actions have no impact." 

Another in-house counsel based in the city criticised the SFC’s indecision on product development. "It is costing the market," he said. He cited the regulator’s inability to promote plain vanilla index- or equity-linked structured finance products to market, by way of example.

"To not allow such products is damaging the market," he said. "We need a regulator that is happy to strike a balance between investor protection and facilitating market development."

"Market regulation had become too politicised post-2008," he said. "We need a regulator that is willing to take action that is not politically motivated and that bolsters market confidence."

Alder challenged the notion regulators had become overly-political. "If you look at the history of regulation in Hong Kong, it follows a much more calibrated approach than some regulations overseas which saw large swings towards deregulation in the years before 2008 and then re-regulation following the financial crisis," he said.   "The political atmosphere in Hong Kong is not as extreme, and Asia was not affected by the financial crisis in the same way as Western markets.  We will adhere to G20 commitments but we must be careful not to overreact."

He added that it was quite right that the regulator looked carefully at new products coming to market.   "There is always a balance to be struck between investor protection and market development and it is important to realise that they are not mutually exclusive," he said. "If we feel a product is suboptimal as far as investor protection is concerned on a number of levels, such as disclosure, structure and counterparty risk, then it is perfectly legitimate to look at that product against the background of what has happened globally in the past few years and basic tenets of investor protection."


It was quite clear, he said, that there had been progress in terms of market development.


"In terms of market development, we just approved a whole new set of exchange-traded funds and RQFII funds in a short space of time. Provided we have satisfied ourselves there are not any untoward investor protection issues, we get on with it."


But he said it would never be right for a regulator to take a relaxed approach to investor protection. "Issuers also understand that the last thing they want to do is issue products that are going to land them in trouble," he said.

The planned short position reporting regime change followed that rationale, he said.

Linning, however, argued the SFC needed to give further thought to the planned rule change.

"If enacted in their current form, Hong Kong’s short position reporting regime would be one of strictest in world," he said. "There has been widespread concern in the market about the impact this level of stringency will have on the industry."


He predicted the SFC would be forced to further examine its proposal before the new regime became law. 

"As it stands, the bill’s passage through Hong Kong’s Legislative Council looks set to be a tortuous process," he said.

Alder disagreed. "There are short position reporting regimes in other jurisdictions that differ in terms of thresholds or reporting requirements," he said.  "But industry participants I have spoken to are happy with the approach we have taken to detect   any significant build-up of short positions from a monitoring risk perspective, but not to indentify the individual short sellers."

On January 12, Alder revealed his agenda for the year ahead. At the inaugural meeting of the Hong Kong Corporate Counsel Association’s (HKCCA) Financial Institutions Group, Alder stipulated market consultations would be taking place on the legal liability of sponsors, revamping the Code of Conduct for sponsors, clarifying the SFC’s joint policy statement with the Hong Kong stock exchange concerning overseas listings and electronic trading rules, among others. It was the SFC’s aim to deal with the practical problems faced by the industry while insuring the solutions "up everybody’s game", he said.