Exclusive: Hong Kong’s SFC CEO on the city’s financial hub future

Author: Ashley Lee | Published: 30 Nov 2012
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Ashley Alder
Ashley Alder, head of the Hong Kong SFC, discusses the city-state's future as a global financial hub

Hong Kong's Securities and Futures Commission (SFC) was established in 1989 by the Securities and Futures Ordinance. Since then, the SFC has been a leading regulator in the Asia-Pacific, recently becoming first mover in a set of controversial sponsor regulations. IFLR interviewed SFC chief executive Ashley Alder about his plans for Hong Kong to retain its place as one of the world's leading financial centre.

IFLR: For someone who has lived in Hong Kong for more than 20 years with experience on both sides of the fence (as a corporate lawyer and a regulator), what are some of the most significant market developments since the handover in 1997?

Against the backdrop of 'One Country, Two Systems', Hong Kong has flourished as a hub for international capital flow with our extremely strong system of rule of law and financial regulation.

During my career as a corporate lawyer, I witnessed how Hong Kong established itself as the premier listing venue for Mainland companies, which now account for more than half of the market capitalisation of the Hong Kong stock exchange (HKEx). This was accompanied by a high level of participation by international investors, with non-Hong Kong investors consistently accounting for more than 60% of Hong Kong's asset management business.

From a regulator's point of view, during my previous stint with the SFC 10 years ago, there was a lot of focus on corporate governance after incidents such as the dotcom bust and the collapses of Enron and Worldcom. Now there is an extreme focus on systemic risks, market stability and close supervision of financial institutions as a reaction to the 2008 financial crisis. So although governance is vital, much of the global regulatory effort is now directed at ensuring the safety of the system across banks and markets while accepting that this increases costs for market participants.

IFLR: What are the key challenges for Hong Kong to maintain its status as an international financial centre?

Although there has been no taxpayer bailout of financial institutions in Asia or Hong Kong since the 2008 financial crisis, the failure of trust across the whole financial industry is a global issue. Hong Kong's attraction for companies and investors located elsewhere gives rise to a significant jurisdictional and enforcement challenge. Therefore, Hong Kong must deal with cross-border risks properly to ensure confidence and maintain overall trust in the market.

Underpinning this is the need to ensure transparent and efficient flow of market information. In this regard, we have two major initiatives.

We have been stressing that initial public offering (IPO) sponsors are critical gatekeepers of listing quality and we are about to issue our Consultation Conclusions on regulation of sponsors. Fundamentally, we will focus on the integrity of the due diligence process and clarifying liability for untrue statements in prospectuses. Secondly, on corporate disclosure, under a new law (Part XIVA of the Securities and Futures Ordinance) that will become effective on January 1 2013, listed companies in Hong Kong will have a statutory duty to disclose price sensitive information in real time.

We will maintain the highest regulatory standards because this is the only way to match quality listing candidates and investors in the longer term. And that is also why we have no wish to join in any 'race to the bottom' so far as regulation is concerned.

IFLR: With the growing importance of international cooperation, is the SFC taking a more active role in global and regional regulatory efforts?

We emphasise the need to work hard on the development of consistent and detailed international standards which frame our own reforms, and our proposals to regulate the over-the-counter (OTC) derivatives market, on which we are working together with the Hong Kong Monetary Authority, represent a good example of this approach.

The SFC is a board member of the International Organization of Securities Commissions (Iosco) and takes a very active part in Iosco's policy and standard setting work.

The SFC will chair the Asia Pacific Regional Committee - one of the four regional committees of Iosco - starting in May 2013. We are also a member of the Financial Stability Board's Regional Consultative Group for Asia.

IFLR: How will Hong Kong's role evolve in the ongoing process of RMB internationalisation? How will Hong Kong cement its position as the top RMB hub in face of competition from markets such as Singapore?

Hong Kong acts as the hub for two-way capital flows and therefore has a unique position in the process of RMB internationalisation. However, we are aware that offshore RMB business is by no means a monopoly.

To stay competitive, Hong Kong needs to align the development of its own financial markets with the increasing sophistication of China's interaction with global investors and markets.

The development of RMB business in Hong Kong has come a long way and we have seen some very significant developments in recent months. In October, we saw the world's first security equity traded in RMB outside Mainland China. We now have four physical A-share ETFs, traded in both RMB and HKD, which raise funds in Hong Kong and directly invest into Mainland's securities market.

IFLR: Under 'One Country, Two Systems', how does the SFC cooperate with its Chinese counterparts?

For cross-border regulatory issues, the SFC has entered into memorandums of understanding (MOUs) with Mainland financial regulators including China Securities Regulatory Commission, China Insurance Regulatory Commission and China Banking Regulatory Commission.

Under these MOUs, we have in place effective communication and coordination mechanisms with our Mainland counterparts. We also maintain close dialogue with People's Bank of China, State Administration of Foreign Exchange and other Mainland authorities.

IFLR: In view of the aforementioned challenges in the local market and changes in the global regulatory landscape, what are the SFC's priorities in 2013?

Apart from the initiatives for IPO sponsors and the OTC derivative market, we will also be analysing feedback on our recent market consultation on electronic trading, which raised questions about direct market access, algorithmic trading and internet trading. In view of the growing volume of listing applications from non-Mainland overseas companies, we are working with the HKEx to review the overall regulatory approach to overseas companies seeking primary or secondary listings.

Other initiatives in the pipeline include a revamp of the rules which allow a different regulatory approach for professional investors, an examination of dark pool trading, and work to enhance Hong Kong's role as an asset management centre, including further work on the regulation of the investment product life cycle.

These are some of the initiatives on our agenda, but the bulk of what we will do is to regulate – focusing on consistent and proactive supervision of products, markets and financial firms and effective enforcement when we find misconduct to send a loud and clear deterrence message, and when possible, achieve recompense for investors.

In the recent Hontex case, we won a court order against the company concerning misleading information in its prospectus, resulting in about HK$1 billion ($129 million) recompense to investors. We also fined its IPO sponsor, Mega Capital, HK$ 42 million. Achieving sanctions for misconduct and seeking recompense for investors will continue to be a core theme to deal with misconduct in our market.

For more of IFLR's 30th anniversary coverage see http://www.iflr.com/30th-anniversary

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