Financial Regulatory Forum

ANALYSIS-Tougher Hong Kong securities regulator risks being defanged

May 26, 2010

By Don Durfee

HONG KONG, May 26 (Reuters) – Wavering political intent and possible changes at the helm of the securities regulator may dent Hong Kong’s recently won reputation as a tough enforcement regime and undermine its place as a prominent financial centre.

Once famous for its anything-goes approach to capitalism, Hong Kong’s sometimes unruly stock market has turned downright sober in the past two years under a crackdown on insider trading and other market misdeeds.

Any regression could affect the bourse’s credibility at a time when it is making a major push to become more global, after recently attracting listings by names such as aluminium giant UC Rusal, L’Occitaine and Prudential.

In just the past few months, the territory’s Securities and Futures Commission (SFC) has convicted two warrants traders for market manipulation, frozen a company’s IPO proceeds citing filing of misleading information, and sought to ban U.S.-based hedge fund Tiger Asia from operating in Hong Kong.

Those actions follow a string of successful cases last year, including one in which the regulator cited rigged voting allegations to successfully block the privatisation of PCCW, Hong Kong’s former telephone monopoly controlled by the son of the territory’s richest man.

That’s a big change for a place where trading on inside information was not even a criminal offence until 2003.

But the moves have triggered a backlash from businesses. Moreover, the government recently watered down a set of reform proposals that would have strengthened the regulator’s hand.

And crucially, the two men most responsible for the change — SFC Chairman Martin Wheatley and head of enforcement Mark Steward — will see their terms expire in 2011 and 2012, respectively, with extensions far from certain.

“Would the SFC be a strong enforcer without Martin Wheatley and Mark Steward? No,” said Jamie Allen, the head of the Asian Corporate Governance Association and a member of the Hong Kong Exchange’s listing committee.

TOUGH MINDSET

Wheatley, who joined the SFC in 2005, is a former London Stock Exchange (LSE) executive who helped see that bourse through its “big bang” transformation into a listed company. Steward is a veteran of Australia’s securities regulator.

Their mandate for change was part of a broader global push to give more teeth to financial regulators at the height of the global financial crisis, blamed in part on lax regulation.

“During the first three years, the buzzwords in Hong Kong were all about being an international financial centre,” said Wheatley in an interview. “But since the collapse of Lehman, the mindset is ‘Is enforcement tough enough to deal with the fact that you can’t rely on the enlightened self interest of bankers to get it right?’”

That tougher mindset has drawn praise from investors and governance experts.

“I’d say the SFC’s record is pretty rock solid,” said Alan Ewins with law firm Allen & Overy in Hong Kong. “They have sent a good message to the market.”

But with the worst of the crisis behind, the regulator may be losing political support for its tough policies, reflecting Hong Kong’s long-standing close ties between local business and the political elite.

That dynamic was brought into relief last year when fierce opposition by business leaders led the SFC to abandon an effort to extend a trading “blackout” period for company directors.

Tycoons also lobbied successfully in March to weaken a proposal to add criminal penalties for companies that violate listing rules, analysts said.

“When you see coercion being applied on the SFC, particularly on the blackout issue, your confidence level can’t be too high,” said C.K. Low, a law professor at the Chinese University of Hong Kong. “But I would definitely give them the benefit of the doubt based on their track record.”

DOUBT OVER REAPPOINTMENTS

Wheatley, who left the LSE to become a carpenter and cabinet maker before coming to Hong Kong, pointed out that the SFC’s recent successes had come despite the lack of any specific new legislative authority.

“We haven’t had any new powers enacted by the legislature,” he said. “Instead, we’ve been using the existing powers (of the SFC) more creatively.”

Those include freezing the assets of individuals and companies pending the outcome of a court case. The regulator has also begun avoiding slow-moving tribunals in favour of taking cases directly to higher courts, which have proven willing to impose stiff penalties.

One former SFC official with close ties to the Hong Kong government predicted that neither Wheatley or Steward would be reappointed when their terms expire, citing the government’s unease with the newer hardline approach.

“They definitely won’t be reappointed,” he said. “While the government is happy with some of their successes, the administration needs to balance the interests of different parties.”

A spokesman for Hong Kong’s Financial Services and Treasury Bureau, which monitors the SFC, declined to comment.

(Additional reporting by Alison Leung)

(Editing by Chris Lewis and Muralikumar Anantharaman) ((donald.durfee@thomsonreuters.com; +852 2843-1649; Reuters Messaging: donald.durfee.reuters.com@reuters.net))

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