Hong Kong’s latest attempt to inject more independence into its listing regime has been heavily diluted—against the wishes of investors.

Late on Friday, the Securities & Financial Commission and the HKEX, the territory’s bourse, revealed the results of 15-month public consultation over oversight of the city’s public floatations. At hand was the potential creation of two new committees to rule on listing approvals and policy development, with the SFC and HKEX equally represented.

Even at the beginning some fund managers had viewed this as a compromise, a “first step” toward moving the regulatory function out of HKEX, itself a profit-seeking listed company, and towards the SFC, the market regulator.

The end result was watered down even further. There will now only be a new “Listing Policy Panel”, which will function as “an advisory, consultative and steering body” outside the SFC and HKEX to “initiate and centralise discussion of listing policies with broader regulatory or market implications,” according to a conclusion released on Friday. 

“SFC and HKEX have received a tremendous amount of feedback and taken into serious consideration different opinions in the market over the past few months…and this conclusion, we believe, will fit the market interest and properly address the main consultation proposals,” SFC chairman Carlson Tong told a press conference late on Friday.

A total of 8,793 submissions were received from corporates, investment managers, accounting firms, law firms, political parties, academics and individuals. And 94% of the respondents were against the proposals, according to the South Morning China Post

But not investors. As the SFC and HKEX disclosed, “the vast majority” of investment managers of mutual and pension funds, hedge funds, and private equity houses expressed support for the proposals, with the proviso that they did “not go far enough”. 

Quality over quantity

The proposals were controversial, and had gained criticism from several powerful parties, including HKEX director Vincent Lee and Lo Ka-shui, vice-chairman of the Chamber of Hong Kong Listed Companies. They argued the proposed new regulatory regime would kill Hong Kong’s IPO market.

Corporate governance advocates demurred, arguing Hong Kong should prioritise IPO quality over quantity.

“Ideally, in the best interests of investors and to provide clarity and certainty about accountability, the task of vetting IPOs should be vested with the SFC. This will ensure that investor interests will prevail over commercial or other considerations,” said Sally Wong, chief executive of the Hong Kong Investment Funds Association. 

Jamie Allen, secretary general of Asian Corporate Governance Association, was similar deflated. “We are disappointed with the result of the consultation. Once again, Hong Kong’s financial regulators have failed to address the inefficiencies and conflicts of interest inherent in our listing regime,” he told AsianInvestor.

However, both sought a silver lining in the announcement.

“It is a positive development to have a dedicated platform to focus on long-term policy development issues,” said Wong, adding that she welcomed the fact the SFC had been more proactive in IPO approvals of late. Similarly, Allen said the only brightspot was the watchdog’s pledge to more directly intervene in problematic IPOs and other listings issues in "real time".

‘Talking shop’? No, ‘co-ordinator’

Others are less generous.

“The conclusions represent a huge climbdown by the SFC, leaving the rule-making powers with the Stock Exchange and its Listing Committee, rather than the proposed Listing Policy Committee, which has been watered down to nothing more than a pointless talk shop—the Listing Policy Panel,” high-profile local investor activist David Webb told AsianInvestor’s sister publication FinanceAsia in an email exchange on Friday. 

Tong and SFC chief executive Ashley Alder dismissed the claim of a “climbdown” at the press briefing, adding it should not be read as a “compromise” and that it’s about “how the SFC and HKEX … can co-ordinate to improve Hong Kong’s status as an international financial centre".

Hong Kong faces fierce competition from other major capital-raising venues, and is slipping behind New York and Shanghai after holding the crow as the leading IPO destination last year. In response, HKEX is lobbying for a third board—on top of its main and GEM boards—to host dual-class shareholding structures. They are favoured by technology companies such as Facebook and Alibaba but often frowned upon by investor groups because they restrict voting rights. 

“I think the conclusion we have today is the best result,” Tong said at the conference. But Webb argued abandoning the 50:50 listing committee leaves Hong Kong “with a second-class system for a second-class market”.

At present, HKEX’s listing department gives preliminary listing approvals and can submit its suggestions on rule changes to a 28-member listing committee—made of lawyers, accountants, listed firms’ management and fund managers—for final clearance. The SFC is not directly involved  but can reject any listing applications or policies.

“In the UK and US, there is a clear division of functions,” Webb said. “Competing exchanges run their exchange businesses, while regulators regulate. In Hong Kong we have a conflicted, for-profit regulator making the listing rules and the SFC running the Takeovers Code. There are long-overdue corporate governance reforms that will not see the light of day under the current listing rule-making process.”

Charles Li, HKEX chief executive, argued there was no way to completely eliminate bad companies. "There can always be bad firms that have no problems at the time of listing but turn problematic afterwards," he said. "So it’s not about who to take a front role or a back role.”

The discussion on dual-class shareholding structures is one area the new panel can contribute to, according to SFC's Tong and HKEX's Li. But they stressed the new panel would have no legal power on decision making or enforcement, appearing to support the arguments of critics accusing it of being little more than a talking shop.