Martin Wheatley, CEO of the Hong Kong Securities & Futures Commission, says regulation will increase but Hong Kong authorities are working to avoid the politicised overreaction that is expected in other countries as a result of the financial crisis.
He spoke yesterday at AsianInvestor's fourth annual investment summit, outlining steps the SFC is working on to improve Hong Kong's financial system.
The first action of note came in December 2008 when the SFC filed a report to the Finance Secretary regarding issues raised by the Minibond crisis, and called for the physical separation within banks of sales and product development; and also called for better recordkeeping of the sales process.
Interim measures included better disclosure of counterparty risk -- one that, before Lehman Brothers collapsed, had never been called into question. The SFC also reminded intermediaries of their obligations regarding suitability tests for products sold investors. Currently all banks and brokers are reviewing such processes.
By the third quarter of this year, the SFC will release a consultation paper on the disclosure regime and intermediaries' code of conduct. The SFC is still debating issues such as the need for additional disclosure; whether and how to highlight up-front commissions and embedded costs in products; the need for a key fact sheet in addition to a prospectus; whether marketing materials require additional rules; and whether the SFC should involve itself in deciding the appropriateness of inducements (that is, should complex investment products be promoted via simplistic things such as Park'n'Shop coupons?).
"There is a great danger of regulators making a knee-jerk reaction," Wheatley says, citing the move by other regulators to impose bans on short selling in September 2008. This is an area that regulators are working towards harmonised rules.
Europe and America are running the danger of overreacting, because their taxpayers have been forced to bail out financial institutions, as well as because of extensive job losses and home foreclosures related to the crisis. For example, the European Union wants to impose oversight of 'systematically important' institutions, but Wheatley says simply identifying such institutions is a challenge. In the US there are calls to move OTC derivative transactions to exchanges, but the complexity of doing so is not fully appreciated.
"We won't slavishly follow Europe or the United States," he says, noting that in some respects, such as hedge fund regulation, Hong Kong has been ahead of the curve. It will follow its own course as much as it can when it comes to regulating private equity, credit rating agencies.
Wheatley says there are a number of areas where change should be expected in Hong Kong, although at this stage he doesn't know what the specifics will involve. These include rewriting the Securities & Futures Ordinance and the Companies Ordinance, in order to bring a more level playing field to the creation and distribution of a variety of financial products, including mutual funds, insurance products, structured products and ETFs.
There will also be changes in how these products are marketed and sold, with the possible creation of extra rules or processes for complex derivative products, or products exposed to complex derivatives.
Wheatley promises to work with industry and the public to ensure regulators' reactions to the financial crisis are balanced. "We don't want to let the pendulum swing too far the other way," he says.