22 Jun 2010
With Britain deciding to scrap its super-regulator - the Financial Services Authority (FSA) - after 12 years, it is a perfect opportunity for our officials to use the British reform plan as a reference for Hong Kong's way forward.
The FSA, which covers everything from banks, brokers, listed companies and asset management firms, was said to be too big to handle the financial crisis effectively. It is to be replaced by a Prudential Regulatory Authority under the central bank to govern the financial strength of all institutions, while also setting up a consumer protection and markets agency.
Hong Kong's problem is the exact opposite of Britain's. While Britain has one regulator that has become too big to move, we have too many regulators for different sectors.
Our banks are regulated by the Hong Kong Monetary Authority, brokers by the Securities and Futures Commission, insurance companies by the Office of the Commissioner of Insurance and pension funds by the Mandatory Provident Fund Schemes Authority. Oh yes, and don't forget the SFC and the Hong Kong stock exchange share responsibility for the regulation of listed companies.
The British reform plan, to be implemented in two years, is similar to Australia's model, which has one watchdog for the financial strength of institutions and another to regulate the conduct of individual salespersons. This "twin-peak" model is favoured by the SFC but not by the HKMA.
White Collar has always said the main problem with a fragmented regulatory structure is inconsistency. In the Lehman Brothers minibonds fiasco, customers who bought the products from banks got 60 per cent to 70 per cent of their money back, while those who bought them from brokers got 100 per cent.
When customers buy investment products from banks, the transactions are recorded on audio tapes. This does not happen when buying from insurance agents.
From January next year, customers over 65 years of age will have to wait two days before banks execute orders to buy structured products for them. Meanwhile, this HKMA regulation does not apply to people buying the same products from brokers.
Some of the smallest independent financial advisers who have been told by the SFC to stop selling fund products are likely to switch to offering insurance- or fund-based investment-linked products, taking them off the securities watchdog's radar screens.
The current Hong Kong regulatory model is very outdated because the boundaries between the various arms of the finance sector have become blurred.
The banks are selling everything from securities and funds to insurance policies while insurance agents are also selling investment-linked products. On top of that, neither the bank nor the insurance sales people are subject to SFC regulations. Investors can easily become victims of such a fragmented model.
In the United States and Britain, customer protection has been a priority of their reform plans. In Hong Kong, however, we may have many regulators but we do not have a customer protection agency.
When the FSA was set up in 1998, the Hong Kong government was asked if it would be following suit, only to be told to "wait and see".
We have waited for 12 years and now the FSA is going to be scrapped. In the meantime our government has done nothing. How much longer should we wait for reform?
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