My friend, Ashley Alder, the CEO of the Securities and Futures Commission (SFC), gave a speech recently about the regulator’s renewed emphasis on policing the market through a “front-loaded” approach. The SFC’s decision to recalibrate how it monitors the market and listing approval process has sparked some discussions about the listing regulatory system we have in Hong Kong, and the roles of both the SFC and HKEX.
For most market professionals, the roles and functions of both regulators are quite clear and without controversy, but I want to tackle a few questions that have popped up from other market players and friends from the media who might be a bit confused about who is responsible for what and whether this means the current system does not work well anymore.
Let me use an analogy here: imagine HKEX is like a city’s traffic cop and the SFC is the sheriff. Both have the same overall goal of keeping traffic moving and ensuring the city’s roads are safe, but there are many differences in their roles and the tools they use to carry out their duties.
The traffic cops get their power from the traffic rules (i.e., the Listing Rules): they are tasked with making sure driver’s licenses (i.e., listing approvals) are given properly, traffic is flowing in good order, drivers are following the rules and traffic lights and speed signs are in the right places.
The sheriff’s department gets its power from the law (i.e., the Securities and Futures Ordinance or the SFO, and the Securities and Futures (Stock Market Listing) Rules or the SMLR), and has a much broader scope and mandate: it’s responsible for safety, enforcing laws, punishing criminals, surveillance and preventing as much crime as possible. The sheriff’s department also supervises the traffic cops and can, under special circumstances, intervene in individual traffic violations or deny the issuance of driver’s licenses.
This may sound simple and clear, but what to make of the recent changes that the sheriff’s department is considering? Three questions come to mind:
1. Does this mean that the traffic cop has not done a good enough job so the sheriff needs to intervene?
I don’t think so. As said earlier, the jobs of the traffic cops and the sheriff are different, and their mandates and approaches are also different. Most importantly, their tools and weapons are different. Standard gear for the traffic cop is a whistle, a night stick and an alcohol detection device. Those tools are effective to control the traffic, but are not terribly useful when it comes to apprehending suspects or detering violations. The sheriff’s department is, however, equipped with big flashlights, handcuffs, tear gas and big guns. Those heavy weapons do not work well with the general traffic but they are highly effective in capturing and deterring criminals.
By the same token, the focus of work is different between the two departments. The traffic cop’s primary objectives are to keep the traffic safe (i.e., market regulation) and keep the traffic moving (i.e., market development). If a driver is caught driving erratically, the traffic cops can pull them over and investigate, and even give them a ticket if necessary. But all along, the traffic cops need to ensure minimal disruption to the traffic flow as they conduct their work, and they won’t block the entire road causing inconvenience to good road users just because they need to catch a person who jumps the yellow light or speeds. Meanwhile, if the traffic cops discover that a driver is a wanted criminal and a threat to the public, then the case is immediately turned over to the sheriff’s department which will catch the fugitive even if that means setting up road checkpoints and bringing the entire city’s traffic to a grinding halt.
2. Will stricter policing minimise or eliminate traffic violations and other criminal activities on the road?
Yes and no.
Greater vigilance and more aggressive patrolling will help detect, deter and minimise violations; if the traffic cops identify trends of certain driving behaviour or misconduct, the traffic cop should proactively enhance its policing by increasing patrols, intensify checkups and put up more speed limits and no stopping zones. The traffic cops should also refer more cases to the sheriff's department for more effective crackdowns. But can the traffic cop weed out all bad drivers or criminals through the vetting system or when granting licenses (i.e., listing approvals)? The answer is unfortunately that it would be very difficult.
Imagine an applicant for a driver’s license successfully passing both the written and road tests. That would qualify him for a license based on the rules, and the traffic cop would likely issue one, despite the fact that he may become a careless or reckless driver, or even turn into a criminal on the road in the future. For sure, if the traffic cops detect a pattern in the breaches of traffic regulations, they can heighten the bar for the driving test before issuing a driver’s license. But even if the traffic cops do that, it’s still not possible to weed out all potential bad drivers. Also, a change in the driving test usually requires a market consultation to minimise the impact to other innocent citizens and the changes adopted should not be used retroactively to those who already secured a license under the old rules.
In contrast to the traffic cop, the sheriff has broader powers in this regard. He can deny the issuance of a license or directly reject the application even if the applicant has successfully passed or is able to pass both the written and road tests based on the traffic rules, as long as the sheriff has sufficient reason to believe that it is in the public interest to do so. In the same spirit, if a driver was stopped by the traffic cop but passed the alcohol test and without breaching any other traffic rules, the rules don’t give the traffic cops a lot of power to detain the driver even if the traffic cop feels some suspicion. In this instance, the traffic cop should refer the case to the sheriff who could intervene and decide to detain the driver if he has sufficient cause to do so, for example, in the public interest. Either way, more aggressive policing on the road could help deter bad drivers from using the road.
3. How should the public be expected to deal with the two different enforcement agencies which end up operating in parallel?
In order not to confuse the traffic and to allocate regulatory resources efficiently, the traffic cop and the sheriff have historically reached an understanding that the city’s traffic should be administered by the traffic cop under the oversight of the sheriff, who has generally worked behind the scenes through the traffic cop.
This means traffic cops administer the written and road tests to grant driver’s licenses (i.e., eligibility and suitability tests), and the sheriff conducts deep background checks of the driver license applicants (i.e., public interest test) based on a wider network of intelligence. Ideally everything is done in one test to minimise additional burdens to the applicants, and although the sheriff can certainly either “front-load” or “back-load” the background test, he may want to avoid making applicants go through another written or road test.
Similarly, the sheriff’s department has the power to get onto the highways with its big flashlights and heavy weapons whenever it deems necessary and appropriate, but doesn’t do it frequently to avoid unduly disrupting the general traffic. It’d also be better to avoid taking the traffic cops’ tools like whistles and sticks away and begin to police the traffic directly without the traffic cops in order to avoid confusion and chaos on the highway.
We have discussed earlier that the sheriff is the senior authority and has broad power under the law. Therefore, if the sheriff believes the prevailing market situation warrants he can certainly decide when and how to use his broad powers but coordination with the traffic cop and communication with the general public about the change would still be important in order to avoid confusion on the roads.
I know that the analogy of the traffic cops and sheriff is not the most precise description of the relationship between HKEX and the SFC, but I thought it could provide some interesting perspectives. On the subject of HKEX’s role in this space, I want to point out that contrary to what some commentators suggest, HKEX, as part of the Hong Kong Inc., has every incentive to ensure high listing standards and a quality market. It’s not worth getting a few extra dollars in revenue and allowing bad actors onto our market, which hurts the overall market reputation and diminishes our business.
In fact, although HKEX is a listed company, it’s not an ordinary business organisation because, under the SFO, we must put the public interest ahead of our commercial interest, something we take very seriously. And from a commercial perspective, it is in our best long-term business interest to ensure quality companies that attract investors and liquidity list in Hong Kong. Half of our Independent Non-executive Directors are appointed by the Hong Kong government, our Chairman is appointed by the government and the Chief Executive is approved by the SFC to ensure the public interest is the top priority.
The regulatory system in Hong Kong has generally served Hong Kong well over the past two decades. Our city has grown from a regional market to a major player in global finance, often finishing among the first in the world in IPO funds raised over the last eight years. Nonetheless the fast evolution of our market and the welcoming of new market players and investors from different backgrounds and cultures have created new challenges, and we need to ensure our regulatory regime is keeping pace.
There is a perception recently of market quality problems. Even if the companies causing the problems just form a very small fraction of our overall market in terms of number, market cap and turnover, we take it seriously. We don’t want a few bad apples to spoil the entire market. We will continue to make the best use of our tools to ensure our market runs smoothly and fulfil our duty as a traffic cop.
Our market has proven to be very resilient through massive transformation all around us, and I am confident that we will continue to thrive by working together to address outstanding market issues and ensure our market is high quality, robust, and safe for everyone.
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