But recognising that even a proven infrastructure requires fine-tuning to meet changing needs, the SFC has made revitalisation its top priority. It is responding to market forces, rectifying deficiencies and in the process, restoring order to the markets, health to the securities and futures industry and confidence among investors.
Established in 1989 two years after a major stock market crash, the SFC is Hong Kong’s statutory regulator of the securities and futures industry. Professionals manage the organisation independently, but it is ultimately accountable to the Government and derives its powers from a statute, ie, the Securities and Futures Ordinance (SFO). Jointly with the other financial regulators, the SFC helps develop Hong Kong’s stature as an international financial centre.
* The Stock Exchange of Hong Kong Ltd
As a statutory body, our work is defined for us according to a scope described in the SFO. Along with the powers come the responsibilities. We are charged with multiple roles as follows:
- Develop and maintain competitive, efficient, fair, orderly and transparent securities and futures markets.
- Help the public understand the workings of the securities and futures industry.
- Provide protection for the investing public.
- Minimise crime and misconduct in the market.
- Reduce systemic risks in the industry.
- Assist the Government in maintaining Hong Kong’s financial stability.
Cascading from the mandates described above, our functions are divided into three distinct areas, that of regulation, market development and investor education. As shown in the chart above, we are structured to address our SFO-stipulated operational priorities through sensible division of labour with due checks and balances.
Workings of the SFC
The arrows indicate how one function flows into another. Our regulatory work begins with setting criteria to admit participants into the industry. Then supervision kicks in at various levels to ensure orderly conduct – of intermediaries, market players and market operators. A breach on any front is investigated, and discipline is reinforced by enforcement actions against violators. In addition, investment products must meet pre-determined criteria to be authorized for offer to the general public.
To maintain a level playing field and a robust operating environment for industry and market participants alike.
How we regulate
Regulation begins with setting standards, proceeds to monitoring for compliance and rounds off with reprimanding or penalising violators to deter misconduct. Standards are set for the full gamut of activities we oversee. Not just licensed intermediaries but market participants of all types must abide by the standards.
Licensing: Our licensing regime stipulates the criteria that must be met by industry practitioners, both corporate and individual, wishing to be and to remain licensed to conduct the 10 types of regulated activities for which the SFC has regulatory responsibility, including dealing in and advising on securities and futures contracts, advising on corporate finance and asset management. From 1 June 2011, the SFC also has assumed regulatory responsibility for a 10th type of regulated activity (providing credit rating services).
Supervision of intermediaries: We issue codes, guidelines and circulars to communicate the standards we expect of industry participants. Through regular reporting and inspections, we monitor the conduct of licensed individuals and the financial soundness of licensed corporations.
Market supervision: To ensure that the markets run smoothly, we supervise the front-line market operators, namely, the exchanges and clearing-houses of Hong Kong Exchanges and Clearing Ltd (HKEx). Through systematic monitoring of market activities, we also keep watch over market participants, ie, all types of investors, industry practitioners, intermediaries and issuers of listed securities. In addition, we oversee the system and technology used in trading platforms in Hong Kong’s securities and futures markets.
Corporate finance: We supervise The Stock Exchange of Hong Kong Ltd’s (SEHK) performance in its regulation of listing-related matters. We also help to ensure the fair treatment of investors in takeovers and privatisations of public companies by requiring equal treatment of shareholders, mandating disclosure of timely and adequate information and ensuring that there is a fair and informed market.
Enforcement: Core to our regulatory work is the principle of enforcement. We are vested with investigatory and disciplinary powers to call violators to task for infractions or misconduct so as to ensure compliance at every level of Hong Kong’s securities and futures markets. In fighting market misconduct, we have recourse to the Market Misconduct Tribunal and the law courts.
Products authorization: For investor protection, certain investment products and/or their offer documents must be authorized by the SFC prior to being distributed to the public. Product-specific codes and guidelines have been issued detailing requirements for authorization of such products and documents.
To maintain the healthy and sustainable growth of the securities and futures markets by fostering innovation without compromising investor interest.
How we aid development
The vitality of a financial market relies in its ability to anticipate, adapt and improve. As per our mandate to develop the markets, this is also one of our vital tasks. We do so on four fronts – enhancing product variety, assessing alternative trading mechanisms, facilitating business development of intermediaries and building ties outside Hong Kong, notably with the Mainland.
Products: Unlike markets adopting the merit-based regulatory regime, we do not pre-determine the suitability of products. Instead, we require that the offering documents and marketing materials of all products contain adequate and accurate information for investors to make informed decisions. Products are required to meet the applicable structural and issuer eligibility requirements in the product codes. But irrespective of the product type, we bear in mind the international trends to strike a balance between industry innovation and investor protection.
Markets: While monitoring the performance of Hong Kong’s front-line market operators on one hand, we also keep abreast of global developments to expand trading channels. Given the growing trend to trade off the bourses, one of our key tasks is to monitor the development of alternative trading platforms, for example, dark pools trading in the Hong Kong market and to provide regulatory responses where necessary.
Cross-border ties: Hong Kong has an indisputable role to play as China’s platform to reach out to the world. Through agreements, meetings, seminars, working-level discussions and staff secondment, we maintain close dialogues and collaborative relationships with relevant Mainland authorities to facilitate the Mainland’s capital-raising initiatives.
In addition, we are active in the international arena of regulators by participating in international standard setting in various areas. Our senior executives regularly exchange
ideas with their counterparts at meetings organised by the International Organization of Securities Commissions. We also participate in the standing committee and are involved in various initiatives of the Financial Stability Board.
To promote investor education with the ultimate aim of safeguarding investor interest and fostering a healthy investing attitude.
How we educate investors
We believe that, in addition to protective measures we prescribe (such as suitability obligations of intermediaries), knowledge of market operations and risks of investment products would prepare investors better to decide what suits them best. As the only regulator with a statutory mandate to educate investors, we champion the cause of knowledge in investing. We reach out to the general public using multiple media, namely, periodical publications, print media, seminars, television and radio programmes and advertisements, and the InvestEd website, etc. Our aim is to nurture a sensible and responsible approach to investing among Hong Kong people. Top of our education agenda is to help the Government set up the Investor Education Council to improve the financial capability of the general public, with a view to assisting them to make more informed financial decisions and manage their money wisely.
The SFC is operationally independent of the Government, and the organisation has been funded by transaction levies and fees from market participants for over 16 years. On 1 October 2010, we reduced for the fourth time our levy for securities and futures trading. At the current level of 0.003%, the levy for securities transactions is significantly lower than the rate of 0.0125% when the mechanism was first set up.
How investor compensation is funded
Even with the best of our efforts, risks are inherent in markets and some intermediaries will fail and go out of business from time to time. The Investor Compensation Fund is set up under Part XII of the SFO and managed by the Investor Compensation Co, Ltd, a subsidiary of the SFC. It provides statutory compensation to investors when a licensed brokerage or registered institution goes into default. Each claimant is entitled to a maximum compensation of $150,000.