Proposed listing regulation reforms
In June, the Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Ltd (HKEX) jointly issued a consultation on proposed enhancements to the existing structure for listing regulation in Hong Kong. Brian Ho, Executive Director; and Megan Tang, Senior Director; Corporate Finance Division of the SFC, discuss the rationale behind the new proposals.
What is the rationale behind the proposals set out in the consultation paper?
Ho: The market landscape in Hong Kong has become more complex, with more Mainland and international enterprises coming to list. In order to maintain Hong Kong’s competitiveness, we need to review the listing regulatory structure.
Tang: There are a lot of legacy reasons why the structure is the way it is today. When it was developed 20 years ago, the listing market was mostly made up of Hong Kong-incorporated companies. Directors, management and shareholders were generally based in Hong Kong. Nowadays, we mostly deal with cross-border and overseas companies, and that brings a host of different issues. The proposals are designed to refine the structure to make things work better.
Ho: We haven’t changed the listing regulatory structure for 20 years, but the world has moved on, and it is time for a review. As for the objective of the proposals, there are three things we are trying to achieve: better coordination, efficiency and accountability.
For better coordination, that can be best explained by a real-life example. The media is very focused on the Growth Enterprise Market (GEM) at the moment since the share prices of many new listings have fluctuated wildly. If you look at this in a fragmented way, you might say it looks like share price manipulation and the SFC should step in to enforce the rules. On the other hand, is it related to intermediary misconduct? But clearly we need to look at market behaviour in a more holistic way – by looking at the big picture which includes listed companies, directors, shareholders and intermediaries. That is what we mean by better coordination.
The second objective is better efficiency. Because of the legacy structure, sponsors and applicants in an initial public offering (IPO) now deal with two regulators: the SFC and the Exchange. In addition to dual filing for IPOs, the listing rules require SFC consent for any listing rules waivers, modifications or variations. The proposal aims to put everybody in one platform – the Listing Regulatory Committee.
The third objective is better accountability. In theory, the Listing Department reports to the Listing Committee, but the Listing Committee doesn’t appraise the staff of the Listing Department. We propose a formal system where the Listing Policy Committee will appraise the senior staff of the Listing Department. This will improve their accountability, while the proposed structure also makes the decision-making process more transparent.
Tang: When a company submits an application or enquiry which involves a complex, novel or controversial issue, the Listing Department comes to the SFC for approval and also separately consults the Listing Committee. This indirect process is inefficient and the company may feel it lacks direct access to the relevant decision-maker. The proposed structure would put all decision-makers in one forum. This is more efficient and it also provides more certainty for companies. The proposals don’t change the balance of power or the responsibilities of the SFC and the Exchange, they just make things work better within the existing framework.
If you were starting today, what listing regulatory structure would you like to see – should Hong Kong have a single, independent regulatory body like other developed jurisdictions overseas?
Ho: It is hard to look at it that way because we already have many decades of legacy. One of the purposes of this exercise is to cause the minimum disruption to the market while ensuring that our three objectives are achieved.
Nevertheless, do you think the long-term trend is towards a single, independent regulatory body in Hong Kong? Many commentators have pointed out the conflicts of interest inherent for the Exchange as a commercial body.
Ho: The challenge for Hong Kong is how to position ourselves – what strategy should we adopt for the next 10 to 30 years? In the 1990s, Hong Kong connected factories in China with the US and worldwide. It was the container port for everything shipped to and from China until container ports opened up all along the coast of China. Hong Kong now plays the connector role in financial services, but what are we going to do next? We are confident that Hong Kong will maintain its reputation and status as an international financial centre (IFC) because we have world-leading systems – good regulatory infrastructure, quality professionals – but most importantly we should aim to maintain the good quality of our markets. If there are more and more bad apples, Hong Kong’s reputation as an IFC will be at stake.
Opponents of the new proposals have said that the current system is working well – Hong Kong is after all consistently the top market for IPO listings – so if it isn’t broken why try to fix it?
Ho: As I mentioned earlier, the market landscape is changing and we are facing a much bigger challenge. If we think “this is not broken so don’t fix it”, then Hong Kong’s regulatory regime may become outdated.
In August 2014, the Exchange launched a consultation on whether a weighted voting rights structure would be appropriate for Hong Kong. In June 2015, the SFC issued a statement that did not support the weighted voting rights proposal. Are the current proposals an attempt to prevent a repetition of that very public airing of opposing views?
Ho: The problem at the moment is that there is no common platform for deciding policy. A good policy-making process should take the views of different responsible parties into consideration and get everybody together to make policy – that will produce policies which look after Hong Kong’s broader and longer-term interests.
The Exchange’s interests will not necessarily always be the Hong Kong markets’ interests. Leaving policy proposals entirely to the Exchange, with the SFC only having a veto, does not maximise the markets’ interests. The proposed restructuring takes a more holistic, big-picture approach to what is good for Hong Kong.
How would you respond to the perception that the current proposals are about shifting power away from the Exchange to the SFC?
Ho: I disagree. There will be no change as to our respective powers.
Tang: Under the statutes, the listing rules and our memorandum of understanding with the Exchange, we already have the power to veto policy and listing rule changes and IPOs. In fact, the proposals will reduce the SFC’s role in the large majority of IPOs. The Listing Department will judge whether there is a policy issue involved in particular cases, and only cases with policy implications would go to the Listing Regulatory Committee. Based on past experience, the large majority of cases will not involve policy issues and will be dealt with by the Listing Committee. This is really about using the SFC’s resources more efficiently and focusing on those cases that require policy deliberations.
Under the proposed new structure, HKEX’s Chief Executive, Charles Li, would no longer sit on the Listing Committee – what is the rationale behind this move?
Ho: It focuses his role on the Listing Policy Committee. The Chief Executive of HKEX will play a role bridging communication between the board of HKEX and the Listing Policy Committee.
Are you confident that the policy decisions of the Listing Policy Committee will reflect a market consensus?
Ho: The Listing Policy Committee will comprise eight members, with three from the SFC. The SFC members would need to present strong reasons to convince the other five members of the committee to take their view. It would not be easy for the SFC to control the committee’s decisions. So I am pretty confident the structure will work well.
One final question – what is your best wish for the way this will go?
Ho: We want to see an improvement in real terms. We hope this can lead to a better approach to influencing market behaviour. For example, to address the problems we have seen in the GEM, we can’t simply take the current fragmented approach and only rely on the SFC for enforcement of the rules, leaving the setting of policy entirely to the Exchange. This is a very fragmented way of looking at things and doesn’t help improve behaviour. There are many possible regulatory responses to different aspects of market behaviour and enforcement is only one of them. We need to get the right approach to work things out in the future.
Brian Ho and Megan Tang were interviewed by Kieran Colvert, Editor, CSj, and Mohan Datwani, HKICS Senior Director and Head of Technical & Research.
The consultation document – ‘Joint Consultation Paper on Proposed Enhancements to The Stock Exchange of Hong Kong Ltd’s Decision-Making and Governance Structure for Listing Regulation’ – is available for download from the SFC and the Exchange websites: www.sfc.hk and www.hkex.com.hk. The three-month consultation ends on 19 September 2016.
Sidebar: How will the new structure work?
The proposed listing regulatory structure will involve the creation of two new committees, on which the SFC and the Exchange would be equally represented.
• The Listing Policy Committee – will initiate, steer and decide listing policy. It comprises representatives from the SFC and the Listing Committee, as well as the Chief Executive of HKEX and the Chairperson of the Takeovers and Mergers Panel
• The Listing Regulatory Committee – will handle important or difficult listing decisions that raise suitability issues or have broader policy implications. It comprises representatives from the SFC and the Listing Committee.
The Exchange’s Listing Committee, together with the Listing Department, will continue to decide a large majority of initial listing applications and post-listing matters, and will continue to comprise representatives of investors, listed issuers and market practitioners. The Chief Executive of HKEX, however, will cease to be a member of this committee.
The Listing Committee will be able to refer any complex or sensitive cases to the newly formed Listing Regulatory Committee for its decision. The Listing Committee will provide a non-binding view to both the Listing Policy Committee and the Listing Regulatory Committee on their decisions. To establish a clear reporting structure, it is proposed that the Listing Policy Committee will become the body responsible for oversight of the listing function and the Listing Department’s performance in listing regulation.