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Tim Lui Tim-leung SBS JP, who took up his current role as Chairman of the Securities and Futures Commission (SFC) in October 2018, discusses the importance for the future of Hong Kong of protecting market integrity and promoting high standards of corporate governance.

What are your aspirations in the role of SFC Chairman?

‘My key aspiration is to maintain Hong Kong as one of the world’s leading international financial centres. It is important that we maintain the highest market integrity and an open and transparent market, because financial services is one of our key strengths and core areas.

Hong Kong is Mainland China’s international financial centre. We have to maintain that status and consolidate and reinforce our position. So my role at the SFC is to push hard on that front, to foster market integrity, and make sure we have a clean and efficient market backed up by high international standards of regulation. Our regulatory practices should stay ahead of the times by keeping up with global developments. We also need to adapt international best practices to the local environment.’

We have seen some developments in Hong Kong, permitting weighted voting rights for example, which seem to be aimed more at boosting the competitiveness of the local market rather than maintaining high standards – is it hard to find the right balance between these two goals?

‘At the SFC we look at regulation and market development as interrelated. We must stay competitive, but not compromise our standards. Taking the example of weighted voting rights (WVR), the US has had WVR companies for many years, so it’s not something new, but we are the first jurisdiction to have the regulatory controls mapped out more formally.

From our perspective, high-tech and biotech companies are businesses of the future and there needs to be space within the capital market to cater for them. So last year we agreed to the new listing regime that allows WVRs with the Hong Kong Stock Exchange (the Exchange). We need to move with the times, but only as long as we are satisfied on the regulatory front that we are not compromising standards just for the sake of grabbing market share.’

In 2016/2017, the SFC launched its front-loaded approach to regulation – nearly three years on, do you think that the new approach is having the desired effect?

‘The front-loaded approach came from discussions between the SFC and the Exchange back in 2016. As the name suggests, the front-loaded approach is all about getting in there earlier, identifying the issues and dealing with them promptly to enhance investor protection. It is also about stamping out systemic risks and threats in the market.

The front-loaded approach can be split into a few component parts. First, it relates to the way we get directly involved at the initial stage of vetting IPOs. If we think an IPO application looks fine, we leave it to the Exchange to handle. But where we have concerns, the applicant needs to address them. If those concerns cannot be addressed, we will object to the listing for the best interests of Hong Kong.

This approach also relates to corporate transactions and other post-IPO issues. In our 2018 fiscal year, we intervened about 46 times – 19 of those were IPO cases but the rest were post-IPO cases where we may have concerns about excessive dilution of the shareholding, undervalued or overvalued acquisitions, or about placements going to parties that are acting in concert. Some companies decided not to proceed with the proposed transactions after we intervened.

We have also prioritised serious cases – situations where there has been market misbehaviour and the reputational risk to the market is high – because they cause the most damage to Hong Kong. There have been reports in the press recently about networks of listed companies, warehousing, backdoor listings and the use of shell companies – these are all concerns for us. We have finite resources here, but when we identify something that is serious or systemic, we put our resources into dealing with it.’

How successful do you think the current working relationship is between the SFC and the Exchange?

‘The Exchange is doing a lot in terms of listing regulation, but it may have some inherent or perceived conflicts because it is also a commercial business. That’s why the SFC has oversight and a regulatory role performing annual audits of the various functions of the Exchange. That some form of tension exists in the regulator/regulatee relationship is only natural, but there is a high level of cooperation and a lot of dialogue between our people.’

Can we talk about regulatory cooperation – both globally and with Mainland China?

‘We are very fortunate that our CEO, Mr Ashley Alder, is in his second term as Chairman of the board of the International Organisation of Securities Commissions (IOSCO). We are involved in IOSCO discussions, and participate extensively in the work of the Financial Stability Board and many other international forums where we are well represented. That reaps a lot of benefits for us, as we hear first-hand about the concerns of our counterparts all over the world, particularly where they see the greatest emerging risks. We can then assess how we should manage and mitigate those risks here in Hong Kong.

Our cooperation with the Mainland is also a big part of our work. More than half the companies listed on the Exchange have a Mainland linkage, and we deal with our Mainland counterparts in relation to a lot of our regulatory work. Over the years we have built up a very good relationship with the China Securities Regulatory Commission (CSRC). We have set up a Mainland Affairs team, which helps improve dialogue with the CSRC and other regulatory bodies on the Mainland.

Our people meet regularly, in fact we have a senior personnel meeting biannually – the latest one took place in May. When I was up in Beijing in March, I had the opportunity to meet with the new CSRC chairman, who took office in February this year. We shared a common vision to make sure our markets are clean and foster more investor protection. To do that, there needs to be cooperation and dialogue between both parties.’

Do you think in the future the SFC will be moving to coordinated supervision with the CSRC?

‘This matter could be explored further down the road, but our people are in contact with the CSRC regularly. If we need to take evidence from individuals residing in the Mainland, we enlist the help of the CSRC. This is working well, particularly in terms of obtaining evidence in civil actions. We have signed numerous memoranda of understanding with the CSRC covering a lot of supervisory and enforcement issues.’

Significant differences remain between the capital markets and the regulatory philosophies of Mainland China and Hong Kong – are there limits to how far market convergence and regulatory cooperation can go?

‘Markets might operate differently, but the SFC and the CSRC are regulatory bodies and our aims and objectives are virtually identical. We are trying our best to make sure we effectively combat market misconduct and fraud, maintain the integrity of the markets and protect investors’ interests. So, from that perspective, the CSRC and the SFC look at the regulatory landscape through the same lens.’

Do you think Hong Kong needs to raise its game where corporate governance is concerned?

‘In the CG Watch 2018 report, published by the Asian Corporate Governance Association (ACGA), Hong Kong ranked second only to Australia in Asia, so I don’t think we are lacking in any sense. Of course you can always improve, and that is why the Hong Kong Institute of Chartered Secretaries, the Hong Kong Institute of Certified Public Accountants (HKICPA), the Hong Kong Institute of Directors and other organisations are pushing very hard on the promotion and development of corporate governance.’

What would be your message for Chartered Governance Professionals and Chartered Secretaries in terms of the role they can play in raising governance standards?

‘Chartered Governance Professionals and Chartered Secretaries play a big part in raising governance standards because they are there on the ground. They know where the soft side of corporate governance is, so they can instil the culture and mindset for corporate governance much more effectively. They can have a huge impact. They give advice to the board of directors and management and, if they do their jobs diligently and properly, they can influence their companies’ corporate governance culture and business performance.’

Technology is transforming our capital markets and the nature of regulation. What’s your view of how the SFC should respond to these changes?

‘Whatever we do, we do it very much based on principle – we are technologically neutral in that sense. We don’t stand in the way of technological advancement. We accept that technology has a big part to play going forward, but we need to make sure there are adequate controls and safeguards in place.

Internally we also need to stay ahead of the curve by deploying more technology, both in our enforcement and licensing work. We also upgrade our technology to help us carry out our work more efficiently. In a nutshell, IT is here to stay and we intend to make the best use of it.’

The advent of machine learning and artificial intelligence means that more decisions are being made automatically – is this a problem for the SFC’s enforcement of individual accountability?

‘The use of technology does not mean that the relationship between the SFC and the firms that we supervise needs to change dramatically, because we are still looking to the Responsible Officers (ROs) as the persons who are accountable. The RO would have to be satisfied that the technology complies with the regulations and is not going to subject the firm to excessive risk.’

There is a lot of interest from readers in the personal background and career path of our ‘In Profile’ interviewees – can you tell us about your own background?

‘After obtaining an MBA in the UK, I joined what was then the largest international accounting firm in London, Coopers & Lybrand (C&L). I started in audit, like everybody else, and later I moved to taxation, which I found to be more challenging.

I came back to Hong Kong in November 1984 and became a partner of C&L in 1989. I was fortunate to have come back to Hong Kong in the 1980s, because I experienced a golden era in Hong Kong when the economy was on the up and professional practitioners were in great demand.

Prior to taking up the SFC’s chairmanship, I only worked in one firm for 40 years – C&L, or as it was later known PricewaterhouseCoopers (PwC). I guess that makes me a dinosaur, but the firm gave me a lot of opportunities. I was the senior tax partner for many years, worked on both the management and the governance side of the firm, becoming the lead director of the Board of Partners. I also became a director of the global board of PwC International for four years.

Given the size of PwC, the firm was very mindful that, where possible, its partners should give something back to society. I became a member of the Council of the HKICPA in 1991 and its President in 1997, the year of the return of sovereignty. I also participated in a lot of government advisory committee work and I became a Deputy of the National People’s Congress (NPC) 12 years ago.’

Are you optimistic about the future of Hong Kong?

‘There has been a lot of negative news recently, both domestically and internationally, but the relationship between Mainland China and the US has always had some tensions. Equally, there are a lot of common areas where both countries can cooperate, so in the end things should work out at the global level.

Hong Kong has done well over the years. It is very important for us to remain international, because that is Hong Kong’s niche and that is what the world looks at Hong Kong to fulfil. Equally, the Mainland is going to present a lot of opportunities for us. If you look at the Greater Bay Area development plan, Hong Kong can play a pivotal role in that. Belt and Road is also another area where Hong Kong can play a part, particularly in financial services.

So there are a lot of opportunities and initiatives at the national level that Hong Kong can tap into. I see Hong Kong as a place full of opportunity, and its values and systems are well understood by the international community. The important thing is to uphold the rule of law. Hong Kong needs to continue to be an East-meets-West city, that’s where the vibrancy comes from and that’s why we continue to attract talent, not just locally but from the Mainland and internationally. That’s what’s going to continue to make Hong Kong a success.

To build a successful international financial centre, you have to develop the infrastructure, the personnel, the legal system and the reputation. We have to preserve that status. Hong Kong people are resilient and they work hard to achieve their goals, so I have every confidence in the future of Hong Kong.’

Mr Lui was interviewed by Kieran Colvert, Editor, CSj, and Mohan Datwani, Solicitor, Senior Director and Head of Technical & Research, and a Fellow of The Hong Kong Institute of Chartered Secretaries.

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