Statement on the conclusions on HK Listing Regulation
15 September 2017
Hong Kong Exchanges and Clearing Ltd (HKEX, 0388), the Government-controlled owner of HK's monopoly Stock Exchange, and the Securities and Futures Commission (SFC), which regulates takeovers but not the Listing Rules, today announced the conclusions of a consultation on listing regulation which ended 10 months ago, on 18-Nov-2016.
The conclusions represent a huge climb-down by the SFC, leaving the rule-making powers with HKEX and its Listing Committee (which is stacked with issuers and their paid advisors), rather than the proposed Listing Policy Committee, which has been watered down to nothing more than a pointless talk-shop – the "Listing Policy Panel". The SFC and HKEX already talk to each other about policy on at least a monthly basis, so that was never the issue – it was about taking the first step to move the regulatory function out of HKEX to a 50:50 HKEX:SFC committee, and this has now been abandoned.
It leaves HK with a second-class system for a second-class market. In the UK and US, there is a clear division of functions. Competing exchanges run their exchange businesses, while regulators regulate. In HK, we have a conflicted, for-profit regulator making the Listing Rules, and the SFC running the Takeovers Code. There are many long-overdue corporate governance reforms that will not see the light of day under the current Listing Rule-making process. Just to name one: tycoons and other controlling shareholders get to decide who shall be an "independent" director on their boards by voting on their elections, making a mockery of the whole process.
As the conclusions paper admits (page 8):
“The vast majority of investment managers that responded expressed support for the Proposals, including international fund managers. There was a view that the Proposals do not go far enough.”
By abandoning the proposals, the SFC, and by implication, the Government which appoints all the directors of the SFC and the majority of directors of HKEX (investors can elect 6 out of 13), have put the interests of the tycoons who elect the Government (via the HKSAR Election Committee) ahead of the interests of investors, large and small. When this consultation was first announced in the 24-Feb-2016 budget speech, the SFC clearly had the backing of then-Financial Secretary John Tsang. The same cannot be said of the current administration.
On top of that, HKEX doesn’t even do its job well as an exchange, because it has been exempted from the Competition Ordinance and has fees, profit margins and archaic practices that only a monopoly could get away with. Removing the regulatory function from HKEX would open the door to introducing competition for exchange services, resulting in better services at lower cost.
So HK loses on two levels. First, the ongoing lack of meaningful reforms to corporate governance, and the attempts to weaken it with second-class shares carrying no or minimal voting rights, will result in a race to the bottom that is now more likely given that the Government has backed HKEX on this occasion. That will erode trust in our market, and raise the cost of capital. We should be heading in the opposite direction, making HK a more trustworthy market that commands a valuation premium for companies willing to sign up to world-class standards of corporate governance. Second, HK continues with a protected monopoly exchange which deprives the economy of a more competitive market for exchange services.
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