SFC Consultation Paper on Proposals to Enhance Protection for the Investing Public
Release Date: 2009-11-03
November 3, 2009
To: Mr. Stephen Po, Senior Director, Intermediaries & Investments Products, Hong Kong Securities and Futures Commission
Dear Mr. Po,
In response to your commission's recent consultation paper proposing enhanced measures for investor protection, which seeks input from industry groups and the public, our association has carefully reviewed the document available on your website. Our directors, officers, and members have thoroughly analyzed it, gathering insights from across the industry. We have compiled these discussions into a set of general opinions, some of which are particularly strong. We hope your commission will seriously consider these suggestions to foster harmony. Enclosed is our association's opinion paper for your review.
Wishing you a productive day!
Sincerely,
Chairman
Hong Kong Securities and Futures Industry Staff Union
Wong Kwok On David
Cc: Mr. Martin Wheatley, Chairman, Hong Kong Securities and Futures Commission
---
Feedback from the Hong Kong Securities and Futures Industry Staff Union on the Consultation Paper on Proposed Measures to Enhance Investor Protection
I. Context and Overview
II. Our Association's Opinions on the Consultation Paper
A. Since most of our members are in intermediary roles, we will focus on Part III "Conduct of Intermediaries" and leave other sections to other issuer groups for comment.
B. Our association firmly opposes unnecessary changes to the current operations of trading listed securities, including account opening, transaction confirmation, and recording procedures. As mentioned earlier, one existing issue is dual regulation, where banks lack a "filter wall" to identify clients with different risk perceptions and tolerance when selling investment products to deposit clients. In fact, post-Lehman, banks were the primary targets of client complaints and accusations. Securities trading regulations, having evolved through numerous financial crises, maintained normal market operations even during a once-in-a-century financial storm, with no local securities firms forced to close due to local issues (Lehman's collapse was due to holding company problems), and no severe client defaults. Many listed products carried risks no less than Lehman products, with many covered warrants and bull/bear certificates losing most of their value or becoming worthless. Yet, most securities firms' clients did not express excessive dissatisfaction or complaints, nor were there unusual disputes, demonstrating the effectiveness of current regulations. Therefore, without clear market or social consensus for change, proposing changes or complicating them would be counterproductive, doing more harm than good. Our association insists on maintaining the status quo of current regulatory codes, with account opening without recording, transaction confirmation concerning only quantities and prices, and recording retained for three months as our baseline.
C. The Lehman incident's crux lies in banks' cross-domain selling. Bank clients originate from deposit clients, whose primary goal is to store wealth in a stable banking system, initially inclined towards low-risk investments. When promoting cross-domain sales, banks must implement an additional layer of risk filtering assessments to identify deposit clients willing to take higher risks. Tightening regulation during this filtering process is understandable. Conversely, securities firms' clients, when opening accounts, are already aware of the risks of listed products and willing to take higher risks. Even with significant fluctuations or devaluation of related derivative products, there were no extreme reactions or complaints, showing mature investor mentality and product simplicity. Unnecessary regulatory complexity would stifle market development, complicating the straightforward, mature securities industry regulation to accommodate banks' complex client backgrounds, resulting in adverse effects, including driving out good currency and punishing law-abiding citizens' unfairness, which our association cannot accept.
D. Our association advocates that the proposed tightening should be limited to non-listed derivative products, with all listed products in SFC-approved stock markets exempted.
E. To minimize impact and confusion for general securities practitioners and increase market flexibility, tightened procedures should be implemented as account addendums, similar to GEM risk disclosures. If staff or clients are not involved in such trades, unnecessary hassle can be avoided, with supplementary signing possible if needed later.
F. Our association accepts the stringent risk disclosure and assessment requirements for non-listed derivative product account opening procedures but believes common product types should be explained at the account opening to avoid repetitive lengthy risk warnings during each similar product trade, preventing unnecessary annoyance.
G. We do not oppose disclosing trading profits but suggest generalized disclosure, such as a percentage of total committed investments, to leave more room for market operations.
III. Opinions on the Proposed Investment Cooling-off Period
Our association strongly opposes this for the following reasons:
1. The Lehman incident severely impacted the investment community, exposing shortcomings in existing rules, allowing opportunities for investor misinformation. Thus, our association does not oppose improving existing mechanisms to strengthen investor rights protection. However, the legislative spirit should maintain fairness, reasonableness, and appropriateness, avoiding over-correction that favors investors at the expense of other industry participants.
2. Investment decisions reflect many contemporaneous factors, both quantifiable, like rates and P/E, and non-quantifiable, like investment sentiment and confidence. Each investment decision reflects unique considerations and evaluations of the investment case at the time, with investors bearing the investment risks to achieve expected returns. A cooling-off arrangement would encourage opportunistic behavior, undermine the “hard work pays off” spirit, encourage unhealthy practices, violate legal fairness, and foster adverse effects where unscrupulous investors drive out honest ones.
3. A cooling-off period necessitates canceling previously agreed trades at the investor's request, inevitably increasing the industry's operational costs, which will ultimately be passed on to investors, reflected in bid-ask spreads and other fees, disadvantaging and unfair to honest investors, and creating industry chaos, making it not worth the trouble.
4. There is significant controversy over what products the cooling-off period should include, how long it should last, how buyback prices are set, and how much costs are deducted. Our association believes the government or regulators should not intervene excessively, allowing the free market competition mechanism to develop and evolve services for self-improvement.
5. We believe legislative spirit should focus on protecting investors' pre-investment rights, such as the right to know, tightening intermediaries' product disclosure responsibilities is more appropriate.
6. If regulators insist on implementing cooling-off measures, our association strongly demands intermediaries have the right to charge corresponding cost fees.
IV. Conclusion
Our association's principle is that the government should minimally intervene, leaving room for market self-adjustment and improvement, with legislation as a final measure. The spirit should maintain fairness and justice for investors and operators alike. Banks' cross-domain selling and dual regulation still await review
To: Mr. Stephen Po, Senior Director, Intermediaries & Investments Products, Hong Kong Securities and Futures Commission
Dear Mr. Po,
In response to your commission's recent consultation paper proposing enhanced measures for investor protection, which seeks input from industry groups and the public, our association has carefully reviewed the document available on your website. Our directors, officers, and members have thoroughly analyzed it, gathering insights from across the industry. We have compiled these discussions into a set of general opinions, some of which are particularly strong. We hope your commission will seriously consider these suggestions to foster harmony. Enclosed is our association's opinion paper for your review.
Wishing you a productive day!
Sincerely,
Chairman
Hong Kong Securities and Futures Industry Staff Union
Wong Kwok On David
Cc: Mr. Martin Wheatley, Chairman, Hong Kong Securities and Futures Commission
---
Feedback from the Hong Kong Securities and Futures Industry Staff Union on the Consultation Paper on Proposed Measures to Enhance Investor Protection
I. Context and Overview
- In recent times, the banking industry has aggressively expanded its non-interest income operations by leveraging its extensive network of savings accounts to encourage frontline employees to promote investment and derivative products to deposit clients.
- This cross-sector selling approach often lacks standardized regulatory guidelines and comprehensive professional training, frequently failing to consider the unique backgrounds and investment needs of clients. This oversight can lead to underestimating potential risks and misaligning with clients' risk tolerance, thereby setting the stage for future disputes between banks and their clients. This issue also highlights the conflicting nature of dual-regulation, necessitating post-event evaluation and review.
- As global financial markets evolve rapidly and investment products innovate at an unprecedented pace, regulatory frameworks worldwide struggle to keep up with these developments in terms of understanding, rules, and risk assessment. Hong Kong, in its quest to maintain its competitive edge as a financial hub, finds itself navigating the inherent tensions between fostering market development and ensuring client protection, as exemplified by the Lehman Brothers minibonds debacle.
- The 2008 financial crisis starkly revealed the vulnerability of even major financial institutions like Lehman Brothers. Its unexpected collapse, without any governmental assistance, triggered a widespread financial domino effect, leading to a devastating plunge in asset values. Lehman minibonds, once considered secure investments, became worthless overnight, resulting in significant investor losses and dissatisfaction, with blame often directed at regulators and the government.
- In response to the sudden public outcry, the government, appearing panicked, bypassed traditional legal processes to intervene administratively, transforming ordinary commercial disputes into political risks. This approach, which prioritized investor interests over industry concerns, fostered a detrimental “heads I win, tails you lose” mentality that could potentially harm long-term economic development.
- Our association hopes that the current consultation process will address these regulatory gaps, promoting fair and efficient market operations. However, we are concerned that overly complex regulations might sacrifice industry benefits for the sake of investor protection, becoming counterproductive and merely offering a resolution to past issues like the Lehman incident.
II. Our Association's Opinions on the Consultation Paper
A. Since most of our members are in intermediary roles, we will focus on Part III "Conduct of Intermediaries" and leave other sections to other issuer groups for comment.
B. Our association firmly opposes unnecessary changes to the current operations of trading listed securities, including account opening, transaction confirmation, and recording procedures. As mentioned earlier, one existing issue is dual regulation, where banks lack a "filter wall" to identify clients with different risk perceptions and tolerance when selling investment products to deposit clients. In fact, post-Lehman, banks were the primary targets of client complaints and accusations. Securities trading regulations, having evolved through numerous financial crises, maintained normal market operations even during a once-in-a-century financial storm, with no local securities firms forced to close due to local issues (Lehman's collapse was due to holding company problems), and no severe client defaults. Many listed products carried risks no less than Lehman products, with many covered warrants and bull/bear certificates losing most of their value or becoming worthless. Yet, most securities firms' clients did not express excessive dissatisfaction or complaints, nor were there unusual disputes, demonstrating the effectiveness of current regulations. Therefore, without clear market or social consensus for change, proposing changes or complicating them would be counterproductive, doing more harm than good. Our association insists on maintaining the status quo of current regulatory codes, with account opening without recording, transaction confirmation concerning only quantities and prices, and recording retained for three months as our baseline.
C. The Lehman incident's crux lies in banks' cross-domain selling. Bank clients originate from deposit clients, whose primary goal is to store wealth in a stable banking system, initially inclined towards low-risk investments. When promoting cross-domain sales, banks must implement an additional layer of risk filtering assessments to identify deposit clients willing to take higher risks. Tightening regulation during this filtering process is understandable. Conversely, securities firms' clients, when opening accounts, are already aware of the risks of listed products and willing to take higher risks. Even with significant fluctuations or devaluation of related derivative products, there were no extreme reactions or complaints, showing mature investor mentality and product simplicity. Unnecessary regulatory complexity would stifle market development, complicating the straightforward, mature securities industry regulation to accommodate banks' complex client backgrounds, resulting in adverse effects, including driving out good currency and punishing law-abiding citizens' unfairness, which our association cannot accept.
D. Our association advocates that the proposed tightening should be limited to non-listed derivative products, with all listed products in SFC-approved stock markets exempted.
E. To minimize impact and confusion for general securities practitioners and increase market flexibility, tightened procedures should be implemented as account addendums, similar to GEM risk disclosures. If staff or clients are not involved in such trades, unnecessary hassle can be avoided, with supplementary signing possible if needed later.
F. Our association accepts the stringent risk disclosure and assessment requirements for non-listed derivative product account opening procedures but believes common product types should be explained at the account opening to avoid repetitive lengthy risk warnings during each similar product trade, preventing unnecessary annoyance.
G. We do not oppose disclosing trading profits but suggest generalized disclosure, such as a percentage of total committed investments, to leave more room for market operations.
III. Opinions on the Proposed Investment Cooling-off Period
Our association strongly opposes this for the following reasons:
1. The Lehman incident severely impacted the investment community, exposing shortcomings in existing rules, allowing opportunities for investor misinformation. Thus, our association does not oppose improving existing mechanisms to strengthen investor rights protection. However, the legislative spirit should maintain fairness, reasonableness, and appropriateness, avoiding over-correction that favors investors at the expense of other industry participants.
2. Investment decisions reflect many contemporaneous factors, both quantifiable, like rates and P/E, and non-quantifiable, like investment sentiment and confidence. Each investment decision reflects unique considerations and evaluations of the investment case at the time, with investors bearing the investment risks to achieve expected returns. A cooling-off arrangement would encourage opportunistic behavior, undermine the “hard work pays off” spirit, encourage unhealthy practices, violate legal fairness, and foster adverse effects where unscrupulous investors drive out honest ones.
3. A cooling-off period necessitates canceling previously agreed trades at the investor's request, inevitably increasing the industry's operational costs, which will ultimately be passed on to investors, reflected in bid-ask spreads and other fees, disadvantaging and unfair to honest investors, and creating industry chaos, making it not worth the trouble.
4. There is significant controversy over what products the cooling-off period should include, how long it should last, how buyback prices are set, and how much costs are deducted. Our association believes the government or regulators should not intervene excessively, allowing the free market competition mechanism to develop and evolve services for self-improvement.
5. We believe legislative spirit should focus on protecting investors' pre-investment rights, such as the right to know, tightening intermediaries' product disclosure responsibilities is more appropriate.
6. If regulators insist on implementing cooling-off measures, our association strongly demands intermediaries have the right to charge corresponding cost fees.
IV. Conclusion
Our association's principle is that the government should minimally intervene, leaving room for market self-adjustment and improvement, with legislation as a final measure. The spirit should maintain fairness and justice for investors and operators alike. Banks' cross-domain selling and dual regulation still await review