The discussion regarding the abolish of the minimum stock brokerage commission framework was held at the Financial Affairs Panel of the Legislative Council. [CB(1)1525/02-03(03)] April 28, 2003
Release Date: 2003-04-28
Reference: SC20030425/1048
Date: April 25, 2003
To: Members of the Legislative Council's Financial Affairs Committee
Subject: Expressing the basic opinions of the Hong Kong Securities and Futures Industry Staff Union (the Union) regarding the report titled "Improving the Business Environment of the Local Securities Industry" by the tripartite working group composed of the Financial Services and the Treasury Bureau, the Securities and Futures Commission, and the Hong Kong Stock Exchange (hereinafter referred to as the Report).
Overall Assessment: The Union is not surprised by the conclusions drawn in the report by the tripartite working group, which has not offered any constructive opinions for the development of the securities industry. As the Union pointed out at the inception of the group, its establishment seemed more like a superficial effort by financial officials to backtrack on a series of damaging policies enacted against the securities industry. Therefore, the time and resources expended by the tripartite group to complete the report have been a waste of public resources.
The Hong Kong Securities and Futures Industry Staff Union evaluates the report from the following aspects and offers several counter-suggestions:
1. Lack of Direction in the Working Group
The tripartite group failed to outline a clear direction for the development of the local securities industry. The members of the group evidently lacked the expertise in this area, resulting in ineffective efforts to address the issues. The report left industry professionals with the impression of being "irrelevant and missing the point." Ultimately, the primary reason for the stagnation of the local securities industry in recent years is the lack of creativity among financial officials, who have opted for strict enforcement instead of innovation, relying on foreign experiences rather than fostering local innovation.
2. Incoherence of the Three-Tier Structure
Due to the appointment of another group by the Financial Secretary to undertake related work, the tripartite group's report did not address another critical issue facing the securities industry: the reasonableness and effectiveness of the three-tier structure. It is regrettable that the Hong Kong government has denied the validity of this structure without proposing a more reasonable solution. The government's previous attempt to resolve the issue by stripping the Hong Kong Stock Exchange of its listing approval authority was not a fundamental solution. However, even this measure failed to proceed due to strong opposition from the exchange. We expect that the flaws in the three-tier structure will continue to harm the local securities industry.
3. Minor Benefits Do Not Address Hardships
The "Report" implements several fee reductions for the securities industry, including a slight reduction in annual fees for practitioners by the Securities and Futures Commission and the cancellation of dual licensing fees by the Hong Kong Stock Exchange for trading representatives. However, the report inadvertently compares the annual fees collected by the government from banks with those of securities firms, which is misleading since banks can operate multiple businesses under a single fee, whereas securities firms cannot.
In mid-January of this year, under pressure from the government, the Hong Kong Stock Exchange abolished the minimum commission system. The absence of significant brokerage firm closures after the abolition has been used by some to argue for the rationale of this decision. However, the reality is that the removal of the minimum commission has directly harmed the interests of practitioners. The majority of securities firms, citing the deteriorating business environment, have canceled various allowances for employees, forcing many practitioners to become self-employed. Some firms have downsized, converting a large number of support staff into brokers, which, in a shrinking business environment, further undermines broker incomes. The Union formally suggests to the government that since you aim to address the concerns of the public, the tripartite group should consider establishing a mechanism to resolve the income inadequacy faced by securities practitioners.
4. The Financial Secretary Should Implement Stamp Duty Reductions
Former Financial Secretary/current Secretary for Administration Donald Tsang Yam-kuen publicly promised that once brokers reduced commissions, the government would reduce stamp duty in line with international trends. However, given the current imbalance in public revenue and expenditure in Hong Kong, it is unrealistic to expect immediate stamp duty reductions. We hope that the Financial Secretary can provide a clear timetable for reducing stamp duty to alleviate the doubts of industry insiders.
Nearly a month after the abolition of the minimum commission, trading volume in Hong Kong stocks seems to have increased. However, upon careful analysis, this is not beneficial for the long-term future of Hong Kong. The Hang Seng Index fell to a new four-and-a-half-year low in late April, reflecting a rare weakness in the market. The general public lacks investment appetite, which counters the notion that the abolition of commissions has increased investor confidence. Data reflecting this situation shows that the trading volume of "Group C" brokers, who serve retail clients, has dropped to just 15%. Why then has overall trading volume significantly increased? This is undoubtedly due to overseas investors benefiting from the commission abolition, leveraging various derivative instruments to profit, not benefiting the general public. This short-term effect will not be sustained long-term; as retail investors continue to incur losses and exit the market, the lack of fish in clear waters will lead to further contraction of the Hong Kong stock market in the medium to long term.
5. Strengthening Industry Training and Support
The government has proposed providing promotional subsidies for securities and futures companies. Although there have been no successful applications to date, this indicates a shift in the government's previous indifference towards the industry, and we initially express our support. From the perspective of enhancing the professional level of practitioners, government assistance for industry training is indeed necessary. Since its establishment, the Hong Kong Securities and Futures Industry Staff Union has been committed to providing "free" continuing education courses. We believe that the securities industry contributes significantly to the local economy, and the government should directly fund institutions that provide such courses.
6. Actively Promoting Personal Settlement Accounts
The Union has consistently advocated for investors to participate in settlements as individuals. Our representatives have repeatedly emphasized this position in several meetings with the tripartite group. However, it is regrettable that the Hong Kong Stock Exchange has repeatedly evaded this issue, citing commercial balance as a reason, thereby hindering promotional efforts. We believe that promoting personal settlement accounts is in the overall interest of the securities industry and should not be driven purely by commercial interests. Moreover, the Hong Kong Stock Exchange currently has a cash reserve of 600 million and has repeatedly considered investing overseas; why not invest a mere few tens of millions locally?
This letter serves to communicate our views.
Yours sincerely,
Hong Kong Securities and Futures Industry Staff Union
Attachment: (1) Summary of the first written statement by the tripartite working group on January 24, 2003.
(2) Summary of the second written statement by the tripartite working group on February 26, 2003.
(3) Summary of the third written statement by the tripartite working group on March 21, 2003.
(4) Response to the tripartite working group meeting on March 21, 2003.
Reference: SC20030331/1044
March 31, 2003
To: Ms. Au King-chi, Head of the Tripartite Working Group
Response to the Tripartite Working Group
The Union expresses disappointment regarding the meeting of the tripartite working group on March 21. As we previously mentioned, the purpose of establishing the tripartite working group was to dissipate industry grievances, but it has provided little actual help to industry practitioners, especially client brokers. The government and the Hong Kong Stock Exchange directly eliminated the direct income of client brokers, and any future recommendations cannot compensate for the losses faced by practitioners and their livelihoods. To date, the tripartite working group and the government have yet to implement concrete plans to assist these brokers who are facing unemployment, leading the Union to question the motives and effectiveness of the tripartite working group.
On the 28th of this month, members of the Legislative Council's Financial Affairs Committee, including Legislators Henry Wu King Cheong, Philip Wong Yu-hong, Jasper Tsang Yok-sing, Sin Chung-kai, and James Tien Pei-chun, in an internal meeting, questioned the true purpose and sincerity of the tripartite working group. Representatives from the Financial Affairs Bureau merely evaded the questions posed by the legislators, while Mr. Lawrence Fok Kwong Man from the Hong Kong Stock Exchange only mentioned the abolition of the minimum commission system due to public interest. However, the issues raised by the Union regarding the resulting vicious competition, monopolies, rising unemployment, and company closures, which violate public interest, were continuously avoided. Therefore, the Union feels that the tripartite working group has merely been stalling for time until April 1 to successfully abolish the minimum commission system. The Union reiterates its extreme disappointment and regret regarding the government's handling and attitude. We hope the tripartite working group will reconsider the abolition of the minimum commission system and restore the minimum commission rate of 0.25%.
Yours sincerely,
Wong Kwok On David
Chairman
Hong Kong Securities and Futures Industry Staff Union
Date: April 25, 2003
To: Members of the Legislative Council's Financial Affairs Committee
Subject: Expressing the basic opinions of the Hong Kong Securities and Futures Industry Staff Union (the Union) regarding the report titled "Improving the Business Environment of the Local Securities Industry" by the tripartite working group composed of the Financial Services and the Treasury Bureau, the Securities and Futures Commission, and the Hong Kong Stock Exchange (hereinafter referred to as the Report).
Overall Assessment: The Union is not surprised by the conclusions drawn in the report by the tripartite working group, which has not offered any constructive opinions for the development of the securities industry. As the Union pointed out at the inception of the group, its establishment seemed more like a superficial effort by financial officials to backtrack on a series of damaging policies enacted against the securities industry. Therefore, the time and resources expended by the tripartite group to complete the report have been a waste of public resources.
The Hong Kong Securities and Futures Industry Staff Union evaluates the report from the following aspects and offers several counter-suggestions:
1. Lack of Direction in the Working Group
The tripartite group failed to outline a clear direction for the development of the local securities industry. The members of the group evidently lacked the expertise in this area, resulting in ineffective efforts to address the issues. The report left industry professionals with the impression of being "irrelevant and missing the point." Ultimately, the primary reason for the stagnation of the local securities industry in recent years is the lack of creativity among financial officials, who have opted for strict enforcement instead of innovation, relying on foreign experiences rather than fostering local innovation.
2. Incoherence of the Three-Tier Structure
Due to the appointment of another group by the Financial Secretary to undertake related work, the tripartite group's report did not address another critical issue facing the securities industry: the reasonableness and effectiveness of the three-tier structure. It is regrettable that the Hong Kong government has denied the validity of this structure without proposing a more reasonable solution. The government's previous attempt to resolve the issue by stripping the Hong Kong Stock Exchange of its listing approval authority was not a fundamental solution. However, even this measure failed to proceed due to strong opposition from the exchange. We expect that the flaws in the three-tier structure will continue to harm the local securities industry.
3. Minor Benefits Do Not Address Hardships
The "Report" implements several fee reductions for the securities industry, including a slight reduction in annual fees for practitioners by the Securities and Futures Commission and the cancellation of dual licensing fees by the Hong Kong Stock Exchange for trading representatives. However, the report inadvertently compares the annual fees collected by the government from banks with those of securities firms, which is misleading since banks can operate multiple businesses under a single fee, whereas securities firms cannot.
In mid-January of this year, under pressure from the government, the Hong Kong Stock Exchange abolished the minimum commission system. The absence of significant brokerage firm closures after the abolition has been used by some to argue for the rationale of this decision. However, the reality is that the removal of the minimum commission has directly harmed the interests of practitioners. The majority of securities firms, citing the deteriorating business environment, have canceled various allowances for employees, forcing many practitioners to become self-employed. Some firms have downsized, converting a large number of support staff into brokers, which, in a shrinking business environment, further undermines broker incomes. The Union formally suggests to the government that since you aim to address the concerns of the public, the tripartite group should consider establishing a mechanism to resolve the income inadequacy faced by securities practitioners.
4. The Financial Secretary Should Implement Stamp Duty Reductions
Former Financial Secretary/current Secretary for Administration Donald Tsang Yam-kuen publicly promised that once brokers reduced commissions, the government would reduce stamp duty in line with international trends. However, given the current imbalance in public revenue and expenditure in Hong Kong, it is unrealistic to expect immediate stamp duty reductions. We hope that the Financial Secretary can provide a clear timetable for reducing stamp duty to alleviate the doubts of industry insiders.
Nearly a month after the abolition of the minimum commission, trading volume in Hong Kong stocks seems to have increased. However, upon careful analysis, this is not beneficial for the long-term future of Hong Kong. The Hang Seng Index fell to a new four-and-a-half-year low in late April, reflecting a rare weakness in the market. The general public lacks investment appetite, which counters the notion that the abolition of commissions has increased investor confidence. Data reflecting this situation shows that the trading volume of "Group C" brokers, who serve retail clients, has dropped to just 15%. Why then has overall trading volume significantly increased? This is undoubtedly due to overseas investors benefiting from the commission abolition, leveraging various derivative instruments to profit, not benefiting the general public. This short-term effect will not be sustained long-term; as retail investors continue to incur losses and exit the market, the lack of fish in clear waters will lead to further contraction of the Hong Kong stock market in the medium to long term.
5. Strengthening Industry Training and Support
The government has proposed providing promotional subsidies for securities and futures companies. Although there have been no successful applications to date, this indicates a shift in the government's previous indifference towards the industry, and we initially express our support. From the perspective of enhancing the professional level of practitioners, government assistance for industry training is indeed necessary. Since its establishment, the Hong Kong Securities and Futures Industry Staff Union has been committed to providing "free" continuing education courses. We believe that the securities industry contributes significantly to the local economy, and the government should directly fund institutions that provide such courses.
6. Actively Promoting Personal Settlement Accounts
The Union has consistently advocated for investors to participate in settlements as individuals. Our representatives have repeatedly emphasized this position in several meetings with the tripartite group. However, it is regrettable that the Hong Kong Stock Exchange has repeatedly evaded this issue, citing commercial balance as a reason, thereby hindering promotional efforts. We believe that promoting personal settlement accounts is in the overall interest of the securities industry and should not be driven purely by commercial interests. Moreover, the Hong Kong Stock Exchange currently has a cash reserve of 600 million and has repeatedly considered investing overseas; why not invest a mere few tens of millions locally?
This letter serves to communicate our views.
Yours sincerely,
Hong Kong Securities and Futures Industry Staff Union
Attachment: (1) Summary of the first written statement by the tripartite working group on January 24, 2003.
(2) Summary of the second written statement by the tripartite working group on February 26, 2003.
(3) Summary of the third written statement by the tripartite working group on March 21, 2003.
(4) Response to the tripartite working group meeting on March 21, 2003.
Reference: SC20030331/1044
March 31, 2003
To: Ms. Au King-chi, Head of the Tripartite Working Group
Response to the Tripartite Working Group
The Union expresses disappointment regarding the meeting of the tripartite working group on March 21. As we previously mentioned, the purpose of establishing the tripartite working group was to dissipate industry grievances, but it has provided little actual help to industry practitioners, especially client brokers. The government and the Hong Kong Stock Exchange directly eliminated the direct income of client brokers, and any future recommendations cannot compensate for the losses faced by practitioners and their livelihoods. To date, the tripartite working group and the government have yet to implement concrete plans to assist these brokers who are facing unemployment, leading the Union to question the motives and effectiveness of the tripartite working group.
On the 28th of this month, members of the Legislative Council's Financial Affairs Committee, including Legislators Henry Wu King Cheong, Philip Wong Yu-hong, Jasper Tsang Yok-sing, Sin Chung-kai, and James Tien Pei-chun, in an internal meeting, questioned the true purpose and sincerity of the tripartite working group. Representatives from the Financial Affairs Bureau merely evaded the questions posed by the legislators, while Mr. Lawrence Fok Kwong Man from the Hong Kong Stock Exchange only mentioned the abolition of the minimum commission system due to public interest. However, the issues raised by the Union regarding the resulting vicious competition, monopolies, rising unemployment, and company closures, which violate public interest, were continuously avoided. Therefore, the Union feels that the tripartite working group has merely been stalling for time until April 1 to successfully abolish the minimum commission system. The Union reiterates its extreme disappointment and regret regarding the government's handling and attitude. We hope the tripartite working group will reconsider the abolition of the minimum commission system and restore the minimum commission rate of 0.25%.
Yours sincerely,
Wong Kwok On David
Chairman
Hong Kong Securities and Futures Industry Staff Union