HTF Members Exclusive: Conflicting interests abound in listing reform

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Kevin Tsui examines the various conflicts bedevilling the consultation on proposed listing reforms vis a vis the HKEx and SFC.

It’s coming to the final lap on the listing reform consultation and our Financial Services legislator Christopher Cheung (張華峰) is taking multiple U-turns. The lawmaker first commended the new arrangement for being “time-efficient.” Then he said it “had to be suspended temporarily. And then he changed his line again that it “shouldn’t be completely scrapped”. Hopefully this is not another crisis in the making.

The current listing reform consultation claims to tackle the issue of conflict of interest within the existing mechanism. The lawmaker’s shifting stance in just a few month’s time, however, shows the inner conflicts within himself before and after the LegCo election. So what conflict exactly does the reform seeks to resolve?

A week ago, I was invited to an exclusive discussion forum on the issue with most participants being industry insiders. The discussion was conducted under Chatham House rule, which allows free use of information on condition of anonymity for participants to encourage genuine exchange of ideas. Why would an earnest discussion be impossible otherwise? This brings up a much neglected conflict of interest. The Securities and Futures Commission (SFC) is the regulator of the securities and futures markets and all industry players fall under its scrutiny. Now with the regulator proposing to expand its authority, would the powerless and regulated stakeholders dare rain down criticism without the fear of the SFC settling scores afterwards? Half a century of public choice theory  – and experience – has shown that regulators are no saints, and the issue of who shall regulate the regulators remains a huge issue.

During the closed-door discussion, it was raised that the HKEX (388) is earning a huge amount of listing fees and there exists another potential conflict of interest as a profit-making regulator. But as Adam Smith, the father of economics, once noted: “Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.” Simply put, profit-seeking should not be seen as an original sin.

Investors are no fools. The HKEX will have no fees to earn if the listing quality is poor resulting in a shrinking market. Granted, HKEX is no saint either, but it is the SFC’s responsibility to convince the public with actual figures  that there is indeed a conflict of interest in the current regulatory system leading to poor market development, and how the reform proposal can optimise market development.

The third potential conflict of interest comes with the fact that regulators, the SFC in this case, in general tends to be risk-averse and prefers severity to leniency, which in the long run can go against the interest of the investors. Economics asserts that markets can self-adjust to halt destructive activities; a regulatory flaw meanwhile is more likely to inflict long lasting defects on the establishment. Participants of the discussion forum reached a consensus that what constitutes a “suitability” concern under current structure and “broader policy implications” under the proposed reform are too vague to allow the regulators to exercise their powers at will. There are also views suggesting that the dissension between the SFC and HKEX over Weighted Voting Rights shows exactly how over-regulation hinders market development.

The author does not reject the notion that proper regulation can help improve market performances. However let’s not forget that the interest of the regulators are often at odds with that of the market itself.


Kevin Tsui is a member of the Hong Kong Institute of Asia-Pacific Studies Economic Research Centre. He is also an assistant professor at Clemson University’s economics department.