Hong Kong Brokers Face Tighter Regulation

by Mary Swire, Tax-News.com, Hong Kong

27 February 2002

According to Hong Kong Financial Services Secretary, Stephen Ip Shu-kwan, brokers in the SAR will face tighter scrutiny when the Securities and Futures Bill is approved by legislators next month.

The bill, which goes to the vote on March 13, is designed to protect investors and their assets from corrupt and failing brokers, and will require each brokerage house to have at least two senior executives acting as responsible officers.

Deputy Financial Services Secretary, Au King-chi explained to the South China Morning Post that such a provision: 'will help to ensure all brokers, including the smallest players, need to set up internal control systems to prevent their staff stealing investors' assets'.

The Bill will also phase out, over a two year period, provisions which allow brokers to act as sole proprietors, which will mean that the jurisdiction's 72 such brokers will need to establish limited companies. This, according to Hong Kong investment experts, is because in sole-proprietor brokerages, investors' assets are mixed in with the personal estate of the broker, meaning that in the event of the latter's death, investors' assets would likely be frozen until the estate process had been cleared.

Mr Ip also revealed that Hong Kong Exchanges and Clearing is considering reducing its charges in order to encourage more SAR investors to open individual accounts in the clearing system, rather than leaving their assets vulnerable by putting shares in the brokers' accounts with the clearing house.

A spokesman for HKEx predicted that this move, in conjunction with plans to extend trading hours is likely to boost market turnover, which in turn will lift brokers' commissions, and should help prevent any further brokerage collapses.

However, the Financial Secretary told the SCMP, investors should remain alert for signs that their brokerage house is troubled, and should report any suspicions that their accounts may have been misused by staff to the SFC. 'Brokers need to know their clients, while investors should also know their brokers,' he observed.

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