Hong Kong's Proposed New Investor Compensation Fund Comes Under Fire

Mary Swire, Tax-news.com, Hong Kong

13 March 2001

Last week, we reported that Hong Kong's Securities and Futures Commission (SFC) had published a consultation paper proposing a new basis for investor compensation in the SAR. Despite much support for the proposal the consultation paper has attracted criticism from some members of the securities industry.

Under the SFC's proposal a new Investor Compensation Fund will be created to replace and combine the total assets of the existing funds: the Unified Exchange Compensation Fund, the Commodity Exchange Compensation Fund and the Dealers' Deposit Schemes for non-exchange participants. Compensation of a maximum sum of HK$150,000 for losses incurred in the event of a brokerage collapse could be awarded.

In addition, the existing transaction levy on the transactions on the Stock Exchange of Hong Kong will be increased form 0.01% to 0.012% with the additional 0.002% of the levy eventually going to the new Fund when it is formed. The existing $0.5 levy for each side of a contract executed on the Hong Kong Futures Exchange would continue unchanged.

The South China Morning Post reported the complaint of Fulbright Securities' general manager, Francis Lun, who described the proposal as 'unconscionable' and said: 'How can the SFC make money from a bankruptcy when the . . . investor may lose up to HK$1 million or HK$10 million and only get HK$150,000 in return? On top of that he has to split [the recovered shares] with the SFC.'

He argues that the value received by the SFC is disproportionate to the amount of money investors could lose in a brokerage collapse. The SFC proposal cited the example of an investor losing HK$500,000 worth of shares: the client will receive HK$150,000 from the fund and, say, HK$100,000 from the shares, of which 30 per cent goes to the SFC, leaving the investor with HK$70,000 from the recovery. This equates to a total compensation which is between HK$220,000 - HK$280,000 below the initial loss.

Furthermore, said Mr Lan, the collapse of a brokerage would be the responsibility of the SFC and its poor regulation procedures: 'If any company goes under it is due to the lack of supervision on the part of the SFC, how can they turn around and claim excess money from any bankruptcy or collapse?'

No doubt Mr Lan will be replying to requests to submit written comments to the SFC during the consultation period which ends on April 6, 2001.

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