25-мая-2019

3. Discussion and analysis of jurisdictions studied. 3.8 Coda

The analysis in this Section 3 has given rise to a total of 28 recommendations. Ten recommendations propose improvements to board processes that will foster transparency and accountability, including in relation to the undertaking of the INED role. Twelve recommendations are concerned with the ability of shareholders and regulators to conduct meaningful, and graded, enforcement where CG standards fall below the requirements. Six recommendations address regulatory architecture and policy development that would work better to serve the interests of shareholders and the market.

As per the objective of the study to make recommendations that are practical implementable, as stated in Section 2, only two of the recommendations require a change to legislation, and another four may require legislative change subject to the outcome of a further consultative process.

All recommendations, and the Sections from which they are derived, are listed in the Tables at the end of this section.

The area where Hong Kong is most clearly in need of reform when compared with the other jurisdictions studied is the enforcement lacuna in respect of issuers in breach of CG standards set by the listing rules. Regulatory powers are either too weak and ineffective, or too strong (if available at all) - this amounts to regulatory inefficiency. Adding to this problem is the reality that shareholders are unable to seek redress where issuers and directors have fallen short of expected standards, either de jure, because shareholders have no standing to enforce the listing rules, or de facto, because although shareholders may possess rights under the law these rights are rarely exercised. In the UK and Singapore, regulators have graded powers over breaches of the listing rules including the power to fine, and shareholders have the right to bring an action for damages in relation to disclosure breaches. While the United States is similar to Hong Kong as regards the listing rules not having any legal standing, it does better than Hong Kong for two reasons. First, many listing rule disclosures are subject to Federal laws that are actionable by regulators, and possibly shareholders. Second, there is an active engagement of shareholder rights that is fostered by a number of factors including active development of fiduciary standards through State courts, efforts undertaken by the SEC (though not always successfully), and the presence of class action rights. Together these give shareholders a measure of meaningful oversight of CG standards, some of which may involve breaches of the listing rules.

Some of these problems arise out of the dual responsibilities model, but not exclusively so. The Section 3 analysis and Appendix I noted that the idea of replacing the dual responsibilities model with a statutory model has been discussed intermittently ever since the adoption of the model in the UK in 2000. A change to a statutory model would represent a significant change to Hong Kong's regulatory architecture - while it is clear that it would resolve certain issues, it is not a panacea for all issues and it is far from clear as to whether it may create other issues that do not sit well with Hong Kong's market-let system. In the course of that debate, two other approaches have been suggested that seek to ameliorate the issues, with varying degrees of success.

The first of these proposed bringing only the most important listing rules into statutory effect. This has been partially, and successfully, implemented - replacing the price sensitive information disclosure requirements of the listing rules with Part XIVA of the SFO appears to have led to some improvements in transparency, case law has developed and, importantly, the change has occurred without disturbance to the market's commercial business undertaking. The second of these approaches proposed giving the SFC fining powers over the listing rules, similar to what the FCA in the UK possesses. In contrast to the partial success of the former case, this approach has met with no success. It is tempting to suggest that the first approach succeeded and the second failed because the latter more fundamentally disrupts the dual responsibilities model in which the SEHK is the frontline regulator and the SFC has reserve powers of oversight. But it would be conceptually wrong to do so since both approaches fundamentally reassign the power of enforcement - the former shifts enforcement to the MMT at the initiative of the SFC, the latter would place power directly in the hands of the SFC.

Recommendation A4.6.4 «Statutory backing of certain listing rules» builds on the Part XIVA experience to suggest that it may now be time to expand this approach and again consider the other listing rules that had previously been suggested for statutory backing. This would help address the breaches of the relevant sections that currently carry insufficient deterrent force, as discussed in Section 3.6.2 «Listing rules».

There are a number of ways that more effective regulatory oversight can be achieved while staying within the intent of the existing dual responsibilities model. Seven recommendations of this Report are relevant to consider. Six of them do not require legislative change (Recommendation A4.5.1 «Legal status of CG-related disclosures», Recommendation C4.5.2 «Status of listing rule compliance and related disclosures (continuing)», C4.6.1 «SEHK to develop use of existing disciplinary power», Recommendation A4.6.2 «SFC to develop use of conditions when exercising existing SMLR powers», Recommendation C4.7.1 «Disclosure of CG standards in listing document» and Recommendation E4.7.2 «Develop role of compliance adviser»). The seventh (Recommendation A4.6.3 «Calibrate SFC's powers under the SMLR) might be perceived as a change to the dual responsibilities model because it gives the SFC fining powers, however, that recommendation proposes fine-tuning sub-legislation such that fining powers are limited to operate within the SFC's existing SMLR power (to suspend trading in an issuer's shares) in a manner that may work better for both the issuer and investors as compared to outright suspension to create a win-win situation.

Not all problems can be connected back to the dual responsibilities model. While the enforcement lacuna discussed in Section 3.7.1 arises partly out the model, it also arises out of problems, as noted above, with shareholders rights in relation to the listing rules and the law. This has given rise to two recommendations, one that does not require a change in the law (Recommendation S4.4.1 «Shareholders as beneficiaries of listing rules»), the other that would (Recommendation A4.4.2 «Collective redress»). In addition to the lacuna between the powers of the SEHK and the SFC, Section 3.7.3 (see also Section 3.7.6) discussed the problem that the SFC is not unconflicted when considering whether or not to bring an action that would benefit shareholders, and this led to a proposal for a new regulatory body that sits outside the dual responsibilities model (Recommendation E4.8.2 «Establish an investor protection agency»).

To this list may be added three other recommendations of relevance to the enforcement lacuna: two that address the position of shareholders' rights collectively (Recommendation A4.4.2 «Collective redress») as well as in relation to the listing rules (Recommendation S4.4.1 «Shareholders as beneficiaries of listing rules») and one that proposes a new regulatory body that sits outside the dual responsibilities model and has a specific focus on shareholder rights (Recommendation E4.8.2 «Establish an investor protection agency»).

Finally, policy development is also complicated by a number of factors. The SFC is an advocate of high CG standards but in practice is constrained to exercising its voice in ex ante or ex post enforcement actions, the former of these also encompassing the expectations it and the HKEX place on sponsors to serve as effective gateway mechanisms. The HKEX is also an advocate of high CG standards but is subject to potential commercial considerations that may work to soften standards or the enforcement of them - to some this is a means of establishing an appropriate balance whereby the CG system serves the needs of the market, whereas to others it represents a common feature cum problem of self-regulatory models that lean toward lighter-touch regulation. That both these agencies have issues has led to the suggestion that a new CG-focussed Unit and Group be established (Recommendation E4.8.1 «Establish a CG Unit and CG Group») within an appropriate agency. The proposed new investor protection agency (Recommendation E4.8.2 «Establish an investor protection agency») would be an ideal venue for the CG Unit, and could serve to facilitate Hong Kong moving forward on CG with a clearer set of objectives.

In the absence of policy development that addresses enforcement issues, the rules themselves become meaningless. The Hay-Davison report had noted that self-regulation and market self-discipline had failed to develop. This was not an assertion having an absolute value but one of appropriate balance between the market and the regulatory agencies having charge of the market (at that time being the Commissioner for Securities). The SFC was born out of that report as a means of remediation, yet, in various regards Section 3 has observed important instances of the SFC having very limited oversight of a listed market which has grown considerably since the Hay-Davison report when it was issued in 1988. This does bring the discussion to the dual responsibilities model and whether the balance between the market and regulatory oversight remains fit for purpose.

It is clear that the fundamental developments of the market and its makeup since the Hay-Davison report have in general been responded to in ways that are consistent with international best practices. However, given that the Hong Kong market is more dependent on non-locally incorporated companies than the other markets studied, Hong Kong may need to develop other solutions. A number of the recommendations made herein will improve the efficiency, and prospect, of enforcement actions against non-local companies as they would locally incorporated companies. However, more may be needed to move forward in respect of significant cases of wrongdoing or fraud and Recommendation 4.6.5 «Explore a narrow-channel cross-border enforcement arrangement» proposed that Hong Kong is in a unique position to develop cross border enforcement solutions that may be beneficial to the integrity of Hong Kong's market as well as to the reputation and standing of Mainland enterprises listed in Hong Kong.