19 July 2019
If listing regulation is too lax, the quality of listed firms may go down and Hong Kong’s reputation as a fund raising hub hurt, but if regulation is too strict, companies may simply list elsewhere. Photo: Reuters
If listing regulation is too lax, the quality of listed firms may go down and Hong Kong’s reputation as a fund raising hub hurt, but if regulation is too strict, companies may simply list elsewhere. Photo: Reuters

When regulations hinder legitimate business

Hong Kong’s Securities and Futures Commission and Hong Kong Exchanges and Clearing are holding a public consultation on reforming listings regulation.

It is partly a question of who decides which companies can list on the market.

Should HKEx be involved – as it is at the moment – or should the process be more independent?

But ultimately it is about how much regulation is ideal.  It is a question of quantity versus quality.

If there is too little regulation, more – possibly poorer quality – companies will be able to list here.

Market participants might have the chance to make more money from initial public offerings. But Hong Kong’s reputation among issuers and investors could be damaged.

If the regulation is too strict, companies might be tempted to list on exchanges in other countries, and our role as a capital-raising center could decline.

In theory, tight regulation of financial markets should be a good thing. But experience shows that it can backfire and lead to unintended consequences.

For example, take another controversy in Hong Kong at the moment: banks turning away customers – notably newly formed smaller companies wanting corporate accounts.

Several major local banks have come under intense criticism from chambers of commerce and within government because of this.

Yet it is not fair to simply blame the banks. Overseas and local jurisdictions have far-reaching regulations designed to prevent banks from servicing illegal terrorist or drugs funds.

In Hong Kong, the Monetary Authority has the task of strictly monitoring banks for any signs of money-laundering.

These regulations are well-intentioned. But in some cases banks face serious penalties for non-compliance – such as criminal charges or huge fines.

The regulators themselves tend to play safe in order to protect themselves in case something goes wrong.

The result is that everyone wants to avoid risks and does not want to leave anything to chance.

It is not so surprising that banking staff are cautious about new clients.

The amount of work involved in background checks to comply with “know your customer” guidelines could take so long that is simply not worth the time or cost in man-hours.

Turning a new customer away might actually be good business.

A similar, if less well-known, situation exists with something called PEPs – politically exposed persons.

The concept comes from the Financial Action Task Force on Money Laundering – an international arrangement.

It essentially means that senior government officials, judicial personnel, military officers, state-owned enterprise executives and various other people are all regarded as potentially higher risks in terms of involvement in bribery or corruption. It also covers such people’s families.

You can see where this came from. A lot of Asian, African and other dictators and their families and friends embezzled billions in the past.

This system helps fight such evils. But it applies to a very broad range of people – including me, as a National People’s Congress deputy.

Due diligence can be so time-consuming, that some institutions find it easier to close an account than go through the lengthy checklist.

In a globalized world where money can move anywhere electronically in seconds, cross-border regulation is inevitable.

For example, the US Foreign Account Tax Compliance Act (FATCA) is national legislation but applies to non-US financial institutions, requiring them to report details about their clients who are American.

The penalties for non-compliance are so harsh that some non-US financial service providers turn away American customers – the risk isn’t worth it.

Increasingly, the international community is taking multilateral action to fight tax evasion across borders – the OECD Convention to Fight Tax Avoidance is an example of this.

Fears of lax regulation in offshore financial centers are encouraging more efforts of this sort.

Everyone who wants healthy financial markets would agree that we need regulation of stock market listings, and of institutions’ involvement in potentially dangerous activities like the creation and trading of certain derivatives.

And anyone who is law-abiding agrees that we need to fight tax evasion, money-laundering, recycling of drugs money and funding for terrorists.

Yet we are running into some very real problems where the regulations have unintended, negative consequences – and even prevent or hinder legitimate business.

The strangest thing of all is that it is no-one’s fault.

That does not mean we have to accept it and not try to make improvements.

– Contact us at [email protected]


Executive Council member and former legislator; Hong Kong delegate to the National People’s Congress

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