LC Paper No. CB(1)87/99-00
(These minutes have been
seen by the Administration)
Bills Committee on
Securities (Amendment) Bill 1998
Minutes of meeting held on
Wednesday, 23 September 1998, at 8:30 am
in Conference Room A of the Legislative Council Building
Members present :
Hon Ronald ARCULLI, JP (Chairman)
Hon Albert HO Chun-yan
Hon Margaret NG
Hon CHAN Kam-lam
Hon LEUNG Yiu-chung
Hon SIN Chung-kai
Hon Jasper TSANG Yok-sing, JP
Hon TAM Yiu-chung, JP
Members absent :
Hon Cyd HO Sau-lan
Dr Hon Raymond HO Chung-tai, JP
Hon Bernard CHAN
Dr Hon Philip WONG Yu-hong
Hon Ambrose LAU Hon-chuen, JP
Public officers attending :
Attendance by invitation :
- Mr Bryan CHAN
- Principal Assistant Secretary for Financial Services
- Mr Wallace LAU
- Assistant Secretary for Financial Services
- Ms Monica LAW
- Acting Senior Assistant Law Draftsman
Clerk in attendance :
- Securities and Futures Commission
- Mr Gerald GREINER
- Senior Director
- Mr John LUFF
- Senior Counsel
- Representatives of claimants of C.A. Pacific Securities Ltd., Forluxe Securities Ltd., and Chark Fung Securities Ltd.
- Mr WONG Tse-cheong
- Mr CHAN Kam-tim
- Miss WU Siu-wah
Staff in attendance :
- Miss Odelia LEUNG
- Chief Assistant Secretary (1)1
I Meeting with representatives of claimants of C.A. Pacific Securities Ltd., Forluxe Securities Ltd., and Chark Fung Securities Ltd.
- Mr KAU Kin-wah
- Assistant Legal Adviser 6
- Ms Connie SZETO
- Senior Assistant Secretary (1)1
(Two submissions tabled at the meeting and subsequently issued vide LC Paper No. CB(1)234/98-99)
Representatives of claimants of CA Pacific Securities Ltd., Forluxe Securities Ltd., and Chark Fung Securities Ltd., presented their written submissions on the Securities (Amendment) Bill 1998 (the Bill). They highlighted the following points -
II Meeting with the Administration
- The Bill only aimed to effect the compensation arrangement for claimants of C.A. Pacific Group. It was uncertain whether the proposed arrangement would apply to affected investors of other known default cases of brokers;
- the proposed compensation arrangement which introduced a per claimant compensation limit of $150,000 in addition to the existing $8 million statutory limit applied on a defaulting broker basis would not offer sufficient compensation. Claimants with large amounts would be unfairly unprejudiced. The level of compensation should be linked to the loss suffered by claimants;
- the amount of monies which the Securities and Future Commission (SFC) recovered through subrogation of the claimants' rights against the defaulting broker under the liquidation process should be fully recycled and distributed to claimants. The monies recovered for recycling should not be capped to the first $8 million as proposed in the Bill;
- the Bill would empower the Stock Exchange of Hong Kong (SEHK) to determine the level of discretionary compensation in each case. This would create uncertainty as to how SEHK would exercise this power. It would be advisable to set up an independent body to oversee compensation matters;
- clients of margin accounts who had been misled to open margin accounts should be eligible for compensation; and
- the Government should make reference to the compensation arrangement of the 1987 stock market crisis under which full compensation totalling $2 billion was provided to affected investors and the amount was later recouped from securities transaction levies.
(LC Paper No. CB(1)225/98-99(01))
Eligibility for compensation
2. On the eligibility of compensation for margin clients, Mr Albert HO opined that as these clients might have been misrepresented in opening margin accounts without their consent, their claims should be allowed.
3. The Principal Assistant Secretary for Financial Services (PAS/FS) stressed that the Bill aimed to give effect to the necessary legislative changes to implement the compensation arrangement for C. A. Pacific clients announced in January 1998. Pursuant to the announced principle for compensation, cash clients and clients who had signed margin agreements with C.A. Pacific Finance but had not used the margin facilities for the period from June 1997 to 19 January 1998 would generally be eligible for compensation. Other claims received by SEHK would be carefully verified and assessed to determine whether they were eligible for compensation. As regards the concern about the compensation arrangements for clients of other defaulting brokers, PAS/FS re-iterated that the Compensation Committee of SEHK would decide on a case-by-case basis having regard to the circumstances of the default and taking into account all ascertained and contingent liabilities of the United Exchange Compensation Fund (the Fund). The Senior Director, SFC (SD/SFC) supplemented that claimants might appeal to the court under section 115 of the Securities Ordinances (SO) (Cap.333) if their claims had been disallowed or only partially allowed by SEHK. Upon members' request, PAS/FS undertook to provide information on the different types of claims made and the respective amount involved in relation to C.A. Pacific, Forluxe and Chark Fung incidents.
(Post-meeting note : The Administration provided the information vide LC Paper No. CB(1)283/98-99(01).)
4. Some members remained concerned that without an express provision in the Bill specifying the per claimant compensation limit of $150,000, there would be uncertainty regarding the level of discretionary payment. They observed that the per claimant limit was expressly provided in the compensation schemes in other stock markets.
5. In response, PAS/FS said that the Administration considered it inappropriate to stipulate a definite amount of compensation in the law, be it the minimum or the maximum compensation amount, as this would limit the flexibility of SEHK in determining the level of discretionary payment and might not be conducive to the interest of the claimants at large. The Government legal advice as set out in the information paper had also confirmed that an amendment to the Bill to provide for a maximum payment level exceeding $150,000 would have charging effect on the Government. Although the per claimant compensation limit was not stipulated in the Bill, he assured members that the compensation arrangement would have to be endorsed by the Council of SEHK and made known to the public. There should not be any doubt on the SEHK's commitment in implementing the arrangement. As regards the compensation systems in other stock markets, while an upper limit per claimant was adopted by the United States, the United Kingdom and Australia, the determination of those limits would have taken into account the domestic market structure, case history, the consequent liabilities of the compensation arrangements, the financial resources, and above all, the balance between protection for investors and the risk of moral hazard. Such market-wide considerations were not addressed by the current Bill as its prime objective was to provide the legal basis for making compensation for a specific default case.
6. Some members were concerned about the checks and balances on SEHK's power in determining the level of compensation and a possible conflict of interest on the part of SEHK in exercising such power. They suggested that section 121A of SO be amended to enable SFC to exercise the power of the Chairman of the SEHK if the latter proposed amount of compensation unacceptable to the SFC.
7. PAS/FS explained that the proposed section 113(5A) laid down the considerations which the Compensation Committee of SEHK should take into account in making the discretionary payments and required SEHK to seek SFC's prior approval in this respect. In addition, section 51 of the Securities and Futures Commission Ordinance (SFCO) (Cap. 24) empowered SFC to give directives to SEHK when the former was satisfied that it was in the interest of the investing public or in the public interest to do so. Nonetheless, the Administration would consider members' suggestion to amend section 121A of SO and would discuss this further with SEHK.
(Post-meeting note : The draft Committee Stage Amendment was issued vide Annex C of LC Paper No. CB(1)283/98-99(01).)
8. As regards the concern about possible role conflict on the part of SEHK, SD/SFC said that notwithstanding that there were no SFC representatives sitting on the Compensation Committee of SEHK, the Committee did include, besides SEHK members, independent members of SEHK Council. The Committee had all along processed and determined claims fairly. PAS/FS supplemented that SFC would issue a consultation paper on new investor compensation arrangements for Hong Kong by the end of September 1998. The subject of the overhaul of the compensation mechanism, including the introduction of a per claimant compensation limit and source of funding for the compensation scheme, would be addressed in the consultation paper.
Clause by clause examination of the Bill
9. Members noted that this clause sought to exclude the discretionary payments made under the proposed section 113(5A) from the calculation of the statutory compensation limit of $8 million so that the new per claimant compensation limit would be implemented in addition to the existing per broker compensation arrangement.
10. Members also noted that under section 118 of SO, SFC's subrogation right preceded the right of claimants in insolvency distribution under the liquidation proceedings and that clause 4 limited the amount of monies SFC recovered through subrogation of the claimants' rights for recycling (i.e. distributed to claimants) up to $8 million. Monies exceeding this limit would be returned to the Fund.
11. Mr Albert HO was of the view that for the sake of equity, the claimant and SFC should be accorded equal priority in insolvency distribution. Since the assets of a defaulting broker available for distribution in the liquidation process were always limited upon exhaustion of the subrogation right of SFC, there might be no more assets left for distribution to the claimants.
12. PAS/FS said that the proposed arrangement would ensure that the claimants would not receive from both the Fund and the liquidation process more than the amount that they were entitled to as monies recovered from liquidation through subrogation would be recycled and distributed equitably to meet any allowed claims which had not been fully met. This arrangement would also preserve the prerogative of the Fund over its resources. If the ceiling of monies for recycling was not prescribed, all recoveries might be exhausted and this might have serious implications on the financial position of the Fund.
13. In order to facilitate members in understanding the proposed compensation arrangement involving complicated issues, such as apportionment of the $8 million among claimants, the subrogation right and the multiple recycling processes of the monies recovered from liquidation, the Administration undertook to provide examples to illustrate the operation of the proposed arrangement.
(Post-meeting note : The information was conveyed to members vide Annex A of LC Paper No. CB(1)283/98-99(01).)
14. Members agreed to hold the next meeting on 7 October 1998, at 8:30 am, to continue discussion on the Bill.
III Any other business
15. There being no other business, the meeting ended at 10:30 am.
Legislative Council Secretariat
9 October 1999