LC Paper No. CB(1) 212/98-99
(These minutes have been seen
by the Administration)

Ref : CB1/PL/FA/1

Legislative Council
Panel on Financial Affairs

Minutes of Special Meeting held on
Thursday, 23 July 1998, at 8:30 am
in the Chamber of the Legislative Council Building

Members present :

Hon Ambrose LAU Hon-chuen, JP (Chairman)
Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon David CHU Yu-lin
Hon Cyd HO Sau-lan
Hon Albert HO Chun-yan
Dr Hon David LI Kwok-po, JP
Hon NG Leung-sing
Hon Margaret NG
Hon Ronald ARCULLI, JP
Hon James TO Kun-sun
Hon CHEUNG Man-kwong
Hon HUI Cheung-ching
Hon Bernard CHAN
Hon Jasper TSANG Yok-sing, JP
Hon CHIM Pui-chung

Members attending :

Hon Martin LEE Chu-ming, SC, JP
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon LEUNG Yiu-chung

Members absent :

Hon Ambrose CHEUNG Wing-sum, JP
Hon SIN Chung-kai
Dr Hon Philip WONG Yu-hong
Hon Timothy FOK Tsun-ting, JP

Public officers attending :

Mr Rafael S Y HUI, GBS, JP
Secretary for Financial Services

Mrs Rebecca LAI, JP
Deputy Secretary for Financial Services

Mr Bryan P K CHAN
Principal Assistant Secretary for Financial Services

Mr Anthony NEOH
Chairman, Securities and Futures Commission

Mr Gerald Greiner
Senior Director, Securities and Futures Commission

Mr Alec TSUI
Chief Executive, Stock Exchange of Hong Kong

Mr Lawrence WONG
Deputy Law Officer (Civil Law) (Commercial)
Department of Justice

Clerk in attendance :

Ms Estella CHAN,
Chief Assistant Secretary (1)4

Staff in attendance :

Mr KAU Kin-wah,
Assistant Legal Adviser 6

Mr Daniel HUI,
Senior Assistant Secretary (1) 5

Mr Andy LAU,
Senior Assistant Secretary (1) 6

I Proposed legislative amendments to Unified Exchange Compensation Fund
(LegCo Brief - Ref:SU B51/98(IV) )

Introducing the Legislative Council Brief on the Securities (Amendment) Bill 1998, the Deputy Secretary for Financial Services (DS/FS) said that the main crux of the Bil was to amend Part X of the Securities Ordinance (Cap 333) on provisions related to the Unified Exchange Compensation Fund (UECF) to enable implementation of the compensation scheme for investors affected by the collapse of the C.A. Pacific Securities and its affiliated finance company in January 1998. The compensation scheme had been announced in the joint press release issued by the Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong (SEHK) on 10 June 1998. The proposed legislative amendments aimed to enable:

  1. the contribution of funds by the SFC from its reserve to UECF;

  2. the introduction of a per claimant compensation limit in addition to the $8 million statutory limit that applied on a defaulting broker basis; and

  3. the making of payments as soon as the claims in question had been verified and allowed, without waiting for the completion of the verification exercise and apportionment for all the claims, which might take a long time.

2. DS/FS further advised that under existing section 118 of the Ordinance, on making a payment out of the compensation fund to a claimant, the SFC would be subrogated up to that payment to the claimant's rights and remedies against the defaulting broker under the liquidation process. Money so recovered by the SFC might be recycled to meet any allowed claims which had not been fully compensated. The proposed legislative amendments would cap the recycling process to the first $8 million recovered through subrogation rights surrendered to SFC. The proposed amendments would also clarify that claims to which discretionary payments had been made would be considered absolutely discharged even if the claimant did not receive any further payment under the apportionment process under section 120(2). As regards the legislative timetable, she advised that after its gazettal on 24 July 1998, the Bill would be introduced into the Council on 29 July 1998. The proposed legislative amendments were intended to take effect with respect to claims made pursuant to relevant notices made under section 112 on or after 27 January 1998.

3. The Chief Executive/Stock Exchange of Hong Kong (CE/SEHK) made the following clarifications in respect of the information contained in the LegCo Brief:

  1. SEHK members had contributed a total of $46 million to UECF, not $15 million as mentioned in paragraph 6 of the Brief;

  2. the total amount of claims of $2,412 million mentioned in paragraph 8 had been adjusted in accordance with the closing price of shares as at 19 January 1998; and

  3. on the current resources of UECF mentioned in paragraph 20, Council of the SEHK had already approved to contribute $150 million to UECF.

4. Some members queried the basis for setting a per claimant compensation limit of $150,000, which was less than the $200,000 mentioned by the Chairman of SFC on previous occasions. The Chairman of Securities and Futures Commission (C/SFC) clarified that he had on some previous occasions mentioned that he hoped to be able to achieve a per claimant compensation limit of $200,000 but the actual figure would have to depend on the size of the claims and the amount of compensation fund available. After reviewing the claims received and cross checking with the provisional liquidator the books and records of the C.A. Pacific Group, SEHK had endorsed a compensation limit of $150,000 per claimant, by which about 70% of claimants would be fully compensated. SFC accepted SEHK's recommendation based on the consideration that the recommendation had struck a reasonable balance among the interests of the parties concerned and the need to preserve a prudential level of the UECF, as well as the need to protect small investors.

5. As regards a member's question on the reason for fully compensating only 70% but not 80% of claimants, the Secretary for Financial Services (SFS) explained that a line had to be drawn on the basis of total amount of claims received, their distribution in terms of the size of individual claims and the amount of compensation fund available. However, the Administration's policy was that investors had to bear some of the consequences of their decision, otherwise there would be risk of a moral hazard. Hence, the policy had never been to guarantee full compensation to affected clients.

6. Noting that SEHK members had to contribute to UECF, members were concerned about a possible conflict of interest arising from section 113 of the Ordinance, under which SEHK had the authority to determine the upper limit of compensation on a per claimant basis. In response, CE/SEHK advised that conflict of interest should not be a problem because SEHK members' contribution of $46 million only made up a small portion of UECF, which amounted to about $400 million in total. Moreover, the Compensation Committee of SEHK included lay Council Members who were independent third parties.

7. As regards compensation to investors whose losses exceeded $150,000, C/SFC explained that apart from compensation payment from UECF, all clients of the C.A. Pacific Group were eligible to make claims for their losses under the liquidation process over and above the payment from UECF. The SFC as trustee for UECF was subrogated to the claimants' rights in the liquidation to the extent of its compensation payment. Therefore, in case a claimant's entitlement to the insolvency distribution exceeded $150,000, the claimant would receive an amount of insolvency distribution being the difference between the total insolvency distribution for that claimant and $150,000. DS/FS added that as far as compensation payment under UECF was concerned, no claimant would receive less than what he or she would have received under the original provisions of the Ordinance, but smaller claims, which constituted the majority of the claims received, would receive significantly more from the proposed compensation arrangement.

8. With respect to members' concern about a long term solution for investors' protection, C/SFC advised that SFC was exploring the feasibility of a compensation scheme that constitutes an insurance element. The Commission hoped to issue a consultation paper on its proposal by mid-September 1998.

9. On subrogation to SFC of the claimants' rights in the liquidation to the amount of the compensation payment made, some members suggested that it would be more equitable for the claimant and SFC to be accorded equal priority to the insolvency distribution arising from the liquidation proceeding than according higher priority to SFC's subrogation right. In response, SFS advised that the subrogation arrangements were statutory requirement for recovering compensation paid out from the UECF so as to ensure it was maintained above a prudential level. In the C.A. Pacific case, consideration had been given to the special circumstances at the time, including the particularly weak confidence of investors, the number of investors affected and the special external factors then prevailing, and as a result, the Administration considered it desirable to introduce additional flexibilities to the existing compensation mechanism in handling this case. Nevertheless, the principle behind the existing legislation would be maintained. Meanwhile, the Administration had completed a Report on Financial Market Review, in which recommendations on improving the monitoring and transparency of the financial market had been made. These recommendations aimed to provide a long term solution to various problems related to the financial market as revealed in the financial turmoil of last October.

10. Members enquired about the Administration's policy in handling compensation cases in respect of the other few stock broker firms which had collapsed after the C.A. Pacific incident. SFS advised that he could not offer any comment at this stage as the SEHK was still receiving submissions of claims by affected investors in the cases concerned.

11. A member noted that the proposed legislative amendments were intended to take retrospective effect as from 27 January 1998 and enquired whether the Administration was aware in January 1998 that legislative amendments were necessary before additional flexibilities could be introduced into the existing compensation mechanism. SFS confirmed that the Administration had not received any legal advice in January 1998 which had suggested that legislative amendments were required. However, subsequent legal advice indicated that it would take a long time to implement the proposed compensation arrangement if the law were not changed.

12. Some members expressed concern about the time gap between the announcement of the compensation scheme in January 1998 and the introduction of legislative amendments in July 1998. SFS and DS/FS advised that after announcement of the compensation scheme in end January 1998, investors were given a 3-month statutory period to submit claims. In parallel, SFC started seeking legal advice on whether legislative amendments would be required to implement the compensation scheme. Pending a confirmative legal advice, the Administration had already requested the SFC to prepare for the legislative amendments to avoid any delay caused to the compensation process. In May 1998, the need for legislative amendment was confirmed and the drafting of legislative amendments had taken longer time to complete due to in some instances conflicting legal opinion among different parties involved. They however assured members that there was no delay in the process of preparing the proposed legislative amendments.

13. As to what the Administration would do if Members proposed amendments to the Bill or if the Bill was not passed by the Council, SFS said that he could not speculate on Members' decision at this stage. He hoped that Members would discuss their views thoroughly with the Administration in the Bills Committee should one be set up to examine the Bill.

14. The Chairman concluded the briefing and said that follow-up issues could be pursued in the Bills Committee to be set up on the Bill.

II Any other business

15. There being no other business, the meeting ended at 9:45 am.

Legislative Council Secretariat
17 September 1998