For discussion on
5 July 1999



Securities and Futures Bill 1999


The Financial Secretary announced a major overhaul of the legislation governing the securities and futures markets of Hong Kong in his 1999-2000 Budget Speech. This paper outlines the major proposals to be enshrined in the composite Securities and Futures Bill ("the composite Bill") earmarked for introduction into the Legislative Council by end 1999.


The Guiding Principle

2. Under Article 109 of the Basic Law, the Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre. The international character of Hong Kong necessitates a modern, flexible securities and futures regulatory framework that will enable Hong Kong to compete effectively. The framework should therefore be able to provide optimal market regulation and afford sufficient protection for investors, while at the same time encourage, not stifle, healthy competition and market innovations.

Scope of the Reform

3. The Securities and Futures Commission (SFC) currently administers the following nine ordinances governing the securities and futures markets -

  1. Securities and Futures Commission Ordinance (SFCO) (Cap. 24) (enacted 1989)

  2. Securities Ordinance (SO) (Cap. 333) (enacted 1974)

  3. Commodities Trading Ordinance (CTO) (Cap. 250) (enacted 1976)

  4. Protection of Investors Ordinance (PIO) (Cap. 335) (enacted 1974)

  5. Stock Exchanges Unification Ordinance (SEUO) (Cap. 361) (enacted 1981)

  6. Securities (Insider Dealing) Ordinance (S(ID)O) (Cap. 395) (enacted 1991)

  7. Securities (Disclosure of Interests) Ordinance (S(DI)O) (Cap. 396) (enacted 1991)

  8. Securities and Futures (Clearing Houses) Ordinance (SF(CH)O) (Cap. 420) (enacted 1992)

  9. Leveraged Foreign Exchange Trading Ordinance (LFETO) (Cap. 451) (enacted 1994)
4. Some of the provisions in the above ordinances were enacted over 20 years ago and contain outdated definitions and concepts. Over the years, new financial instruments and practices have greatly increased the diversity as well as complexity of the financial landscape far beyond those envisaged in those provisions. This creates gaps in the legal framework, rendering certain regulatory approaches no longer effective or appropriate. There is an urgent need to modernise and consolidate the regulatory framework under which our securities and futures industry can remain competitive.

5. The legislative reform will be built upon an earlier draft of the Securities and Futures Bill prepared by the SFC which seeks to consolidate and update the above nine ordinances. The draft was exposed to the public as a consultation document for comments in 1996. Under the current reform, new elements will be added to the composite Bill, including those announced by the Financial Secretary in his Budget Speech, i.e. clearer regulatory objectives and more effective supervisory and investigative powers for the SFC; the introduction of an independent Market Misconduct Tribunal; new regulation on internet trading; and a streamlined licensing regime for market intermediaries. In addition, we propose to introduce new checks and balances, including a Securities and Futures Appeals Tribunal and a Process Review Panel. The details are set out in paragraphs 43 to 51 below. Meanwhile, the demutualisation and merger of the exchanges and clearing houses will require separate enabling legislation. This is being pursued in parallel with the composite Bill.


Clearer Regulatory Objectives for the SFC

6. There is a growing international consensus among market regulators on the need for promulgating clear objectives of regulation so as to clarify the role of the regulator and increase its transparency and accountability to the public.

7. In October 1998, members of the International Organization of Securities Commissions ("IOSCO") agreed that the core objectives of securities regulation are -

  1. the protection of investors;

  2. ensuring that markets are fair, efficient and transparent; and

  3. the reduction of systemic risks.
8. In addition, IOSCO emphasized as a principle of securities regulation that the responsibilities of the regulator should be clear and preferably set out by law, and that the regulator's exercise of powers and discharge of functions should be comprehensible and transparent to the public.

9. In accordance with the recommendation of IOSCO, the composite Bill will set out clearly the regulatory objectives of the SFC, which are not being provided for in the existing SFCO (Cap. 24). In maintaining Hong Kong's competitiveness as an international financial centre, the SFC should be charged with the following regulatory objectives -

  1. to maintain and promote fair, efficient, transparent and orderly securities, futures and other related financial markets;

  2. to promote public confidence in and understanding of the financial system; and to secure the appropriate degree of protection for members of the investing public;

  3. to minimize crime and misconduct in the securities, futures and other related financial markets;

  4. to reduce systemic risks in the securities, futures and other related financial market; and

  5. to assist the Government in maintaining the stability and integrity of the monetary and financial systems in Hong Kong.
More Effective Supervisory and Investigatory Powers

10. In order to maintain and enhance the integrity of the securities and futures markets for investors, the SFC needs to have the necessary powers to conduct effective investigations into suspected market misconduct, as well as a range of supervisory powers which enable the SFC to deal proportionately with different circumstances. The composite Bill will seek to close gaps in the existing law which prevent the SFC from discharging its supervisory and investigatory duties effectively, while maintaining necessary safeguards against unnecessary and undue intrusion into the affairs of firms and individuals.

Preliminary Inquiry of Misconduct in the Management of a Listed Company

11. Under the existing law, the SFC may seek the production of books and records when it has reasons to suspect fraud, misfeasance, or other misconduct in the management of a listed company. The SFC, however, has a limited ability to place the entries in the books and records in any meaningful context or to check the veracity of these entries.

12. To rectify these problems, the composite Bill will explicitly provide that the SFC may -

  1. ask for an explanation as to the circumstances, reasons and instructions for the making of an entry in the books and records;

  2. make enquiries of parties with which the listed company purports to have contractual relationships, so that the veracity of the information in the books and records could be confirmed;

  3. have access to the working papers of the auditors of the listed company, which could contain helpful information that is not otherwise available or that could curtail the need of further inquiry. It should be stressed that this power is not aimed at assessing the quality of audit work performed. Furthermore, to exercise this power, the SFC must first certify in writing to the auditors that it has initiated an inquiry into the management of the listed company. Overseas regulators such as those of the United States, the UK and Australia can also obtain auditors' papers to the extent that they are relevant to an investigation within their legal jurisdictions; and

  4. have access to the banking records of the listed company. This power is available in the current law, but unclear wording has impeded its use. To exercise this power, the SFC must first certify in writing to the bank that it has initiated an inquiry into the management of the listed company and that the banking records are relevant to the inquiry.
Disciplinary Inquiries into Market Intermediaries

13. The existing law provides that before the SFC commences disciplinary proceedings against any market intermediary for suspected improper conduct, it shall first conduct an inquiry specifically for such purpose. In practice, however, improper conduct may be identified in the course of other investigations or inspections, and a separate inquiry may be unnecessary. In addition, a disciplinary inquiry under the existing law depends on the voluntary cooperation of the intermediary and other persons with information relevant to the inquiry. Such co-operation might not necessarily be forthcoming.

14. The composite Bill will streamline the disciplinary process by no longer making an inquiry a prerequisite. Procedural requirements on the SFC, however, will continue to apply throughout the course of the disciplinary process. Thus the SFC must:

  1. give the intermediary written notice of its intention to begin the process, with relevant facts clearly stated;

  2. afford the intermediary an opportunity to present its case; and

  3. give the intermediary written notice of its decision, with relevant reasons and reasoning clearly stated.
As for circumstances that warrant an inquiry, the SFC will have the necessary powers under the Bill to compel production of information, explanations or answers to specific questions.

More Proportionate Disciplinary Sanctions

15. At present, the SFC has the statutory power to impose certain sanctions on a market intermediary when it fails to conduct its business in a proper manner. The sanctions available to the SFC are public or private reprimands and suspension or revocation of the intermediary's registration.

16. These sanctions are not always appropriate. For example, a public reprimand may not sufficiently punish an intermediary for its improper conduct or adequately deter similar acts in the future. Yet suspending or revoking an intermediary's registration might cause disproportionate harm to third parties, such as customers, employees, shareholders, and counter-parties. Intermediate options are therefore needed so that the SFC can in a particular instance set sanctions more appropriate for the improper conduct committed. To this end, the composite Bill will introduce two new sanctions -

  1. Civil fines. This is in line with the generally accepted practice in several leading overseas jurisdictions including the United States.

  2. Suspension of part of the business of an intermediary. This will give the SFC greater flexibility in imposing a suspension, so as to target the specific area of an intermediary's business in which improper conduct has occurred as well as to minimise any incidental effects on third parties.
Streamlined Licensing Regime of Market Intermediaries

17. The ambit of the existing licensing regime was first conceptualized in early 1970s. In essence, it seeks to categorize practitioners in the securities and futures markets into dealers and advisers by reference to their business functions. Many of the legislative provisions relating to licensing matters have remained largely unchanged over the years.

18. In recent years, innovation and growing sophistication in the financial markets have blurred the lines between traditionally separate categories of products. Many market intermediaries now need to simultaneously deal in and advise on securities, futures and foreign exchange, as well as other investment products. Some large intermediaries provide proprietary trading and settlement services to their clients. There have also been significant changes in the way in which intermediaries deliver services. All these changes have suggested the need for a review of the existing licensing regime in order to maintain Hong Kong's position as a leading financial centre.

19. The SFC initiated a comprehensive review of the licensing regime in late 1998. In conducting the review, the SFC is mindful of the regulatory objectives of investor protection, and the demand from industry participants for a cost effective and flexible licensing structure. The SFC has scheduled to publish the results of the review in late June for public consultation. The major recommendations include -

  1. a single licence will be issued to each market intermediary, specifying the scope of permitted business. This approach will remove the requirement to obtain different licences for different activities (i.e. dealing and advisory activities) and products (i.e. securities, futures and leveraged foreign exchange) in the present multiple-registrations regime. The cost and administrative burdens to both the licensees and the SFC will therefore be reduced. This single licence concept should not affect the right of existing licencees as all of them will be allowed to continue performing regulated activities under their existing registrations for two years. Before the end of the two years, each licensee should apply for grandfathering their active activities under the new system;

  2. all senior staff who are able to exercise a significant influence over the conduct of licensed entities, as well as those who are directly responsible for the management and supervision of the operations of a licensed corporation, including all executive directors, need to be licensed and designated as responsible officers;

  3. licensed status will be limited to corporate entities, with transitional arrangements for existing sole proprietorships and partnerships to incorporate in two years;

  4. as at present, persons who act as principals and deal solely with professionals will not be required to apply for a licence, but they will be required to notify the SFC of their existence and be subject to certain reporting and Code of Conduct requirements that are essential to the maintenance of a transparent, fair and orderly market (i.e. honesty and fairness, diligence capabilities, conflicts of interest and compliance); and

  5. exempt dealer status will be limited to "authorised institutions" (i.e. banks and other deposit-taking companies regulated by the Hong Kong Monetary Authority), and such exempt persons will be subject to the SFC's power of inquiry into their compliance with law, the terms and conditions of exemption, and their fitness and properness in having the exempt status.
Regulation of Automated Trading Facilities

20. Advances in information technology and the demands of increasingly sophisticated investors are spurring a diverse array of automated trading facilities. Trading in securities and futures nowadays can be done through computer connections and in "cyberspace" via the Internet. Such facilities are also referred to as electronic communications networks or automated trading systems (ATSs). Some of these facilities operate much like a broker or dealer; others are not at all similar to any traditional intermediaries. The experience of the SFC, in line with that of the leading jurisdictions, is that there is no single set of rules appropriate for the whole range of facilities and services on offer.

21. The activities and services of ATSs have to be subject to proper regulatory supervision. However, the existing law only defines market as a physical place and does not cover all automated trading. The composite Bill will therefore no longer define "market" by reference to a physical location and will make it clear that any unauthorized provision of a facility for bringing together buyers and sellers on a regular basis constitutes an illegal securities and futures market operation. It will ensure that the SFC will have a sufficient range of powers to facilitate and regulate these trading facilities.

22. The particular characteristics of a facility will determine how it is to be regulated so that its operation is fair, efficient, as well as transparent, and that its risks are properly managed. The SFC will work with members of the industry and other professionals on setting guidelines for potential applicants who wish to offer such services.

Establishment of Market Misconduct Tribunal

23. In order to maintain the reputation of a market, effective enforcement action needs to be taken against market manipulation and other market misconduct. Such activities are prescribed in the existing law. However, experience demonstrates that investigating such conduct with a view to criminal prosecution is fraught with difficulties. Sophisticated practices and techniques in such conduct can make it extremely difficult to obtain sufficient evidence to prove matters to the criminal standard of "beyond reasonable doubt".

24. One form of market misconduct is "insider dealing". This is addressed by the Insider Dealing Tribunal (IDT) established under the S(ID)O. The IDT has proven to be effective in dealing with a sophisticated form of market misconduct. This success is based primarily on IDT's ability to conduct its own inquiries and to hear the matter on the basis of civil, rather than criminal, proceedings. Proceedings before the IDT, are designed to seek the truth and allow for lower, civil burden of proof i.e. "balance of probabilities". The IDT's ability to investigate and supplement evidence during the course of proceedings not only simplifies its task in determining if insider dealing has occurred but also increases the likelihood of a success prosecution.

25. We propose to build on the success in tackling insider dealing by expanding the role of the IDT to cover also other forms of market misconduct that affects the market as a whole. The new tribunal would be called the Market Misconduct Tribunal (MMT)

Market Misconduct

26. The composite Bill will prohibit activities which constitute market misconduct -

  1. creation of a false and misleading appearance of active trading, or with respect to the market for or the price of dealings in securities or futures contracts;

  2. creation of a false and misleading appearance of active trading by the use of wash sales (i.e. a person, or his associates offering to buy and sell securities at the same price);

  3. maintaining, increasing, reducing or causing fluctuations in the price of securities by wash sales or in the price of securities and futures contracts by fictitious transactions or devices;

  4. dissemination of information about illegal transactions in securities or futures contracts by a person who, or whose associate has, engaged in illegal transactions or has received, or expects, a benefit as a result of the dissemination;

  5. carrying out a transaction or transactions that increase, reduce or stabilise prices with the intention of inducing others to sell, purchase, subscribe for or to refrain from selling or purchasing or subscribing for securities;

  6. dissemination of false or misleading information that may induce the sale or purchase of securities, or induce persons to deal in futures contracts or raise, or lower, or stabilise the market price for securities, or for dealing in futures contracts;

  7. in a transaction in securities or futures contracts, fraud or deceit of a particular person, fraudulent or deceptive conduct and making of an untrue and misleading statement without an honest and reasonable belief that it is true; and

  8. bucketting of futures contracts.
27. The prohibitions outlined in paragraphs (a) to (f) above will be dealt with civilly by a MMT with the perpetrators being subject to pecuniary sanctions as outlined in paragraph 31 below. The prohibitions detailed at paragraphs (g) to (h) carry an element of fraud and, unlike the other contraventions, have clearly identifiable victims. They will remain as criminal offences and will be outside the purview of the MMT.

Operation of the MMT

28. The MMT would model largely on the IDT. It would be chaired by a Judge or Deputy Judge of the High Court, assisted by two market practitioners, who would be appointed for a particular hearing by the Chief Executive. It is envisaged that MMT would subsume the work of the present IDT. The Financial Secretary would be able to initiate proceedings before the Tribunal into whether or not other types of market misconduct as detailed in paragraphs 26(a) to (f) has, or may have taken place.

29. To facilitate proceedings, the future MMT will have a Tribunal Officer to be appointed by the Secretary for Justice. This Tribunal Officer will present the case to the Tribunal and initiate such further inquiries as he considers necessary.

30. The proposed MMT will have financial implications on the Government and the Judiciary and details will be worked out after the establishment of the MMT has been finalized.

Penalties to be imposed by the MMT

31. The MMT would not have jurisdiction to impose criminal penalties. It may make orders disqualifying a person implicated in market misconduct from acting as a director or officer of a corporation for a period of 5 years. In addition, it may order a person to pay, as a pecuniary penalty, the greater of an amount:

  1. not exceeding $10,000,000; or

  2. not exceeding three times the amount of profit gained or loss avoided by the person as a result of his misconduct.
32. The current IDT only has the power set out in (b). The additional sanction at (a) is intended to cater for cases of market misconduct in which it may not be possible to identify the profit gained or loss avoided whilst the conduct involved had caused damage to the market. This should provide a further deterrent to those contemplating market abuse.

Statutory Backing for Listing Rules and Liability for Misstatements

33. The observance by listed companies of their obligations imposed by the stock exchange governing their listings and the accuracy and completeness of disclosures are important elements of a successful securities market. Experience in the Hong Kong market in recent years shows that the enforcement of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules"), and the quality of disclosures as required under the Listing Rules and the Hong Kong Code on Takeovers and Mergers ("The Takeovers Code") need to be strengthened. Conduct in violation of these rules and poor quality disclosure harm investor interests, undermine the integrity of our market and must be discouraged.

34. As mentioned in the Report on Financial Market Review published in April 1998, the SFC embarked some time ago on a study to put more 'teeth' in the Listing Rules. In considering ways to strengthen the enforcement of the Listing Rules, we are mindful of the need to ensure that they should be market oriented and should be flexible to allow for market growth and innovation. Accordingly, the composite Bill will not alter the non-statutory nature of the Listing Rules.

35. The framework presently under consideration, and on which views of the market are sought, would comprise of two main areas -

  1. Disclosure-related: Establishing specific civil liability for

    1. omissions and misstatements in statements made under the Listing Rules or the Takeovers Code; and

    2. failure to proceed with an announced takeover offer without the consent of the Takeovers Executive or Takeovers Panel.

      The specific civil liability provisions will seek to simplify the judicial process which an injured person has to go through to obtain redress.

  2. Court Orders: Authorising the court, upon application of the SFC (which power to apply may be delegated to the Stock Exchange), to:

    1. make an order compelling compliance with the Listing Rules. Non-compliance with the order will constitute a contempt of court, and the court may at its discretion impose appropriate sanctions on those in breach;

    2. make an order disqualifying a director of a listed company who has wilfully or persistently failed to discharge his duties under the Listing Rules or the Takeovers Code from being a director of any listed company for a period of time.

Concern has been expressed that the manner in which statutory support for the Listing Rules is provided should not be such as to render the application of the Listing Rules unduly legalistic. The views of the market would be taken into account in any legislative proposals ultimately put forward.

Statutory Private Right of Action

36. One of the key objectives of the SFC is to facilitate investors in taking charge of their investments and protecting themselves. At present, a victim of another person's misconduct in the securities and futures market can seek redress under common law or at equity. However, the victim will have to fashion the claim in traditional tort or contract terms, and in many cases will have to face a number of procedural or legal challenges.

37. Other leading jurisdictions, including the United States, the United Kingdom, and Australia, provide a simple statutory cause of action for injury resulting from another person's violation of securities laws. The composite Bill will put Hong Kong more in line with this accepted international practice by enabling a person who is or might be materially affected by another person's misconduct to apply to the Court of First Instance for an injunction or other remedies. The creation of this private cause of action is intended to eliminate the unreasonable necessity of fitting an act that contravenes securities and futures regulations into traditional common law or equitable precepts. An applicant for relief will still have to prove the defendant's violation of regulatory requirements, causation of harm, and materiality.

SFC's Intervention into Third Party Litigation

38. Litigation where the SFC is not a party may nevertheless involve points of law that are relevant to the SFC's functions and responsibilities as regulator. At present, there is no simple mechanism whereby the SFC can submit its expert views for the benefit of the court. The composite Bill will propose to give the SFC the ability to intervene and be heard in relevant third-party proceedings (other than criminal proceedings) where it has an interest in the matter by virtue of its statutory powers and functions.

Other proposals

Statutory Immunity for Auditors of Listed Company

39. We shall also take the opportunity to include in the composite Bill an earlier proposal to provide statutory immunity to auditors of listed companies if they see the need to report suspected fraud and practices to relevant regulatory authorities in the course of their auditing work. This proposal was previously introduced into the Legislative Council on 27 November 1996. We understand that auditors may choose to report to the board of directors, or the audit committee (if there is one), of a listed company in the first instance. To do so should not deprive the auditors of the proposed immunity, if they choose to report to the regulatory authorities afterwards.

Offer of Investments

40. Investment products such as unit trusts, mutual funds, investment-linked assurance schemes, pooled retirement funds, immigration-linked investment schemes and other forms of investment arrangements require authorization by the SFC under the current law before they may be offered to the public. Financial innovation is creating a wide variety of investment products and arrangements that do not fall within traditional definitions. This has resulted in certain loopholes and points of uncertainty in current law with regard to the SFC's power to facilitate and regulate the offering of investment products and arrangements. The composite Bill will rectify these deficiencies by -

  1. expanding the definition of "investment arrangements" to arrangements in relation to any property, including money and securities;

  2. using a new term "collective investment schemes" to include all investment arrangements and not just unit trusts and mutual funds being covered by the existing law.
41. The composite Bill will also expressly empower the SFC to withdraw an authorisation for an investment arrangement when the product or its operator no longer satisfies the criteria and conditions for authorisation.

Disclosure of Interests in Securities

42. Information is at the centre of an efficient market. It enables investors to make better decisions, and maintains a level playing field among different participants. The international trend is to move to full disclosure of relevant information, so that investors may take responsibility for themselves in assessing the risks and returns. In June 1998, the SFC published a public consultation paper to propose a series of enhancements to the present disclosure regime. Conclusions of the consultation were published in March this year. The main proposals are -

  1. lowering the initial shareholding disclosure threshold for persons other than directors from 10% to 5%;

  2. shortening the disclosure notification period from five days to three days;

  3. increasing the disclosure requirements for derivative products; and

  4. levelling the disclosure obligations of local and overseas trustees and investment advisers.

43. The SFC must have considerable powers and discretion so as to perform its functions effectively. At the same time, it should be as transparent and accountable to the public as practicable to ensure proper and fair exercise of its powers and avoid any possible abuse. The regulatory objectives of the SFC to be set out in the composite Bill (para. 9 above) will go a long way in this regard through providing a set of benchmarks by which the public and the industry could measure the performance of the SFC.

Existing Accountability Arrangements

44. When the SFC was first established in 1989, the Legislative Council exercised due care in prescribing adequate safeguards when vesting powers in the new regulatory watchdog under the SFCO. Main accountability arrangements include -

  1. Under the law the SFC shall comprise not less than eight directors including the Chairman appointed by the Chief Executive. Half of the directors must be non-executive. Currently, the SFC has 12 directors, including six who are Non-Executive Directors (NEDs). The NEDs are not SFC's staff and are not involved in the day-to-day management of the affairs of the SFC. They oversee the work of the SFC on a regular basis to act as the first line of independent supervision of the SFC executive's work.

  2. The existing law provides for the establishment of an independent Securities and Futures Appeals Panel, comprising members who are not directors or employees of the SFC to hear appeals from parties aggrieved by certain decisions made by the SFC on licensing and disciplinary matters.

  3. A person may apply to the Court of First Instance for judicial reviews of relevant decisions of the SFC.

  4. A person may complain to the Ombudsman in accordance with the Ombudsman Ordinance.

  5. A person may appeal to the Chief Executive in Council the SFC's decisions concerning the recognition and closure of the exchanges.
Additional Checks and Balances

45. In enhancing the regulatory powers of the SFC, there will be a need to strengthen also the existing accountability arrangements to ensure that they are commensurate with the regulatory powers of the SFC. It is important that these powers shall be exercised judiciously and fairly, without imposing unnecessary burden on the intermediaries or stifling market growth and innovations.

Securities and Futures Appeals Tribunal (SFAT)

46. As an improvement to the mechanism of checks and balances, the composite Bill will expand and upgrade the current Securities and Futures Appeals Panel (SFAP) to a Securities and Futures Appeals Tribunal (SFAT).

47. The existing SFAP is an informal merits review panel. It can provide an effective remedy by substituting its own decision for that of the SFC. The SFAP has jurisdiction over certain decisions by the SFC on licensing and disciplinary matters. However, there are other SFC's decisions which also affect the interests of people as greatly as those currently appeallable to the SFAP. Moreover, the SFAP is operating on a part time basis. It does not have the resources to handle a large caseload. Any delay caused by caseload is contrary to the aim of the SFAP as being a quick and effective means of merits review.

48. There is a need to further improve the existing arrangements of the SFAP. Accordingly, the composite Bill will expand the SFAP to a specialist merits review tribunal. It is proposed that the SFAT be chaired by a Judge or Deputy Judge of the High Court and include a number of well respected market practitioners. It will have a wider jurisdiction than SFAP and may review many important decisions of the SFC including all licensing and disciplinary decisions as well as certain matters relating to intermediary supervision, investment products, and registration of prospectuses. The time required for an appeal hearing would be shortened as the SFAT will operate on a full-time basis. The establishment of the SFAT will have financial implications on the Government and the Judiciary which will be worked out after the details of the SFAT have been finalised.

Process Review Panel

49. It is important for the SFC to continue to earn public confidence and trust. Part of its work is necessarily subject to privacy and confidentiality requirements of law, and specific information cannot always be publicly disclosed. To bridge this gap, the SFC will establish an independent panel to review aspects of its internal operations, including investigative procedures, that by their nature, cannot be meaningfully scrutinised by the SFAT. As currently envisaged, the panel will comprise a majority of independent, prominent public persons, to be appointed by the Chief Executive, as well as NEDs of the SFC. The panel will make its report to the Financial Secretary. To demonstrate SFC's openness to independent scrutiny, it is our intention to set up the panel in 2000 and in any case before the commencement of the composite Bill.

Communication with the Public

50. In addition, the SFC will continue to use existing channels of communication with the industry and the public, including -

  1. Presentation of its annual accounts to the Legislative Council and attending its Financial Affairs Panel meeting from time to time;

  2. Publication of comprehensive annual reports;

  3. Frequent press releases and announcements;

  4. Participation in discussion in public forums;

  5. Internet website, containing up-to-date policy as well as legal materials;

  6. Consultation with professional and user groups, and advisory committees to seek market perspectives, and public consultation of policy proposals at the earliest practicable opportunity; and

  7. Drafting rules and codes of conduct along accepted market practice wherever appropriate.
51. An on-going dialogue with the industry and general public is essential not only as a matter of accountability, but also in order for the SFC to perform its functions effectively. Indeed, the objective of the composite Bill can only be achieved, and Hong Kong's competitive position as an international financial centre maintained, through the joint efforts of the public, the industry, and the Government.


52. We need to have a modern regulatory framework for the securities and futures markets so as to allow Hong Kong to meet the challenges in global competition, advances in technology and rapid financial innovation. The proposals to be included in the composite Bill will help achieve the following -

  1. a regulatory framework which is technology friendly;

  2. a regulatory framework which keeps pace with market developments;

  3. a regulatory framework which is on a par with the best international practices;

  4. a regulatory framework which can facilitate and be able to address future financial innovation;

  5. a regulatory framework which can minimise legal uncertainty;

  6. gaps in the existing regulatory regime can be filled;

  7. the regulator will be as accountable and transparent as practicable; and

  8. regulatory procedures and processes will be simplified and made more user-friendly.
Such a modern regulatory framework is urgently required to keep our securities and futures markets competitive in the next Millennium.

Financial Services Bureau
June 1999