LegCo Paper No. CB(1) 1999/95-96
(These minutes have been seen by the Administration)
Ref : CB1/PL/FA/1

LegCo Panel on Financial Affairs

Minutes of Meeting
held on Tuesday, 2 July 1996 at 8:30 a.m.
in the Chamber of the Legislative Council Building

Members present :

    Dr Hon HUANG Chen-ya, MBE (Chairman)
    Hon Eric LI Ka-cheung, OBE, JP (Deputy Chairman)
    Hon Martin LEE Chu-ming, QC, JP
    Hon CHIM Pui-chung
    Hon James TO Kun-sun
    Hon Paul CHENG Ming-fun
    Hon Ambrose LAU Hon-chuen, JP
    Dr Hon LAW Cheung-kwok
    Hon SIN Chung-kai
    Hon Mrs Elizabeth WONG CHIEN Chi-lien, CBE, ISO, JP

Members absent :

    Dr Hon David LI Kwok-po, OBE, LLD (Cantab), JP
    Hon Ronald ARCULLI, OBE, JP
    Dr Hon Philip WONG Yu-hong
    Hon Andrew CHENG Kar-foo
    Hon NGAN Kam-chuen

Public Officers Attending :

Items III to V
Mrs Lessie WEI
Acting Secretary for Financial Services

Item III
Mr Ros K T LAM
Acting Commissioner of Insurance
Acting Assistant Commissioner of Insurance

Attendance by invitation :

Item III
The Medical Insurance Association of Hong Kong Limited
Miss Patricia TANG
Deputy Chairman

Item IV
Securities and Futures Commission
Mr Raymond TANG
Chief Counsel
Mr Richard YIN
Director (Intermediaries Division)

Item V
Securities and Futures Commission
Miss Barbara SHIU
Director (Corporate Finance Division)
Stock Exchange of Hong Kong
Mr Herbert HUI
Deputy Chief Executive

Staff in Attendance :

Ms Estella CHAN
Chief Assistant Secretary (1)4
Miss Anita SIT
Senior Assistant Secretary (1)6

I. Confirmation of minutes of meeting

(LegCo Paper No. CB(1) 1599/95-96)

The minutes of the meeting held on 6 May 1996 were confirmed.

II. Date and items for discussion for the next meeting

2. Members agreed that the next meeting would be held on 5 August 1996 and the following items would be discussed:

  1. work plan of the Inland Revenue Department (including the taxation arrangements for using a company to buy or sell properties); and
  2. bullion trading.

    (Post-meeting note: The meeting was subsequently re-scheduled for 29 July 1996.)

III. The regulation of the health insurance industry

(LegCo Paper No. CB(1) 1715/95-96)

3. Mr Ros LAM briefed members on the general market situation of the local health insurance industry and the present regulatory system for the industry.

4. On the Administration’s stance on the promotion of health insurance in Hong Kong, Mrs Lessie WEI advised that the Financial Services Branch (FSB) had an objective of promoting the local insurance industry in general, the Health and Welfare Branch (HWB) was considering the option of a compulsory medical insurance scheme. In reply to the Chairman, Mrs WEI said that FSB and HWB had not had any joint discussion on the subject. Members considered that the Administration should make a decision on a compulsory medical insurance scheme without further delay. In response to their enquiry on the progress of the Administration’s deliberation on the subject, Mrs WEI undertook to consult the Secretary for Health and Welfare and inform the Panel accordingly.

(Post-meeting note: The information note on the time-frame for the comprehensive review of the healthcare system prepared by HWB has been circulated to members vide LegCo Paper No. CB(1) 1895/95-96 dated 24 July 1996.)

5. A member remarked that in considering a compulsory medical insurance scheme, the Administration should be particularly alert to difficulties that might be faced by the chronically ill and the poor. The Administration should ensure that with a community-wide medical insurance scheme implemented, nobody would be denied proper medical treatment due to the lack of means - this was a mission prescribed in the Hospital Authority Ordinance.

6. In response, Mr LAM made the following points:

  1. The most up-to-date statistics on the industry were up to 1994 only because the deadline for submission of statistics for the year 1995 by insurance companies to the Commissioner of Insurance was 30 June 1996. Hence, the statistics for 1995 were not yet ready for presentation at the Panel meeting.
  2. According to a survey conducted by the Medical Insurance Association of Hong Kong Limited (MIAHK) in 1994, the numbers of health insurance policies taken up by corporations and individuals were about 11,500 and 273,000 respectively, while the numbers of persons insured under these two categories of insurance policies were about 693,000 and 386,000 respectively.
  3. At present, there were 161 insurance companies authorized to carry health insurance in Hong Kong. Premium rates and policy terms of health insurance policies were, as with other types of insurance policies, not subject to regulation. The Administration considered that given the competitive market condition and in line with the free market philosophy of the local economy, premium rates and policy terms should be determined by market forces. For the same reasons, the Administration also did not consider it necessary to regulate the level of commission for insurance brokers/agents.
  4. As the local health insurance market was a competitive one, insurance companies carrying health insurance would seek to publicize information on the terms of their insurance policies to consumers. The Administration therefore did not consider that it had a role to play in the dissemination of information on the health insurance policies available in the market.

7. Referring to the statistics presented in the information paper, Mrs WEI clarified that health insurance and accident insurance were treated as a single category in the compilation of the statistics under the Insurance Companies Ordinance. Miss Patricia TANG supplemented that the overall underwriting profit for the local health insurance industry in 1991 to 1994 was around 0% to 2% of the gross premiums.

8. In response to members’ enquiries about the costs of underwriting health insurance, Mr LAM provided further statistics on the industry for the year 1994 as set out in the Annex which were extracted from the Annual Report 1995 of the Office of the Commissioner of Insurance and the Registrar of Occupational Retirement Schemes.

9. On the suggestion that the Administration should require insurance companies to disclose the amount of commission for brokers/agents to policy holders, Mr LAM remarked that this was a controversial issue which needed to be carefully examined. He added that the main considerations for one’s decision to take up an insurance policy were the policy coverage and the premium rates.

10. Members observed that in 1994, the commission payable together with the management expenses amounted to about 30% of the gross premiums. A member commented that the level of commission (about 19% of the gross premiums) was rather exorbitant and doubted if the local health insurance market was genuinely competitive. The Chairman remarked that if a compulsory medical insurance scheme also entailed such a high level of commission and management expenses, it probably would not be regarded by the public as a desirable option for the long-term financing of the public healthcare system. In response, Mr LAM reiterated that the Administration believed that there was sufficient competition in the market as there were 161 insurance companies authorized to carry health insurance. Under a competitive environment, insurers should have every incentive to reduce costs so as to remain competitive.

11. Regarding the redress system for insurance policy holders, Mr LAM advised that the Insurance Claims Complaints Bureau provided a simple and inexpensive avenue for policy holders to seek redress in respect of complaints about claims arising from personal insurance policies. The Insurance Claims Complaints Board, appointed under the Bureau, was chaired by a retired judge and its members included representatives from the Consumer Council, the legal profession and the insurance industry. Insurers were required to abide by the decisions of the Bureau while complainants had the right to resort to other redress channels if they were not satisfied with the decisions. No complainant had so far expressed dissatisfaction with the Bureau’s handling of complaints. In 1994, the Bureau had received a total of seven complaints. The Chairman commented that the small number of complaints might be attributable to the lack of publicity about the Bureau.

12. Miss TANG informed the meeting that the MIAHK was working with the Consumer Council to improve the content of insurance policy documents and standardise claim forms for the convenience of policy holders. The Association had also assisted the HWB in collecting information on the local health insurance industry.

13. Members expressed interest in obtaining information on the health insurance industry in other countries. Mr LAM said that the Office of the Commissioner of Insurance had not conducted any research on health insurance markets in other countries. He however agreed to discuss with the industry to see if such information was available.


IV. Supervision of stock brokers

(LegCo Paper No. CB(1) 1715/95-96)

Update on the Wei Xin case

14. Mr Raymond TANG briefed members on the progress of the case of Wei Xin Securities Ltd as set out in the information paper. Members enquired whether the paid-up securities of Wei Xin’s clients had been distinguished from Wei Xin’s own securities, both of which were being held in the Stock Clearing Account (SCA) of Wei Xin in the Central Clearing and Settlement System (CCASS). Mr TANG said in reply that it was necessary to follow the prescribed procedures of the CCASS and the relevant legislation on company insolvencies in handling the securities held in the SCA of Wei Xin. The court hearing on the winding-up petition against Wei Xin would be held on 3 July 1996. The provisional liquidator would need to await the court’s decision before proceeding with any payout arrangements.

15. Members expressed concern that Wei Xin’s clients might suffer financial loss as a result of the present operational procedures of the CCASS. In response, Mr TANG advised that the securities now held in the SCA of Wei Xin were not in congruence with the clients’ claims. According to the relevant legislation, the ownership of the securities now held in the SCA of Wei Xin would have to be determined based on the records kept by Wei Xin in respect of its individual clients. However, up to the present, the ownership of the securities could not be determined. According to legal advice, the provisional liquidator should not dispose the securities in the SCA of Wei Xin pending the court’s decision.

16. A member queried if the Securities and Futures Commission (SFC) had acted beyond its powers in directing the freezing of the securities held in Wei Xin’s SCA despite the Stock Exchange of Hong Kong (SEHK)’s suggestion to return the paid-up securities to Wei Xin’s clients in the first instance. In response, Mrs WEI said that in this case, SFC had all along been acting in accordance with the relevant legislation and within its remit of powers. Mr TANG added that the default of Wei Xin necessitated the inception of the liquidation proceedings, in the course of which all relevant legislation would have to be complied with. It was SFC’s responsibility to abide by the relevant legislation. Another member queried if SFC had made an assessment of its actions in terms of the overall interests of the parties concerned. In response, Mr TANG said that the claims of investors and creditors of Wei Xin could not be handled individually mainly because Wei Xin had not used Segregated Stock Accounts to hold securities for its individual clients. Under the circumstances, the financial situation of Wei Xin as a whole would need to be ascertained first before deciding on the claims. This approach was consistent with the company insolvency law.

17. In response to the Chairman’s enquiry on whether the legal costs incurred on the case would have to be borne by the investors, Mr TANG advised that the main asset of Wei Xin was its seat in SEHK. If the value of the seat was realised, the proceeds should be sufficient to cover the legal costs incurred. However, the disposal of the proceeds was subject to the court’s decision. The fees for the provisional liquidator was now advanced by SFC.

18. Members enquired whether the Administration and SFC had reviewed the CCASS in the light of the Wei Xin case and whether any improvement measures would be implemented. Mr TANG advised that SFC would review the relevant legislation and procedures in the light of the case and in the course of the review, would consult relevant bodies including the Hong Kong Securities Clearing Company (HKSCC) and the SEHK.

19. On the Administration’s position, Mrs WEI said that the FSB was in support of the view that the CCASS should provide adequate protection for individual investors. As revealed at the last Panel meeting, the HKSCC was undertaking a comprehensive study on investors’ participation in CCASS. FSB had been liaising with HKSCC in this regard and it was hoped that the study would be completed within 1996 as scheduled.

20. As regards whether the Wei Xin case had revealed any shortcomings of the present regulatory framework, Mrs WEI advised that SFC was reviewing the regulatory framework in the light of new developments in the market and the problems revealed in individual incidents.

21. The Chairman remarked that the Panel held the view that the Wei Xin case revealed that the existing mode of operation of the CCASS did not provide adequate protection for investors. He called on the Administration to work out improvement measures with the relevant parties without further delay.

Fit and Proper Criteria

22. Members noted that under section 56 of the Securities Ordinance, SFC was empowered to inquire at any time into the continuing fitness and properness of a registered person. Where the management control of a registrant was acquired by a person who was not fit and proper, the Commission might, after making the inquiry, and irrespective of the percentage of acquisition, revoke or suspend the registration on the grounds of the lack of fitness of a person concerned in its management. At members’ request, Mr TANG agreed to provide information on the instances of invoking section 56 in cases involving changes in the management control over a SFC registrant.

(Post-meeting note: The information provided by SFC has been circulated to members vide LegCo Paper No. CB(1) 1916/95-96 dated 29 July 1996.)

23. In response to members’ enquiries, Mr TANG advised that SFC had not invoked section 56 in the case of the acquisition by the Allied Properties of 33.18% equity in the Sun Hung Kai Securities Co. However, SFC would keep a watchful eye on the management control of Sun Hung Kai subsequent to the acquisition.

24. Members enquired whether a person who had been reprimanded by the financial regulatory authorities would qualify as a registrant or a director or a substantial shareholder of a corporate registrant. Mr TANG advised that if an applicant had been reprimanded, that would be a significant factor in determining the fitness and properness of the person to act as an intermediary. A member commented that for Hong Kong to maintain an open, credible and respectable financial system, SFC should give a definite indication as to the implication of a reprimand on an applicant’s/registrant’s fitness to act as an intermediary. In response, Mr TANG said that the legislation only required a person to meet the fit and proper criteria but did not preclude persons who had been reprimanded from acting as an intermediary. SFC in considering the fitness or continued fitness of an applicant/registrant needed to adopt a balanced and objective view.

25. Some members commented that the present legislation was vague with regard to the system of sanctions enforced by SFC and the implication of the different sanctions on a person’s eligibility to be a registrant or a director or a substantial shareholder of a corporation registrant. They also opined that the manner and the procedure in which SFC applied the Fit and Proper Criteria should be more transparent. In response, Mrs WEI said that the Administration in conjunction with SFC would review the system of sanctions enforced by SFC taking into account members’ views.

26. In reply to a member’s enquiry, Mr TANG advised that the dealing director of a corporate registrant was also required to be registered with SFC.

27. The Chairman advised that the Panel would follow up other issues arising from the case of the Allied Properties acquiring equity in the Sun Hung Kai Securities Co. in a future meeting.

V. Offering mechanism of initial public offerings and the Kwong On Bank incident

(LegCo Paper No. CB(1) 1745/95-96)

28. Mr Herbert HUI briefed members on the offering mechanisms of initial public offerings (IPO) and the features of a global offering as set out in the information paper.

29. In response to members’ enquiries about the Kwong On Bank IPO, Mr HUI advised that Kwong On Bank IPO was a global offering. The total equity offered was 75 million shares, of which 15 million were offered for subscription by the public in Hong Kong (Hong Kong tranche), and the balance of 60 million planned to be offered through a book-building placement in the international tranche. The shares offered under the Hong Kong tranche were oversubscribed by 23 times and there was a subsequent claw-back of 3.75 million shares from the international tranche to the Hong Kong tranche. Hence, the subsequent number of shares offered under the Hong Kong tranche was 18.75 million shares, i.e. 25% of the total equity of offer, while the balance was issued under the international tranche.

30. As regards the incident concerning the subscription of shares of the Kwong On Bank by members of the Urban Council, Mr HUI advised that since the case was being looked into by SEHK and SFC, it was not the right time to disclose further details.

31. On the mechanisms to ensure fairness to all classes of investors, Mr HUI advised that it had been emphasised in the joint announcement made by SEHK and SFC in November 1994 that underwriters and sponsors should conduct equity offerings in a manner that would be in the best interests of the issuer and the general body of its investors. Before making a global offering of shares, an issuer must consult SEHK and SFC on the offering plan. The offering procedures must be to the satisfaction of SEHK and SFC before the offering was implemented.

32. One of the offering mechanism of IPOs was "placing" which was the obtaining of subscriptions for or the sale of securities by an issuer or intermediary primarily from or to "persons" selected or approved by the issuer or intermediary. Members enquired if there were any pre-determined criteria for selection of those "persons" by issuers and intermediaries. Miss Barbara SHIU explained that a placement was made through a book-building process. Sponsors would solicit indications of interest from prospective investors. The subsequent allocation of shares in the placement was at the discretion of sponsors, who were expected to make such decisions impartially. Mr HUI further advised that sponsors were required to provide SEHK and SFC with their books containing a list of the investors (placees), their demand and the corresponding number of shares allocated after a placement. SEHK and SFC would review the book to ascertain if there had been any irregularities.

33. In response to members’ enquiries, Miss SHIU advised that it was not illegal for a placee to re-sell the allocated shares privately after a placement. Such a practice was also permitted in other major financial markets. In principle, the placement tranche was to facilitate subscriptions by institutional and professional investors with sizable demands for an offering. SFC’s main concern was whether there was any abnormal interference by a person over the allocation of shares to any placee.

34. A member commented that there was inadequate information on the placement mechanism of "placing" in the information paper. He enquired if any person or institution could obtain shares at very low prices in the placement tranche. Miss SHIU explained that under existing requirements, a person applying under the public offering tranche should pay the same price as a placee under the placement tranche for a share. While sponsors would quote a price range for investors, all the placees should pay the same price for a share subsequently. She also confirmed that the concern would be if any person exercised undue influence over the allocation of shares in the placement tranche. Another member remarked that it was practically not possible to preclude personal influence as the relationship between an issuer and an underwirter or a sponsor was not a one-off relationship.

35. The Chairman commented that re-sale of shares to retail investors by placees would create an unfair situation as some retail investors could buy shares from institutional investors who obtained shares from the book-building placement tranche while other retail investors could only subscribe through the local public offer tranche. Mr HUI remarked that the claw-back procedure was therefore very important for the protection of general retail investors. Besides, underwriters and sponsors played an important role to ensure that the interests of the issuer and the general body of investors were given due regard in the offering process. In response to a member’s enquiry, Mr HUI advised that the level of claw-back from the placement tranche to the public offering tranche was determined on a case-by-case basis. However, the arrangement for claw-back needed to be included in the plan of the global offer and was examined by SEHK and SFC before the implementation of the offering. In general, a 5% claw-back from the placement tranche to the public offering tranche was the minimum requirement in the case of an over-subscription of three to five times. On the suggestion of disclosing the claw-back arrangement in the offering prospectus, Mr HUI said that SEHK would consider the suggestion but if that was to be done, the relevant clauses would need to be very carefully worded to avoid any misinterpretation by investors.

36. Members commented that there appeared to be no solid mechanism to prevent unequal treatment under the two tranches of offering. According to the information provided so far, it appeared that the present regulatory mechanism only enabled the regulatory authorities to apprehend the offering process but could not prevent abuses of the offering mechanisms. Mr HUI acknowledged that there might be aspects of the global offering mechanisms that needed to be improved.

37. The Chairman concluded that the discussion revealed that there were opportunities in the present global offering mechanisms for unequal treatment or abuses. He urged the relevant authorities to review the mechanisms as soon as possible. Miss SHIU responded that SFC would try to complete a review of the mechanisms by the end of the year.


38. There being no other business, the meeting closed at 11:00 am.

LegCo Secretariat
28 August 1996

Last Updated on 18 Aug, 1998