Legislative Council

LC Paper No. LS18 /98-99

Paper for the House Committee Meeting
of the Legislative Council
on 4 September 1998

Legal Service Division Report on
Securities (Amendment) Bill 1998

Objects of the Bill

To amend the Securities Ordinance (Cap. 333) (SO) :-

  1. to enable the Securities and Futures Commission (the Commission) to inject money into the Unified Exchange Compensation Fund (Compensation Fund) (clauses 2 and 3);

  2. to empower the committee of the Exchange Company to, under certain circumstances, authorize payment to claimants against the Compensation Fund, before the normal apportionment procedure takes place, discretionary sums as compensation (clause 5);

  3. to exclude the discretionary sums in the calculation of the limit on the total amount payable out of the Compensation Fund, and to restrict the amount of money recouped by the Commission in exercise of its subrogation rights that may be paid out for compensation of claimants (clause 4); and

  4. to expressly provide that the claim of a claimant who has been paid a discretionary sum is absolutely discharged on payment of the total amount under the apportionment procedure even if he is not entitled to any further payment thereunder (clause 6).

2. The Bill also enables the committee of the Exchange Company to exercise its power to allow payment of discretionary sums to claimants before apportionment in relation to certain claims made before the enactment of the Bill (clause 7). LegCo Brief Reference

3. SU B51/98(IV) issued by the Financial Services Bureau.

Date of First Reading

4. 29 July 1998.


5. The Bill seeks to provide a legal basis for implementing the compensation package for eligible clients of the defaulted C A Pacific Securities announced on 25 January 1998 by the Administration jointly with the Hong Kong Monetary Authority and the Stock Exchange of Hong Kong (Annex 2 to Annex C of the LegCo Brief). The joint press release on 10 June 1998 gave further details of the intended compensation to the claimants (Annex C of the LegCo Brief). The provisions of the Bill are intended to be applicable to other pending claims of compensation resulting from defaults of other stockbrokers.

Clause 2

6. The Administration has explained that there is no express provision in the Securities and Futures Commission Ordinance (Cap. 24), by virtue of which the Commission is established, governing the holding and the appropriation of reserves by the Commission. The proposed section 99(2) gives the Commission power to pay, subject to the approval of the Financial Secretary (FS), such sum of money as it thinks fit out of its reserves into the Compensation Fund.

7. Members may consider as a matter of principle whether the utilization of the Commission's reserves for compensation of investors is appropriate.

Clause 3

8. This clause specifies that the money paid by the Commission shall be part of the Compensation Fund.

Recapitulation of the present position

9. To facilitate Members�understanding of the proposed amendments described in the following paragraphs, a brief description of the existing mechanism of administering compensation under the SO is set out below:

Section 113 states that the committee of the Exchange Company shall determine what claims and what amount of such claims are allowed. Section 109 sets the upper limit of HK$8,000,000 as the total amount payable out of the Compensation Fund in respect of all the allowed claims in connection with the default of a stockbroker. When this sum of HK$8,000,000 is insufficient to pay off all the allowed claims, then apportionment should be made according to section 120.

Clause 4

10. The proposed amendment to section 109(3) will allow the payment of HK$8,000,000 in respect of all allowed claims and a further payment of HK$8,000,000 out of the amount recovered from the defaulted stockbroker in liquidation or, as the case may be, bankruptcy. This will be on top of any payment authorised under the proposed section 113(5A) (clause 5).

11. Section 109(3) as amended by the Bill will operate as if the proposed section 113(5A) has not been enacted. The potential danger of a claimant being paid double is averted by the provisions contained in section 120(2), which, after the proposed amendments, stipulates that the committee of the Exchange Company, or as the case may be, the Court shall apportion the total amount amongst the claimants equitably having regard to the sums already paid under section 113(5A).

Clause 5

12. The proposed section 113(5A) will give the committee of the Exchange Company power to authorise payment out of the Compensation Fund as soon as a claimant's claim or any part of it is allowed. Such payments are not subject to the upper limit set in section 109(3) and do not require apportionment under section 120(2).

13. The Administration will consider inserting the words "the committee of" before "the Exchange Company" where it second appears in the proposed section 113(5A).

Clause 6

14. The proposed section 120(3) seeks to exclude the investors who have been paid under section 113(5A) from claiming further compensation. The Administration has stated that the proposed subsection aims at only those investors who have already been sufficiently compensated by payments made under section 113(5A). However, the proposed subsection has, in our view, failed to make this clear and contains self-contradiction.

Clause 7

15. This provision makes the amendments to sections 109, 113 and 120 apply to claims for compensation made in relation to a person specified in a notice calling for claims against the compensation fund published by the committee of the Exchange Committee on or after 27 January 1998.

Public Consultation

16. The Administration has not consulted the public on the Bill.

Consultation with the LegCo Panel

17. Members of the Panel on Financial Affairs have been briefed by the Administration on the Bill during a special meeting held on 23 July 1998.


18. As the Bill seeks to make significant alteration to the regime of administering compensation to investors in securities in Hong Kong, Members may consider whether it is necessary to set up a Bills Committee to study the Bill in detail.

19. In the meantime, the Legal Service Division is seeking clarification from the Administration on the legal and drafting aspects of the Bill.

Prepared by

KAU Kin-wah
Assistant Legal Adviser
Legislative Council Secretariat
2 September 1998