The Role of the SFC Chairman - Towards a More Effective and

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					    10   Speeches

The Role of the SFC Chairman - Towards a More Effective
and Efficient Securities Market1
Eddy Fong, Chairman of the Securities and Futures Commission
January 2007

Introduction                                                             The "Non-Executive Chairman"
1. It is my honour to be invited to the Institute                        6. T h i s p o s i t i o n w a s c r e a t e d t h r o u g h t h e
   luncheon today. As a member of the Institute,                            introduction of the Securities and Futures
   it makes me feel very much at home speaking                              (Amendment) Ordinance 2006 in June last year.
   to my fellow members and such an assembly of                             With the rapid development of the securities and
   distinguished guests.                                                    futures markets, the Government saw the need
                                                                            to continually enhance the internal governance
2. Agreeing to speak is easy, but choosing an
                                                                            and regulatory structure to ensure the effective
   appropriate topic for the occasion requires
                                                                            functioning of the SFC in order to meet the
   careful thoughts. I have been told that I can
                                                                            future challenges. This is because, as noted by
   choose my own topic, provided that it is one
                                                                            the Government2, the SFC has an important role
   of "significance to company directors and the
                                                                            to play in maintaining Hong Kong's position as
   Hong Kong financial market".
                                                                            an IFC. The Amendment Ordinance provides
3. Having given it some thought, as I am fairly                             for the separation of the role of the Chairman
   new to the job, I believe many of you are here                           from that of the executive arm, which is now
   because you want to find out about the role of                           headed by a Chief Executive Officer (CEO).
   the new SFC Chairman and my views on the
                                                                         7. The Chairman leads the Board in setting
   direction of the Commission. My talk today
                                                                            the overall directions, policies and strategies
   therefore will be in two parts.
                                                                            of the Commission and in monitoring the
4. First, I would like to talk about my role as a                           performance of the executive arm. The CEO
   "Non-Executive Chairman", a title which is                               has the executive responsibility for the day-
   distinctly different from that of my predecessor,                        to-day running of the Commission. He is
   who was at the time a full time Executive                                there to implement the objectives set by the
   Chairman. I think there could not be a more                              Board, and facilitate the effective functioning
   appropriate occasion to discuss my role as SFC                           of the Commission. This role model is very
   Chairman than a luncheon of the Institute.                               similar to the best governance practices both in
                                                                            commercial organisations and public bodies, e.g.
5. Second, I would like to share with you how I                             MPFA (Mandatory Provident Fund Schemes
   intend to lead the SFC in the next three years,                          Authority), Hong Kong Mortgage Corporation
   and how the SFC may contribute to facilitating                           Ltd, and MTR Corporation Ltd.
   Hong Kong's development as an international
   financial centre (IFC).

         The speech is presented at the luncheon of the Hong Kong Institute of Directors on 26 January 2007.
         The Secretary for Financial Services and the Treasury, Mr Frederick Ma, when moving the resumption of the Second Reading of the
         Securities and Futures (Amendment) Bill 2006 on June 14, 2006.

                                                                                              Speeches   11

8. If you have the opportunity to visit the SFC          required and make the SFC the priority of all
   website (, you will find that the          my commitments. You can well imagine that.
   respective roles and responsibilities of the
                                                      11. So, it was only after some very hard thinking
   Chairman and CEO have been clearly set out.
                                                          that I finally agreed to take up the appointment.
   They have been thoroughly debated in the
                                                          And I was deeply honoured to be appointed.
   legislature and endorsed by the Commission
   Board during the passage of the Bill. Without      12. So much for the time being on my role as
   going into details, there are 11 separate items        Chairman. I would like to share with you some
   of responsibilities for the Chairman and 14 for        of the challenges facing the Commission as I see
   the CEO. It is only logical that the CEO gets a        them, and the way forward.
   longer list, as he is a full time executive.

9. The position of a Non-Executive Chairman is        My Priorities
   a public service appointment, and as Chairman,     13. Many of you may remember that, when I took
   I receive a moderate sum of honorarium. Some           up this appointment three months ago, I set out
   commentators, you may recall, suggested that           four of my priorities:
   the Government should pay more in order
                                                         •   to provide leadership to the SFC Board
   to attract the right candidate. However,
                                                             to ensure that all members participate and
   when I was first approached to take on this
                                                             contribute fully in setting strategies and
   appointment, remuneration was not my prime
                                                             directions of the Commission;
   consideration. My concerns were focused on
                                                         •   to ensure that the CEO and I discharge our
   the heavy responsibilities of the post, the high
                                                             duties in a complementary manner;
   expectations of the public and the amount
   of time and efforts that are required for the         •   while carrying out its regulatory duties, the
   position. I also recognised the need to make              Commission should be mindful that it has
   certain sacrifice because I need to perform my            another important role to play, which is to
   duties impartially and be seen to do so. For              facilitate Hong Kong's ongoing development
   example, I have to resign from all my previous            as a leading international financial centre;
   involvement with publicly listed companies                and
   such as acting as Independent Non-Executive           •   to maintain close and regular ties with our
   Directors. In addition, under the Securities and          counterparts in the Mainland.
   Futures Ordinance (SFO), I need to comply
                                                         I am pleased to report that progress has been
   with strict requirements on the preservation of
                                                         made in each of these areas. I will give you
   secrecy (section 378) and avoidance of conflicts
                                                         some highlights.
   of interests (section 379). I am also subject to
   the SFC's internal Code of Conduct.

10. Although the position is non-executive, I am
    also expected to devote as much time as is

                                                                  SFC QUARTERLY BULLETIN      WINTER 2006
 12   Speeches

Board Involvement
14. At present, the Board is made up of a Non-                          17. However, effective governance, whether in a
    Executive Chairman, six Executive Directors                             commercial or public body, in my view requires
    and seven Non-Executive Directors. The Board                            a close working relationship between the
    meets once a month and its committees - on                              Chairman and the CEO which is characterised
    audit, remuneration and budget - meet regularly                         by trust, openness and communication. Here
    to discharge their functions. As I previously                           are a few examples of what needs to be done:
    mentioned, the role of the Executive Chairman                          •   First, have regular dialogues with the CEO.
    has been changed to a non-executive one which                              Stay on top but stay out of details. Always
    means that the Chairman, in his new capacity,                              have sufficient knowledge on major issues
    would have more time to devote to leading the                              and be prepared to respond to queries from
    Board and to communicate more frequently                                   other Board members and external parties.
    with the stakeholders.                                                 •   Second, be honest and constructive with
                                                                               the CEO on issues to be addressed. When
15. I b e l i e v e t h a t t h e m o s t v i t a l r o l e o f t h e
                                                                               an issue comes up, discuss openly how it
    Chairman is to call upon all members of the
                                                                               should be dealt with.
    Board to fully participate in the affairs of
                                                                           •   Third, be a sounding board for the CEO.
    the Commission, which include not only
                                                                               Advise him the likely Board opinions on
    spending time considering and endorsing
                                                                               certain issues and the time they should
    proposals put forward by the executives, but
                                                                               come to the Board.
    also setting strategies and directions for the
    future. Together as a Board we should bring                            •   Fo u r t h , d e f e n d t h e C E O f r o m u n f a i r
    "an independent and informed judgment" to                                  or unreasonable criticisms as and when
    bear on every matter that comes to the Board                               necessary.
    for decision. I am currently working with                              •   Finally, engage in an ongoing process of
    my executive team to put forward an annual                                 performance feedback for the CEO and his
    business plan to the Board to ensure that the                              executive team. Engage on a "no surprise"
    objectives for the coming year are fully captured                          approach and don't delay until the "annual
    and will be implemented in a timely manner.                                review".

                                                                           Overall, I think it is most important to build
Roles of Chairman and CEO                                                  mutual trust between the Chairman and the
16. Another of my priorities concerns the roles of
    the Chairman and the CEO. I have at the outset
    mentioned the background, so I won't repeat
    that here. I have scheduled regular meetings
    with the CEO, Mr Martin Wheatley, and I am in
    close contact with him and indeed other EDs on
    a regular basis.

                                                                                                                 Speeches   13

A More Effective and Efficient
18. I would now turn to the third point, i.e.                                     introduction of new products. They also
    how the SFC may enhance its effectiveness                                     wanted us to improve the speed of response
    a n d e f f i c i e n c y t o f a c i l i t a t e H o n g Ko n g ' s          in certain areas, although you may be aware
    development as an IFC.                                                        that we already have performance pledges
                                                                                  covering some areas of our work.
19. When I took office in October last year, I
    recognised that the SFC, like any public body,                         21. The message is very clear: our stakeholders
    has to not only be accountable to the public,                              have high expectations. Their comments should
    but also measure itself up to the stakeholders'                            not be taken lightly. The Commission, within
    expectations.                                                              the regulatory objectives set down in law 3 ,
                                                                               should strive to explore how it may contribute
20. But what are the expectations of the SFC
                                                                               to making Hong Kong a competitive IFC. We
    s t a k e h o l d e r s ? We h a v e j u s t r e l e a s e d a
                                                                               have to ask ourselves some critical questions
    Stakeholder Survey report, and I would like to
                                                                               such as the following:-
    share with you some of the findings:
                                                                              •   Can the SFC move in tandem with the
     •    The survey, conducted by an independent
                                                                                  changes in the globalised marketplace
          market research firm, interviewed
                                                                                  and respond promptly to the needs of the
          stakeholders including market practitioners
                                                                                  market with a pro-business approach, so as
          and other professionals - and company
                                                                                  to ensure Hong Kong's continued success?
          directors too. The survey found that the
          SFC was generally highly regarded and                               •   Can we conduct our regulatory activities
          viewed to have conducted its regulatory                                 more effectively and efficiently by
          activities impartially and to have effectively                          streamlining our processes?
          enforced the Hong Kong market.                                      •   Can we maintain an active, open dialogue
     •    Stakeholders regarded the SFC as                                        with the industry at the senior level, and
          approachable and overall, the best securities                           at the same time ensure that our frontline
          regulator in Asia.                                                      staff are capable and adequately resourced
                                                                                  to handle matters raised by market
     •    On t h e other hand, stakeholders also
          expressed their expectations about the SFC,
          including that the SFC should support                            22. I am an optimist, so I think the answers to all
          Hong Kong's competitiveness in a global                              these questions must be "yes". It is a matter
          market.                                                              of "how" we may achieve that, "how" we can
     •    For instance, stakeholders would like the                            better ourselves and "how" we benchmark
          SFC to be more proactive in developing                               ourselves against similar institutions in terms
          Hong Kong as a major financial centre and                            of performances and pledges. These are what
                                                                               the Commission should carefully consider as a
          be less conservative in its approach to the
                                                                               matter of utmost importance.

      Section 4 of the SFO.

                                                                                      SFC QUARTERLY BULLETIN      WINTER 2006
    14   Speeches

On the Mainland                                           What is the Way Forward for the SFC?
23. It goes without saying that the Hong Kong             27. The SFC has a core mission to protect the
    market's continued growth and prosperity                  interest of investors. We must therefore set
    depends to a large extent on the development              high regulatory standards for the market and
    of the Mainland market. The influence of                  encourage the use of best practices. We must
    Mainland enterprises on our market has been               continue to enforce against misconduct and
    increasing rapidly. At the end of 2006, 47%               illegal practices in the market firmly and fairly.
    of the market capitalisation in HKEx was                  This cannot be compromised.
    accounted for by PRC enterprises 4 . The              28. But our rules and regulations must be effective
         comparative percentage was 37% a year ago.           without creating unnecessary or undue
         PRC enterprises accounted for 43% of the total       compliance burdens, and our processes must be
         turnover in 2006.                                    efficient and user friendly.
24. And hence our need to continue strengthening          29. The SFC has a key role to play in supporting
    our relationship with our counterparts in                 Hong Kong's conti nued development a s a
    the Mainland such as the China Securities                 lead ing I FC . We w ill join hands w ith our
    Regulatory Commission (CSRC), the People's                stakeholders, such as HK Ex, and the Hong
    Bank of China and the State Administration of             Kong SA R Gover nment to leverage on the
    Foreign Exchange. My colleagues and I visit               existing strengths of Hong Kong as a financial
    the Mainland regularly and meet senior officials          centre.
    of the various authorities. In addition, we
                                                          30. Last but not least, the SFC will continue to
    work closely with the CSRC on international
                                                              educate investors - but everyone, including each
    regulatory issues at meetings of the IOSCO,
                                                              and every member of the Institute, has a role to
    or the International Organization of Securities
                                                              play in this.
    Commissions - of which both the CSRC and
    SFC are members.
25. Maintaining regular dialogue and exchanges
                                                          31. Fellow members and guests, overall I have only
    of personnel are essential to fostering the link
                                                              one simple message to deliver. I consider that
    between the two places which in the long run
                                                              it is essential for the SFC as a regulator to find
    will help to yield win-win results.
                                                              the right balance between investor protection
26. Some of you may have read the Report on                   and facilitation of market development. I regard
    Economic Summit in response to China's 11th               this a major challenge, and possibly the biggest
    Five-Year Plan last week. There are some 80               challenge, for the Commission. However, I
    initiatives for the financial sector, many of             cannot do this by myself. I shall work closely
    which the SFC is closely associated with. The             with my SFC colleagues and, of course, our
    SFC should study what role we can play and                stakeholders in the financial community like
    respond positively to the Action Agenda.                  you.

                                                          32. Thank you.

         These include H shares and red chips.


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