Asian regulators grow their adult teeth

Peta Tomlinson looks at financial regulators post-Enron

The Financial Express called 2005 “the year the regulators grew up”. With soaring penalties for corporate misconduct and a newfound eagerness to publicly air their dirty laundry, the post-Enron era has marked a coming of age for financial regulators round the world.

It is no surprise that the US Securities and Exchange Commission (SEC), once considered the only regulator with teeth, is leading the charge. Between 2002 and 2005, calculated Herbert Smith lawyer Alex Bafi, the SEC fined more companies than it had in the entire period since it was founded (in 1934).

But, in other jurisdictions round the world, regulators have been gaining strength of their own. Although their approaches may be quite different to the SEC, regulators in various countries have become more open and transparent, increasingly talking to other regulators about different ways of sorting out common problems.

Martin Wheatley, chairman of the Hong Kong Securities and Futures Commission (SFC), agrees that regulators round the world are catching up with the SEC, using a variety of ways to look at issues of enforcement. He cites the Financial Services Authority (FSA) in the UK, Australian Securities and Investments Commission (ASIC) in Australia and Hong Kong’s SFC as examples of regulators who have “upped their game”.

In Hong Kong, he points out, the new Securities and Futures Ordinance (SFO) has marked a major shift for enforcement. The ordinance, which came into effect on 1 April 2003, expanded the regulator’s punitive powers, marking a recognition by Hong Kong that it had a problem and a willingness to do something about it.

With its newfound ability to take action against corporates and their directors, the SFC could now fine stockbrokers for misconduct and prosecute those charged with market manipulation. So far, under the new law, it has brought eight prosecutions for false trading (a form of market manipulation), of which three were successful, four are awaiting trial and one was withdrawn.

Alan Linning, SFC’s executive director of enforcement, elaborates: “Also since 2003, we’ve been mopping up cases under the old law and have had 23 successful prosecutions that have resulted in sentences ranging from fines to periods of imprisonment. The courts have started to impose more severe sanctions, and this is a great disincentive. For anyone convicted after trial, there is a real danger of a prison sentence. Certainly for repeat offenders, the courts have made it clear they will go to prison.”

And Hong Kong stands out as a leader in Asia in its pursuit of insider dealers, says Linning. Since 1991, 20 successful cases have been brought before a tribunal. Transgressors were forced to give up the profit they had made and penalised a further two or three times that amount, resulting in orders totalling well over HK$500m (US$65m). “We believe we have one of the best track records in the world in successfully going after inside dealers,” Linning says.

“We are also beginning a campaign to look at disqualifying directors of listed companies who we feel have failed in their duties towards the companies they manage. The campaign will raise the disincentives for people not to misbehave, not to misuse their positions, and not to misuse company assets.”

Like other regulators, the SFC works closely with local police and co-operates with the Independent Commission Against Corruption (ICAC) in the fight against white-collar crime. “We recognise that nobody has the full picture, and we all have something to contribute,” says Linning. “To get results, we need to share intelligence with other law enforcement bodies and other countries’ regulators as well.”

With so many new listings coming to Hong Kong, especially ones involving the Chinese mainland, a strengthening of the SFO’s powers was both timely and necessary, Linning added.

“With the inflow of smaller capitalised stocks, there are also those people who see opportunities to exploit minority shareholders, retail investors and the less wary. The SFO makes it clear that such exploitation will not be tolerated.”

Further changes are under consideration, with a proposal to put some of the listing requirements of the Hong Kong Stock Exchange (HKEx) into black-letter law and provide sanctions for breaches of those laws. “This proposal is designed to improve corporate governance and the quality of disclosure made by listed companies, and further increase the deterrent value,” explains Linning.

Similarly, Australia, with one of the highest levels of share ownership in the world, has been forced to take stock of its financial services regulatory framework. Even before the infamous HIH Insurance Group collapse of 2001, Australia had begun implementing the Corporate Law Economic Reform Programme (CLERP) as part of a government drive to promote business, economic development and employment.

Promote confidence

The Financial Services Reform Act introduced in 2002 was designed to further promote investors’ confidence, creating a single licensing regime for all financial services providers and improving disclosure requirements. With it came additional funding and statutory powers of enforcement for Australia’s financial regulator, ASIC. Its chairman, Jeffrey Lucy, calls the new-look regulator “strong, fair and progressive”. As examples of its effectiveness in dealing with corporate wrongdoing, he cites 27 successful prosecutions in 2004/05, resulting in jail terms totalling more than 96 years. In the same year ASIC took 40% more action on reports of crime and misconduct and checked 56 superannuation operators, stopping five schemes. Now, under CLERP 9, Australia is turning the spotlight on executive pay, requiring remuneration disclosure by CEOs and CFOs. ASIC has also been empowered to penalise breaches of the continuous disclosure regime, while shareholders have been given a greater say at company AGMs.

According to Melbourne University’s Professor Ian Ramsay, director of the Centre for Corporate Law and Securities Regulation, what is happening in Australia is a familiar theme: corporate collapses leading to significant legal changes and greater transparency. ASIC has grown to 1,600 employees and a budget of A$200m, “more than they’ve ever had”, and in general is “doing a decent job”, he says. It has not been entirely smooth sailing, with ASIC having to be highly selective in choosing which to investigate of the 10,000 complaints it receives each year. The regulator has also been criticised by some for not being tough enough, especially in one high-profile insider trading case last year in which it controversially decided to bring civil proceedings instead of criminal charges against businessman Steve Vizard.

Going forward, ASIC needs to be proactive with the media by endeavouring to explain complex decisions, Professor Ramsay said. “All regulators have an important mandate beyond enforcement, and that is to fulfil their educational responsibilities.”

By and large, Australia is sending out the right messages to both deter wrongdoers and promote investor confidence, believes Professor Ramsay. “We have lifted our game. Clearly, in recent years we have done better with issues like transparency.” In Asia, Australia’s corporate regulator is regarded very highly, he added. Australia is seen as a leader in terms of corporate law, and the hosting of its annual Summer School for regulators across the region, an ASIC initiative, is evidence of that. “For regulatory best practice,” he says, “Australia can hold its head up.”

Peta Tomlinson is a freelance journalist who writes for the South China Morning Post and the Hong Kong Trade Development Council.