Response to Mr. Law’s Letter to the Financial Times

No regulation can be effective without sufficient legal disincentives

Regarding Mr. Law’s letter concerning the regulatory standards of the Hong Kong Exchange (HKEx), I am grateful for the education, but unconvinced. In game theory if a principal appoints a watch dog, the agent’s best move is to suborn the watchdog. Why is there a need for the Securities and Futures Commission, a regulator, to regulate another regulator, especially one motivated by profit even if that profit is limited by more regulation? Why can’t the SFC regulate the exchange directly? What does the SFC do if the HKEx does not comply? Does the SFC have the power to shut the HKEx down? Imprison its executives? I did not find any penalty provisions under Chapter 571, Section 21 (2) of the Securities Futures Ordinance. What are the legal disincentives that the SFC can employ?

Also if I understand correctly, the SFC is an organ of the Hong Kong Special Administrative Region Government, which is part of China. China is run by the State Council, which also supervises State-owned Assets Supervision and Administration Commission (Sasac), which is the majority shareholder of many Red Chip and H share companies listed on HKEx. So what are SFC’s economic and legal incentives? To protect foreign minority shareholders in accordance with international standards? It is always important to remember that any law is still just a piece of paper.

William Gamble

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