After belated securities reform, Hong Kong should look at insurance regulation

Twenty-five years after it was proposed, the Hong Kong stock exchange is finally going to implement a key reform that will bring it in line with late-20th century practice.

In a city known for its efficiency, that is amazingly tardy. But better late than never.

After many rounds of consultation, the government will seek in the second quarter lawmakers’ approval to change the law to allow investors to hold their shareholdings in the form of electronic records instead of paper certificates.

Thus will the final major proposal in the Ian Hay Davison report in 1988 be adopted. The report, which followed the 1987 market crash, was the blueprint for Hong Kong’s regulatory system today. It led to the setting up of the Securities and Futures Commission in 1989 and the introduction of a consolidated securities law – the Securities and Futures Ordinance – in 2003.

With the imminent implementation of the report’s final recommendation, it is time to think about what is the next step forward.

On the securities side, no major changes are needed, but major reforms are required to the regulatory regime for insurance.

While the SFC has been in operation for almost 25 years, the insurance regulatory system hasn’t changed.

Insurance companies are registered with the government’s Office of the Commissioner of Insurance, while insurance agents and brokers are supervised by self-regulating industry bodies.

Last year, many complaints were made about the selling of complex investment-linked assurance schemes. Some investors said they were misled by sales agents or insurance brokers.

If nothing is done to plug the regulatory loopholes, more problems could arise as products become more complicated.

Why do we need an independent regulator for the insurance sector?

The Davison report said in 1988 that Hong Kong needed to set up “a single independent statutory body outside the civil service, headed and staffed by full-time regulators and funded largely by the market” to regulate the securities market and offer investor protection. This quickly resulted in the birth of the SFC on May 1, 1989.

When Davison returned to Hong Kong in 2009 to celebrate the 20th anniversary of his baby, he told White Collar “The securities regulator should be outside the civil service and its executives should be paid at a commercial rate”. He said the SFC was doing well, “as its executives are properly paid. In the old days, the regulatory jobs were done badly, as they were poorly paid and those who did the regulation were remote from the market”.

What Davison said about the securities market could apply equally to the regulation of the insurance industry.

After the change to the law to allow scripless shareholdings, the next change should be to establish an Independent Insurance Authority.