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19th Legco Report to HKSA Council By Hon. Eric K.C. Li

I. Highlights

The 2000-01 Budget turned out to be a non-event as predicted. The unexpectedly strong stock market has helped to paint a better Budget picture at the end of the fiscal year on 31 March 2000. The new Committee on tax review will have to find a way forward and shoulder some of the political heat next year.

The Taiwan election fore-shadowed much of the political discussions during the second quarter this year. The historically low popularity of the Chief Executive and the approaching election of the Election Committee are gradually attracting some attention more recently.

My Motion Debate on the 'management of risks of IT stocks' was well timed in that we had just seen the roller-coaster action at work on IT stocks worldwide. It also gave the accountancy profession a platform to proactively explain our proper role and perceived predicaments on public record in advance of any trouble.

Professional responsibilities and self-regulation had also attracted much publicly in the last few months. The piling saga of the Housing Authority, the controversial disciplinary hearing of the Medical Council and the continue professional education and assessment of our teachers were all widely publicised. We should reflect on these events and to take note that professional issues may not always be dealt with 'in-house'. Professionals must be prepared to take on greater transparency and increasingly higher public responsibilities in a politicised environment.

II. Committees and Panels

1. Public Accounts Committee (PAC):
@ On 15 March, the Director of Audit tabled his Report No. 34 in the Council. The Report No. 34 contains 8 chapters. The Committee, after holding 3 public hearing sessions to receive evidence from Controlling Officers, have met 9 times to finalise our own independent report. I intend to present the PAC Report to LegCo on 21 June 2000.

The Committee has also concluded the outstanding Reports on Chapters 1, 4 and 12 of the PAC Report No. 33, i.e. "The Refuse Collection Service of the Urban Service Department", "Management Practices of the Vocational Training Council" and "Water Purchased from Guangdong Province" respectively. Despite of its highly controversial contents, all concerned parties have accepted its conclusions and recommendation. In particular, there were highly visible follow up actions taken by the Administration on the 'Water Purchase' issue.

2. Financial Affairs Panel:
@ The Panel held 4 meetings since the last report and the relevant agenda are attached as Appendix I.

On 13 March 2000, the Chairman of the Securities and Futures Commission (SFC), Mr. Andrew L T SHEUNG, and the Chief Executive of the Stock Exchange of Hong Kong, Mr. Alex TUSI have provided the Panel with a report on the listing requirements and subscription arrangement for shares on the Growth Enterprise Market. The meeting was widely reported and in particular, SFC has publicly criticised BNP Prime Peregrine Securities for the company's poorly organised settlement arrangements in the Tom.com's listing during February.

The Financial Secretary (FS) also briefed the Panel on macro economic issues on 5 June 2000 and he had also made use of the occasion to consult members on the expenditure proposals for the 2001-02 Budget.

A proposed list of future agenda items is attached as Appendix II for reference.

3. Welfare Services Panel:
@ The Panel held 6 meetings since the last report. The Panel focused on the social welfare subvention reform; the social welfare services for squatter areas in the New Territories and the "Promoting Self-reliance" strategy. It also discussed the career support services; the support services for streetsleepers; the proposed lump sum funding system; the assistance provided to the blind or visually impaired persons in processing and accessing information on the computer; the review of family services and the various other issues arising from the comprehensive review of CSSA.

There were 2 joint meetings with Panels on Manpowers to discuss the research study on unemployment benefits systems on 2 June 2000 and 13 June 2000.

4. Economic Services Panel:
@ The Panel held 3 meetings since the last report. The Panel discussed the development of logistic management centres in Hong Kong, the prohibition on the use of flueless gas water heater, the retail price of industrial diesel, aviation safety and the Hong Kong international airport.

It also studied the Hong Kong Disneyland (Disney Theme Park), the retail and wholesale prices of major fuels, the interconnection and competition in the electricity sector in Hong Kong as well as the revision of Government fees and charges.

5. Information Technology and Broadcasting Panel:
@ The Panel held 4 meetings since the last report. The Panel mainly focused on the Y2K monitoring and co-ordinationg arrangements for roll-over to 29 February 2000, the registration of Internet domain names, the third generation mobile phone and the Film Development Fund. It also studied the progress of the Cyberport projects; the consultation paper on the Control of Obscene and Indecent Articles Ordinance; the proposed revision of Government fees and charges under the purview of the Information Technology and Broadcasting Bureau and its departments, hacking and virus activities and preventive measures; industry consultation on licensing framework for Third Generation Mobile Services as well as the public consultation on the administration and assignment of Internet domain names and Internet protocol addresses in Hong Kong.
6. Finance Committee and House Committee:
@ There were 8 meetings of Finance Committee (including 4 special meetings with 18 sessions from 21 to 24 March 2000 to examine the draft Estimates of Expenditure 2000-01 as well as one special meeting to enable Members to express their views on the expenditure proposals for 2001-02 Budget on 5 June 2000) and 11 meetings of House Committee.

TD of HKSA were kept informed of progress on all Bills on a weekly basis and I held two separate stocktaking meetings with the Secretariat on 16 March 2000 and 2 May 2000 to closely monitor progress of all HKSA submissions. I plan to hold one more such meeting to wrap-up this LegCo session before the end of the month.

III. Bill Committees Joined

1. Telecommunication (Amendment) Bill 1999
@ The Bills Committee has held a total of 22 meetings. Apart from discussing the Bill with the Administration, the Bills Committee has also met with 21 deputations from the telecommunications industry, tunnel operators and other interests parties to receive their views.

Considering the proposed section 7H (tariffs and price control), HKSA suggests that "accounting practices" in the first line and second line should be replaced by "accounting policies": and "accounting principles" respectively. Appropriate amendment has now been made.

With regard to the Section 35A (inspection of records, documents and accounts), HKSA considers that Telecommunication Authority's (TA) powers to enter the premises of a licensee and to inspect and make copies of documents, etc. too broad. Amendments have been made to restrict the scope to within the Ordinance's enforcement powers.

HKSA also considers that Section 36D provisions will be unfair to non-licensees in that the grounds or purposes for which TA requires the information are very wide. Besides, TA is not under any confidentiality obligation in respect of the information he obtains. Since the order can be applied by TA ex parte, the non-licensees are not given any prior opportunity to respond to TA's demand for information and that their only course of redress is to seek a judicial review on the magistrate's decision to issue the order. Substantial amendments have now been made to require TA to give notices to concerned parties, receive representation and to submit same to the magistrate for his consideration and further action. TA is also now required to keep the information so obtained confidential and the third party is explicitly excluded from such civil claims and liabilities.

The amended Bill was passed on 7 June 2000 without further controversy.

2. Securities (Amendment) Bill 1999
@ The Committee have held 5 meetings to discuss with the Administration and have also invited industry representatives, legal professionals and concerned organisations to give their views on the Bill.

The Bill seeks to strengthen the regulation of short selling in Hong Kong to safeguard the markets from the failure of price-discovery and lack of transparency brought about by non-compliance with the disclosure rules of short selling. HKSA made no significant comment.

The Bill was passed on 17 May 2000.

3. Companies (Amendment) Bill 2000
@ The Bills Committee held 5 meetings with the Administration since the last report. The objective of the Bill is to amend the Companies Ordinance (Cap. 32) ("the Ordinance") in order to V (a) implement the recommendations of the Law Reform Commission of Hong Kong ("CRC") in its Report on Corporate Rescue and Insolvent Trading; (b) implement the recommendations of the Standing Committee on Company Law Reform ("SCCLR") and (c) effect miscellaneous amendments to various other sections of the Ordinance.

In view of the complexity and the significant changes that this legislation will bring to the existing regime of insolvency practices, the Committee feel that we do not have sufficient time to study that part of the 'corporate rescue' procedures properly. We have decided to shelf the relevant parts of the legislation for further consideration till next LegCo. The Insolvency Practitioners Committee made a comprehensive and detailed submission and they have agreed it best to stall scrutiny of the Bill. Given the present requirement of the Bill to pay all workers' wages before launching a legitimate 'corporate rescue', it can only work in rare circumstances. The Bill also require significant refinement before the Committee can give support. There is also an extremely late submission by the HKSA to S.228 of the Bill which is now being sorted out with the Administration.

The Committee suggested that the expected date for resumption of Second Reading should be 21 June 2000.

4. Building Management (Amendment) Bill 2000
@ The Bills Committee has held 9 meetings with the Administration. The Bill is to amend the Building Management Ordinance (Cap. 344) ("the Ordinance") to provide for: (a) specification of building management and maintenance standards for compliance by owners' corporations ("Ocs"); (b) mandatory management of buildings with serious management and maintenance problems; (c) simplifying the manner for owners of new building to convene meetings to appoint management committees; and (d) miscellaneous matters relating to insurance, auditing of OC's accounts, notice of owner's meeting and quorum at a meeting of OC.

HKSA made a written submission to the Bill. HKSA had proposed technical amendments to section 27(1A) concerning audit reporting requirements. These amendments have now been accepted by the Administration and CSA's will be moved in due course.

5. Securities and Futures Legislation (Provision of False Information) Bill 2000
@ There were 5 meeting held since the last report. The objective of the Bill is to amend the Securities and Futures Commission Ordinance (Cap. 24), the Commodities Trading Ordinance (Cap. 250), the Stock Exchanges Unification Ordinance (Cap. 361), the Securities and Futures (Clearing Houses) Ordinance (Cap. 420) and the Exchange and Clearing Houses (Merger) Ordinance (12 of 2000) to make the provision of false, misleading and incomplete information to the relevant authority a criminal offence whether the person is providing the information under a statutory obligation or in other circumstances.

HKSA made 2 written submissions to the Bill. Under clause 2, proposed section 56A(2), HKSA are concerned, in particular, with the references to providing information that is "connected with" the performance of a function of the relevant authority. This is a vague and potentially wide test.

Under the proposed section 56A(2)(b)(i) and (ii), HKSA considered that whereas the term "misleading" is used in paragraph (i), "inaccurate" is used in the negatively-worded provision in paragraph(ii). However, unlike "true/false" and "complete/incomplete", "misleading" and "accurate" cannot be said to be direct opposites. This apparent discrepancy may create confusion.

The Administration has amended the Bill to use the words "false or misleading" to describe information that is intended to be caught by the proposed offences. The scope of Section 56A(2) is now a subject for further negotiation with the Administration who is unwilling to compromise.

6. Urban Renewal Authority Bill
@ The Bill is to repeal the Land Development Corporation Ordinance (Cap. 15) and to provide a legislative framework for the establishment and operation of the Urban Renewal Authority.

HKSA made a written submission to the Bill. Under clause 15 (Debt of Authority), HKSA commented that the accounting and auditing requirements as presently drafted are too brief and loose. The Administration has agreed to address these concern with our proposed CSAs.

7. Broadcasting Bill
@ The objective of the Bill is to implement the policy recommendations arising from the 1998 Review of Television Policy following the consultation on proposals set out in the consultation paper entitled "1998 Review of Television Policy" issued by the Information Technology and Broadcasting Bureau in September 1998 with a view to V (a) widening programme choice; (b) encouraging investment, innovation and technology transfer in the broadcasting industry; (c) ensuring fair and effective competition in the provision of broadcasting services; (d) ensuring that broadcasting services do not offend public taste and decency; and (e) promoting the development of Hong Kong as a regional broadcasting and communications hub.

HKSA made a written submission to the Bill. Under clause 16 (Separate accounting), HKSA enquired under what circumstances would the Broadcasting Authority (BA) direct a licensee to adopt an accounting practice pursuant to Clause 16(2) of the Bill. Amendments have been made to section 16(2)(c) by deleting "practices" and substituting "principles", to restrict the scope to the enforcement of the BA's powers. The Administration has also voluntarily amended all relevant sections with regard to access to information from third parties to ensure consistency with the 'Telecommunication (Amendment) Bill 1999'. (see paragraph (1) above)

The Bills Committee supports the resumption of Second Reading debate on 21 June 2000.

8. Subcommittee on Resolution under Section 3 of the Dogs and Cats Ordinance (Cap. 167) and Dogs and Cats (Amendment) Ordinance 1997 (97 of 1997) Commencement) Notice 1999
@ The purpose of the Subcommittee is to seek the Legislative Council's approval of the Dangerous Dogs Regulation ("the Regulation") which provides for the control and regulation of fighting dogs, large dogs and known dangerous dogs. I received a number of representations from dog-owners within the Accountancy Functional Constituent.

The Regulation was finally approved on 17 May 2000 after substantial improvements made to satisfy public concerns.

9. Subcommittee on Securities and Futures Bill
@ There were 4 meetings held on 11, 14, 27 & 28 April 2000 since the last report. The next meeting will be held on 19 June 2000 to meet the Administration. The Bill will not be moved within this LegCo session. A submission from HKSA is still awaited. I have urged the HKSA to suggest a policy wide procedure to deal with access to working papers and records from third parties like accountant to provide consistency and fair dealing of all the regulators and departments concerned. Otherwise, our legislation may be littered with many different versions of similar legislation which will cause problem in future.
10. Subcommittee on Financial Resources Rules, Commodities Trading (Accounts and Audit) (Amendment) Rules 2000 and Securities (Margin Financing) (Amendment) Ordinance 2000 (20 of 2000) (Commencement) Notice 2000
@ The Subcommittee has held 2 meetings with the Administration. The Subcommittee has only discussed the Financial Resources Rules and has no objection to other Rules.

The Financial Resources Rules ("FRR") are subsidiary legislation under the Securities and Futures Commission Ordinance (Cap. 24). The aim of the FRR is to provide appropriate prudential standards on the financial resources of market intermediaries. One of the key objectives of the new FRR is to extend appropriate financial regulation to securities margin financiers.

In the Subcommittee, I have made a brief statement on the following line. HKSA will not oppose the passage of the FRR because we identify with the aim of standardisation but would, urges the SFC to actively investigate the possibility of information technology applications; I also warned that HKSA may not be able to have technical guidelines etc ready on time before the effective data of implementation i.e. 12 June 2000; and there will definitely be cost implications for the securities industry but the extent of additional costs will depend on the exact scope of the further audit works required which can be significant.

The SFC and Subcommittee both recognised our position on record and the SFC had promised further liaison with HKSA through ASCI and CPD programmes.

The Subcommittee has not proposed any amendments. The commencement date for these three pieces of subsidiary legislation is 12 June 2000.

V. Motion Debate

I moved a Motion Debate on 3 May 2000 which was duly passed with little controversy. The contents of my speeches will be highlighted in my circulars to members and Web page. A list of all other topics are attached as Appendix III.

VI. Questions

I have asked 6 questions (2 questions for the Growth Enterprise Market, 2 questions for the air pollution, 1 question regarding the drafting of Bills on regulation of Financial market and the other is for the hiring of Certified Public Accountants by SFC) since the last report which are attached as Appendix IV. The relevant HKSA Committees may wish to be advised and to consider the replies further.

VII. General Political Background

With Legco in summer recess from 1 July 2000, the Administration will be able to relax a little. The scence is likely to be set by slinging matches amongst competiting politicians in high election gear.

The development of a political relationship between the Mainland and Taiwan, the China WTO entry and the Housing Authority's piling saga are all likely to take more twists and turns which require further observation. However, the HKSA should take this breathing space to think hard and to build consensus amongst accountants on difficult issues like the Securities and Future Commission (Amendment) Bill and corporate rescue legislation. Once Legco resumes in October, these important legislation will be rushed through leaving no time for us to ponder.


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