|I remember when my British friends asked me how Hong
Kong would change after the handover. But as you know,
we have changed little. During my recent trip to London,
I was invited by Hong Kong's British Consul-General to
visit several of the City's prominent financial institutions,
such as the Bank of England, Financial Services Authority
and Standard Chartered Bank. By contrast, changes there
are far more evident!
In May 1997, the Labour Government took power in the
UK. And with it came fast and furious sweeping changes
- the establishment of the Scottish and Welsh Parliaments
and momentous reforms to the House of Lords, the education
sector, and last, but certainly not least, to the entire
financial services industry.
The British Government announced shortly after taking
office that it had decided to give the Bank of England
operational independence to implement the country's
monetary policy. A fortnight later, the Government announced
the radical reform of the entire financial service industry's
regulation structure, including the transfer of the
Bank's banking supervision responsibility to the Financial
Service Authority (FSA), a new regulatory body for the
whole financial services industry.
The FSA is the broadest financial regulator in the
world. The one-stop regulatory shop covers a wide range
of industry sectors ranging from independent financial
advisers operating on the high street to global investment
However, the new British Government did not appear
to even ponder making these drastic changes, nor did
it wait for the full legislative process to be completed.
With its wide margin of voting power in Parliament,
most changes took place immediately, with the numerous
existing regulatory bodies exchanging management agreements
and 'Memoranda of Understanding' with the FSA. The FSA
will have to learn as it works and legislate whilst
it learns. But why the radical reforms and the undue
The fact is, the whole world is changing. The Swedes
and the Danes have successfully operated unified regulators
for some time. The Irish and Luxembourgers are following
suit. The Australians have also chosen a single prudential
regulator to cover all sectors. Japan and Korea introduced
similar changes last year, under the influence of the
There is one other point worth making in relation to
the international dimension of financial regulation.
The G7 Finance Ministers recently agreed to set up a
committee to bring together regulators and central bankers
around the world. Their proposal suggests that each
country be represented by its finance ministry, central
bank and 'leading national regulator'. The FSA fills
that role neatly in the UK, but in Hong Kong and other
countries, it is not as easy.
The UK's regulatory consolidation not only matches
the emerging needs of the global financial marketplace,
it also completes, at least in theory, the basic architecture
of a single market for financial services across Europe.
The set-up of the FSA followed all the relevant EU directives.
The proponents for change believe that the FSA model
offers more market sensitivity for regulation, as well
as enhanced effectiveness. From a market point of view,
it reduces regulatory overlap and the plethora of different
reporting requirements, particularly for large financial
institutions. The economies of scale gained also offers
further cost reduction opportunities for financial transactions,
possibly creating serious international competitive
From the 'market protection' perspective, it makes
increasing sense to manage the risks of complex financial
institutions more comprehensively and on a global basis.
The wave of financial sector mergers rolling across
global markets is clearly gathering speed in North America,
Switzerland, Benelux and Italy. The use of new technology,
such as the Internet, has made international financial
business even more mobile.
The experience of the past decade has already demonstrated
embarrassing gaps in traditionally centre-based regulatory
armoury. As such, international co-operation amongst
regulators is a certain trend for the future.
A unified regulator also leaves no doubt as to who
is responsible in the event of regulatory failure. The
regime incorporates clear lines of accountability. It
could also be tasked to enhance financial literacy and
to improve the quality of consumers' decision making.
It is also better placed to invest in long-term professional
The case for reform in the UK is indeed compelling.
Hong Kong should be similarly motivated to find its
own solution, one which is effective and quick to respond
to the unpredictable market changes, both in terms of
products and the technological evolution. The recent
Budget has already mapped out the first step for such
changes, which is to unify the exchanges. But I don't
think it should, or will, stop there.
The forces resisting change will no doubt be vociferous
- there are substantial vested interests involved. The
sweeping powers brought about by the consolidation of
regulators will also need to be properly checked and
the following will all be essential: a widely representative
structure for corporate governance; detailed codes of
conduct for financial markets; a statutory practitioners
panel; a statutory consumer panel; an independent financial
ombudsman to prevent the abuse of powers; and an oversight
committee in the legislature to provide an overall balance
We must also ensure that consumers do not become over-dependent
on regulations. Appropriate references should be made
to define consumers' responsibilities in relation to
different markets. The intensity of regulation must
also be well balanced and sensible to prevent international
businesses being pushed off-shore into less regulated
The Government has no time to lose. We must study and
carefully assess the changes taking place around us,
engaging expert consultants if necessary. Hong Kong's
accountants are also strategically placed to take a
lead in these changes and it is now time to prepare