Bills Committee on Securities (Amendment) Bill 1998 (Minutes) 15 Sept 1998

Legislative Council

LC Paper No. CB(1)101/99-00
(These minutes have been
seen by the Administration)

Ref: CB1/BC/1/98/2

Bills Committee on
Securities (Amendment) Bill 1998

Minutes of meeting held on
Tuesday, 15 September 1998, at 2:30 pm
in Conference Room B of the Legislative Council Building

Members present :

Hon Ronald ARCULLI, JP (Chairman)
Hon Cyd HO Sau-lan
Hon Albert HO Chun-yan
Dr Hon Raymond HO Chung-tai, JP
Hon Margaret NG
Hon Bernard CHAN
Hon CHAN Kam-lam
Hon LEUNG Yiu-chung
Hon SIN Chung-kai
Hon Jasper TSANG Yok-sing, JP
Hon Ambrose LAU Hon-chuen, JP

Members absent :

Dr Hon Philip WONG Yu-hong
Hon TAM Yiu-chung, JP

Public officers attending :

Item II
Mr Bryan P K CHAN: Principal Assistant Secretary for Financial Services
Mr Wallace LAU: Assistant Secretary for Financial Services
Mr Gerald GREINER: Senior Director
Securities and Futures Commission
Mr John LUFF: Senior Counsel
Securities and Futures Commission
Ms Monica LAW: Acting Senior Assistant Law Draftsman

Clerk in attendance :

Miss Odelia LEUNG,: Chief Assistant Secretary (1)1

Staff in attendance :

Mr KAU Kin-wah,: Assistant Legal Adviser 6
Ms Connie SZE-TO,: Senior Assistant Secretary (1)1

I Election of Chairman

Mr Ronald ARCULLI was elected Chairman of the Bills Committee.

II Meeting with the Administration
(LegCo Brief Ref: SU/B51/98(IV), LC Paper Nos. CB(3)124/98-99, LS18/98-99 and Appendices IV and V of CB(1) 187/98-99)

2. At the invitation of the Chairman, the Principal Assistant Secretary for Financial Services (PAS/FS) explained that the object of the Securities (Amendment) Bill 1998 (the Bill) was to amend Part X of the Securities Ordinance (SO) (Cap. 333) to enable implementation of the compensation scheme for investors affected by the collapse of the C.A. Pacific Group in January 1998. The amendments aimed to achieve the following -

to enable the Securities and Futures Commission (SFC) to inject money from its reserve into the Unified Exchange Compensation Fund (UECF);
to empower the Stock Exchange of Hong Kong (SEHK) to authorize, under certain circumstances, discretionary payments to claimants before the completion of processing and determination of all claims under the apportionment procedure;
to exclude the discretionary payments from the calculation of the statutory compensation limit of $8 million;
to cap the money for recycling for compensation to the first $8 million recovered through subrogation rights surrendered to the SFC by the affected claimants; and
to clarify beyond doubt that the claim of a claimant who had been paid a discretionary sum was considered absolutely discharged whether or not he received any further payment under the apportionment procedure.

3. PAS/FS added that the Bill, if enacted, would take retrospective effect from 27 January 1998.

Per claimant compensation limit

4. Noting the announcement jointly made by the SFC and the SEHK in June 1998 that the per claimant compensation limit would be $150,000 for clients of the C. A. Pacific Group, members sought clarification on the absence of such an express provision in the Bill. The proposed section 113 (5A) of the Bill empowered the SEHK to determine the level of discretionary compensation payment in each case. Members were concerned about the lack of certainty and how the SEHK would exercise the discretionary power. They were concerned in particular about the possibility of the SEHK recommending an amount of compensation less than the announced sum to claimants of C. A. Pacific Group and other known defaulting stockbrokers.

5. In response, PAS/FS explained that the decision to relax the current compensation rules and the statutory compensation limit of $8 million per defaulting stockbroker was made having regard to the prevailing market conditions at the time of the collapse of the C. A. Pacific Group, its potential systemic risk to the market system as well as the size of the possible claims in relation to the company. The per claimant compensation limit of $150,000 was worked out by taking into accounts the total amount of claims made to the company and the distribution of the size of claims. This compensation limit might not be applicable to other defaulting cases. The Administration therefore considered it inappropriate to specify the per claimant compensation limit in the Bill in order to provide flexibility to the SEHK in determining the amount of compensation having regard to the circumstances of each case. The Administration understood that the SEHK was processing the claims of C. A. Pacific clients according to the principles announced in January and June 1998 and on the basis of a per claimant limit of $150,000. He assured members that there should be no doubt over the SEHK in implementing the compensation package for the C. A. Pacific clients. As regards compensation for clients of other defaulting brokers, PAS/FS stressed that the SEHK would decide on a case-by-case basis having regard to the circumstances of the default and taking into account all ascertained and contingent liabilities of the UECF. The C. A. Pacific compensation package would certainly serve as an important reference.

6. In this connection, Assistant Legal Adviser advised that the compensation scheme for C. A. Pacific claimants had been endorsed by the SFC and the SEHK and made public. Although the SEHK was not legally bound to implement the scheme, it would breach its own pledge should it fail to do so.

7. On the broader concern about checks and balances on SEHK's power in determining the level of compensation, the Senior Counsel, Securities and Futures Commission (SC/SFC) advised that the SEHK needed to have the SFC's prior approval in making the discretionary payments under the proposed section 113 (5A). Moreover, the existing section 121A of SO provided that the SFC could exercise all or any of the powers, functions and duties of the SEHK under Part X of the Ordinance if it was satisfied that the SEHK had either failed or refused to exercise its functions, or that the SEHK had unreasonably delayed the making of determination of the claims. As regards the concern about the possibility of the SEHK recommending an unreasonable amount of compensation payments after taking into account the financial position of the UECF, SC/SFC said that section 51 of the Securities and Futures Ordinance (SFCO) (Cap. 24) empowered the SFC to give directives to the SEHK when the former was satisfied that it was in the interest of the investing public or in the public interest to do so. There were thus sufficient checks and balances on the power of the SEHK. PAS/FS added that any claimants might appeal to the court under section 115 of SO if their claims had been disallowed or only partially allowed by the SEHK.

8. Some members opined that since section 51 of SFCO was a draconian provision, they doubted whether it could be invoked when the issue in question concerned a limited number of investors. Members requested the Administration to consider amending section 121A of SO to enable the SFC to exercise the power of the SEHK if the former was satisfied that the amount of compensation payable to claimants as determined by the SEHK was unreasonable. The Administration undertook to consider the suggestion.

9. Responding to a member's enquiry about the basis for setting the per claimant compensation limit at $150,000 instead of $200,000 as had been mentioned by the former Chairman of the SFC, PAS/FS said that the former Chairman of the SFC had clarified on previous occasions that he hoped to be able to achieve a per claimant compensation limit of $200,000 but the actual figure would have to depend on the size of the claims and the amount of UECF available. PAS/FS advised that about 70% and 77% of claimants of C. A. Pacific Group would be fully compensated if the limits of $150,000 and $200,000 were adopted respectively. The Administration considered that the compensation limit of $150,000 per claimant had struck a reasonable balance between the interests of the parties concerned and the need to preserve a prudential level of the UECF. A member was unconvinced of the Administration's explanations and said that a compensation limit of $200,000 per claimant had been publicly announced and accepted by the public. At members' request, PAS/FS agreed to examine whether an amendment to the Bill to provide for a maximum per claimant compensation ceiling exceeding $150,000 would have a charging effect. As regards a member's suggestion to specify a minimum compensation limit in the Bill, PAS/FS said that this was not advisable since a claimant might receive more compensation than his pecuniary loss.

Subrogation right of SFC

10. Members noted that under the existing law, the SFC's subrogation right preceded the right of claimants in insolvency distribution under the liquidation proceeding. A member considered it more equitable for the claimant and the SFC to be accorded equal priority to the insolvency distribution. In response, PAS/FS explained that under section 118 of the exiting SO, after a payment was made to a claimant, the SFC was subrogated to the claimant's rights and remedies against the defaulting broker to the extent of the payment under the liquidation proceeding. Money recovered by the SFC were recycled to meet any allowed claims which had not been fully compensated. Such further payments were apportioned among the outstanding claims on an equitable basis. The amendment to section 109(3) proposed to cap the amount of money for recycling to the first $8 million recovered through subrogation rights surrendered to the SFC. The SFC's subrogation right had to precede the right of the claimant from whom the subrogation right derived so as to ensure that claimants would not receive from both the UECF and the liquidation process more than what they were entitled to as well as to preserve the prerogative of the UECF over its own resources. Through subrogation, the risk of non-recovery under the liquidation process was transferred from the claimants to the UECF to the extent of the compensation made.

Role conflict of SEHK

11. Some members were concerned about a possible conflict of interests on the part of the SEHK in making decisions on claim related matters since compensation was paid out of the UECF which was made up partly by contributions from SEHK members. To enhance investors' confidence, a member suggested setting up an independent body to manage the UECF and to determine the level of compensation for eligible claimants. In his view, the level of compensation available to a claimant should be linked with his investment and be specified in a Schedule to the SO to facilitate future adjustment.

12. Addressing the concern about a conflict of interests on the part of the SEHK, PAS/FS responded that this should not be a problem since the majority of the UECF came from transaction levies paid by investors and contributions by SEHK members only made up a small proportion. Moreover, the Compensation Committee of the SEHK included lay Council Members who were independent third parties. All along the Compensation Committee had handled claims against the UECF fairly.

13. As regards strengthening the protection for investors, PAS/FS stressed that the Administration was committed to improving the existing compensation system to achieve the purpose. The broader issue of the review of the current compensation mechanism was under study. The Senior Director, SFC supplemented that a consultation paper on new investor compensation arrangements would be released by the end of September 1998 for public consultation. One of the proposals was to introduce a new compensation scheme that constituted an insurance element.

14. Since the consultation paper would soon be released, members explored if the Bills Committee should examine the compensation mechanism as well. PAS/FS advised that it would take one to two years to consult concerned parties and prepare legislative amendments. The Administration hoped that the Bill could be enacted as early as possible to effect compensation to C. A. Pacific claimants and the issue of the overhaul of the existing compensation mechanism should be addressed in a separate exercise.

Other concerns

15. A member remarked that the Administration should have ensured the existence of a legal basis for implementation of the proposed compensation arrangements when these were announced in January 1998. In response, PAS/FS said that should time allow, the Administration would surely seek thorough legal advice before announcing the proposed compensation scheme. At the time of the announcement, the Administration had not received any legal advice suggesting that legislative amendments were required. Subsequent legal advice confirmed that legislative amendments were necessary. He stressed that there was no delay in preparing the legislative amendments. Pending a confirmative legal advice on the need to amend the law, the drafting work already commenced before May 1998.

III Any other business

Date of the next meeting

16. Members agreed to hold another meeting on 23 September 1998 at 8:30 am to continue discussion on the Bill.

17. The meeting end at 4:15 pm.

Legislative Council Secretariat
12 October 1999