The Consumer Council welcomes the initiatives of the Securities and Futures Commission (SFC) in promoting efficient market development by securing confidence and protecting participants from fraud and other unfair practices.
Overall, the Council expresses its support on the proposals set out in the consultation paper. In particular, the Council notes that as a result of the proposals safeguards will be in place to ensure that share registrars are financially sound and trustworthy; staff members of share registrars are competent; information on which to base their decisions are correct; and there are clear procedures for making a complaint.
However, notwithstanding the existence of the above safeguards, the Council would like to raise a question regarding the lack of specific compensation arrangements for retail investors if something does go wrong in relation to the conduct of share registrars. The MTRC share issue is a case in point.
In October 2000, according to the Hong Kong iMail of 7 October 2000, when MTRC launched its first initial public offering its share registrar, Central Registration Hong Kong Ltd., misprinted share certificates and about 3,000 duplicate certificates were mailed to MTRC shareholders. In another newspaper report, by the 'Sun' of 8 October 2000, Central Registration had also made other printing and distribution mistakes. For example share certificates were found to be missing shareholding information, and certificates were sent to the wrong persons. In this particular case, the share registry announced immediate measures to rectify the problems and therefore alleviated the problems that arose for MTRC shareholders.
However, as a general point, where similar problems such as the above arise, investors could be detrimentally affected where verification of share ownership certificates is inordinately delayed and investors suffer a loss because the opportunity to sell the shares is also delayed. This raises a question as to what legal remedies are available to shareholders to compensate them for their loss. The Council's understanding is that currently the only available remedy is to bring a case for negligence against the share registry. This would be both complex and costly for many investors, and therefore not a viable option.
The Consultation Paper sets out various requirements to ensure that share registries are operated efficiently to reduce the risk of problems arising. For example, the contingency plan requirements for share registrars, in order to deal with potential operational failures in paragraph 4.7, and adequate internal control procedures, in paragraph 4.1. As such, the potential for investor loss to arise through negligence by share registrars should be diminished; and the Council welcomes the requirements that are being put forward. However, it is noted that while share registrars are also required to ensure that there are proper safeguards for clients and registered owners of securities from financial loss arising from, amongst other matters, omissions committed by the share registrar, no further details are provided.
The government is currently implementing proposals for investor compensation arrangements that will assist consumers in recovering losses that might be incurred through the actions of intermediaries; with one of the objectives of the compensation arrangements being to increase investor confidence. The probability of investor loss through negligence by share registrars could be considered low, in view of the proposed internal control and contingency planning safeguards. Nevertheless, the Council suggests that in view of the need for investor confidence in the operations of share registries, the possibility of expanding the range of compensatory mechanisms available for investors, so as to include losses incurred due to the actions of share registries could be kept open to consideration. Whether this option would need to be pursued would depend on the extent to which operational failures do occur in share registries, leading to inordinate delays in the issuing of share certificates. The SFC should therefore keep the incidence of such matters arising under observation, and if necessary reconsider whether more direct forms of assistance for investors should be provided.
With regard to the proposed Disciplinary Committee and the Disciplinary Appeals Committee, the Council notes that the proposed formation of the committees does not include representation by public members specifically nominated to represent the public interest. The Council suggests that consideration could also be given to including such representation by suitably qualified persons, both in terms of their representation of the public interest, and their required technical skills to understand the complex legal questions that could arise in the course of the committees' deliberations.
