Hong Kong regulator to proceed with raising investor compensation limit

Hong Kong’s Securities and Futures Commission (SFC) has earlier today announced that it has concluded its consultation on Investor Compensation regime.

In its present form, the regime covers losses in respect of securities or futures contracts that are listed or traded on the SEHK or the HKFE, as well as any related assets. Also, only losses attributable to the default of a dealing or financing intermediary, or a person related to such an intermediary (eg, its employee), are covered under the regime.

The proposed enhancements were:

• to raise the compensation limit from HK$150,000 to HK$500,000 per investor per default, and, consequential to this, to raise the trigger levels for suspending and reinstating the investor compensation fund (ICF) levies from $1.4 billion and $1 billion, to $3 billion and $2 billion respectively;
•  to adjust the coverage of the ICF regime so that it covers the northbound leg of Stock Connect and excludes the southbound leg; and
• to empower the SFC (in exceptional circumstances) to make interim compensation payments out of the ICF where urgent pay-outs are necessary to manage potential systemic risks in the securities and futures industry or to the financial stability of Hong Kong.

The SFC said it had received 10 submissions in response to the consultation. Respondents included individuals, intermediaries and an industry association.

There was strong support for the proposals to increase the compensation limit, raise the trigger levels and adjust the ICF coverage in light of Stock Connect. The regulator will proceed with these accordingly.

Let’s recall that one of the reasons for the proposed increase in compensation limit is the growth in client assets. According to the regulator, along with the growth and development of Hong Kong’s securities and futures markets, the value of client assets held with intermediaries has also increased substantially. Data from the 2014 and 2017 broker surveys shows that the total value of client assets held with the securities intermediaries covered in both surveys has increased by more than 50%, from $598 billion to $918 billion.

The SFC has also compared the current HK$150,000 compensation limit with limits adopted under other comparable investor compensation schemes, and the existing limit of HK$150,000 appears to be on the low side. Raising it to HK$500,000 would bring Hong Kong within the mid-range and on a par with the UK and the Hong Kong Monetary Authority’s (HKMA’s) Deposit Protection Scheme (DPS).

Regarding the proposal to empower the SFC to make interim payments in exceptional circumstances, concerns were raised with respect to the detailed arrangements. For this reason, the SFC proposes not to pursue this proposal for the time being.