Hong Kong’s SFC aims to raise investor compensation limit to HK$500,000

The Hong Kong Securities and Futures Commission (SFC) invites market participants and interested parties to comment on proposals to reform the Investor Compensation regime. In its current 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.

At present, the investor compensation limit is HK$150,000. For example, if an intermediary with both a securities and futures business defaults, its clients can claim up to $150,000 in respect of any securities-related losses and a further $150,000 in respect of any futures-related losses. However, the $150,000 limit for securities-related losses cannot be used to offset any futures-related losses that exceed $150,000, and vice versa.

Under the proposals, the compensation limit will be raised from HK$150,000 to HK$500,000. One of the reasons for such a hike 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, over the last three years.

The SFC has also compared the current HK$150,000 compensation limit with limits adopted under other comparable investor compensation schemes, and he 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).

The regime provides a mechanism for suspending and reinstating the Investor Compensation Fund levies when the net asset value of the ICF reaches certain trigger levels. The mechanism was introduced in 2005, and aims to ensure that the ICF is maintained at a sufficiently prudent level to cover potential obligations, but without resulting in investors having to contribute beyond what is necessary. The current levy suspension and levy reinstatement levels are HK$1.4 billion and HK$1 billion respectively. These levels are expected to vary along with changes in the compensation limit.

As a result of raising the compensation limit to HK$500,000, it will be necessary to raise the trigger levels for suspending and reinstating the ICF levies, the SFC says. The regulator proposes to increase the levy suspension level from the current $1.4 billion to $3 billion, and the levy reinstatement level from the current $1 billion to $2 billion.

In addition, the coverage of the regime should be expanded to cover losses relating to Northbound trading, according to the SFC.

The regulator is also pushing for flexibility to make interim payments. Currently, compensation can only be paid after ascertaining all the relevant details of a claim, including the amounts due to and from the investor. This, however, requires time as relevant information may not always be readily available or reliable. A delay in making compensation payments may pose a threat to the stability of the wider market. For instance, a default of one of the largest intermediaries may trigger a run which could threaten market stability. That is why the SFC proposes to enable it to make interim payments in exceptional circumstances.

The SFC anticipates comments by June 27, 2018. The regulator hopes to be able to finalize the proposals by mid-2018, and to introduce relevant legislative amendments into the Legislative Council for negative vetting in accordance with the established procedures before end-2018.