Speech Presented by Mrs. Laura Cha

Attached is a speech given today by the Acting Chairman of the Securities and Futures Commission, Mrs Laura Cha, at the "Conference on Professional Ethics for the Securities, Futures and Investments Sectors" in Hong Kong.

For further information, please contact Bill Weeks at 2840-9289 or Chan Chi-keung at 2842-7624.

Although we are in the middle of an economic recession brought about by the Asian Financial crisis, I believe that there is always an opportunity to be found in every crisis. The people of Hong Kong has seen many crises in the past and through hard work and fortitude we have always come through stronger than before. This time will not be an exception for in the financial markets of Hong Kong, there are still the essential ingredients which have made us into an international market. We have skilled practitioners and high standards of financial regulation which will, as soon as the real economy begins to improve, be the cornerstone upon which investors will return, and return in force to our markets.

Financial markets thrive because they represent a forum for users of capital to raise capital and investors to derive what they consider to be reasonable returns. Therefore, as soon as value is perceived in our markets, investment will begin to stir. But value is always perceived against risk. What every market can usefully do is to make the best attempt it can to deal with risks. That is why our regulatory system has stressed the need for good internal management of financial institutions and the need to ensure that we have intermediaries and advisers who are not only technically qualified but are committed to high standards of business conduct. High standard of professional conduct would generally mean that the likelihood of risk in the business conduct is reduced.

We, therefore, like almost all securities and futures markets throughout the world, require intermediaries and advisers to be authorised by a regulatory authority. This requirement is based on the need for market participants generally, and investors in particular, to have confidence that the people and organisations with whom they deal are efficient, honest and financially sound, and will treat them fairly. Thus, we have in Hong Kong the now familiar, "Fit and Proper Test".

This important umbrella test ensures that those who practise in the markets comply with standards which all professions would regard as normal, that is to say, apart from educational, experiential and technical qualifications, the applicant must show that he is a person of good reputation and character. This last requirement is judged according to the declarations of the applicant (for example, whether the applicant had previously been convicted of criminal offences involving honesty or whether the applicant has previously been found guilty of insider trading or other market misconduct), which are, of course, subject to checking by the licensing authority. But what is even more important, is that a licensed person must continue to be "Fit and Proper" for the role for which he is licensed. This continuing requirement throws a licensed person's status as "fit and proper" into doubt if that person was involved in:

(a) failure to observe all relevant laws;

(b) failure to abide by the rules of any exchange of which he is a member;

(c) failure to abide by the Hong Kong Code on Take-overs and Mergers, the Hong Kong Code on Unit Trusts and Mutual Funds, and any other Codes of Conduct and guidelines issued by the Commission, other regulator in Hong Kong or any relevant overseas exchange or regulator; or

(d) knowingly or negligently aiding or abetting other persons in breaches of relevant laws, exchange rules or Codes.

The "Fit and Proper" requirement places high standards of conduct on licensed persons because it is our practitioners who will make or break our financial systems in the end. If Hong Kong is to continue in the competition for the funds of investors here and around the world, then we cannot have but the best standards.

It will be seen that the duty is not only restricted to proper conduct in the Hong Kong markets but also to proper conduct elsewhere in breach of the rules of other regulatory agencies. That is not just because we are an international market but because in a market which seeks to regard its practitioners as true professionals, we must ensure that those who carry the right to practice here must be seen to respect rules which seek to place order and fairness in markets wherever they are.

The continuing duty to be "fit and proper", it will also be seen, extends to the situations where an intermediary acts for or an adviser advises others who have broken rules of market conduct or have otherwise broken relevant laws. The intermediary must be careful not to be a knowing party to a breach of market rules or laws and an adviser must make sure that he adequately advises his client. Failure to do so would mean that the professional standards had not been carried out adequately. To the extent that client interest and/or the public has been misled or compromised, such failure might result in disciplinary action by the Commission.

We in the Commission realise that high standards must have practitioner input. If we should be wrong in our disciplinary penalties, an aggrieved person can appeal to the independent Appeal Tribunal headed by an eminent legal practitioner who sits with two members of the industry.

We have also been careful to ensure that all important rule and Code changes are only made after industry consultation. The Fund Managers Code of Conduct was drafted in close consultation with the Fund Management Industry. In the next year, we aim to compile a code for corporate finance practitioners and we have begun to sound out the industry with a view to producing a draft in consultation. As our industry becomes more sophisticated, we believe that it is now time to consider a review of the licensing system so as to recognise the specialisation which has now emerged. We believe that advisers who specialise in fund management, financial planning, or derivative dealings require different expertise and should be recognised as such in our licensing regime. This review has begun and in the next year, we hope to bring the results of this review to the market for consultation.

As the Mandatory Provident Fund Scheme begins to take shape, our practitioner community should look forward not only to more work but to yet another level of professional development. The Commission has for some time now begun planning with the MPF Authority the Conduct and Product Authorisation requirements of the Scheme. When the MPF Scheme launches, employers and employees will have to rely heavily on the professionalism of the industry.

In my years of service with the Commission, I have found that the overwhelming majority of the industry believe in high professional standards. Encapsulated in professional standards are, of course, the ethical values of our community. Thus, the seven General Principles in the Code of Conduct for Persons registered with the Commission reflect basic ethical principles. This Code has been the cornerstone of market conduct and is reflected in the rules of both Exchanges. I am therefore certain that the Programme for Professional Ethics will receive widespread support and your attendance today proves the point to me. I would like to congratulate the Organising Committee for their success in organising this event and wish them continuing success in the Programme. Thank you.