Rigorous regulation to go hand in hand with enhanced investor education

Last month a securities firm was suspended from trading following a report of alleged misappropriation of certain client assets. The case raised public concern over the risks faced by investors who keep their shares in brokers' omnibus accounts.

There are laws in place to prevent misconduct by securities firms or their staff. Regulatory bodies also exercise their monitory roles and functions. But there is also a need for effective internal controls on the part of securities firms, coupled with enhanced alertness and awareness of investors over the protection of their interests.

At present, most client securities are deposited with the Central Clearing and Settlement System (CCASS) in brokers' omnibus accounts. This is convenient for both brokers and clients because brokers have full control of the movements in the omnibus account. But it also entails risks of misappropriation on the part of the brokers or the securities companies.

To enhance protection, the Stock Segregated Account with Statement Service (SSA) was introduced by the Hong Kong Securities Clearing Company Limited (HKSCC)¹ back in 1994. Although the shares kept in the account remain under the custody of the broker, the HKSCC sends the investor a monthly account statement as well as a daily statement whenever there is any change in the share balance of the account.

In 1998, the Hong Kong Exchanges and Clearing Limited (HKEx) introduced the Investor Participant Account or IPA. This allows investors to open direct custody accounts in the CCASS. Every client using IPA has full control of his or her shares kept in the account and only the clients themselves can authorise the transfer of shares out of the account.

IPA holders evidently enjoy greater protection. However, as account holders need to transfer shares between brokers' accounts and their own accounts to transact shares, some of them may find it relatively inconvenient. They may choose to leave the shares in the custody of the brokers and authorise them to trade shares on their behalf. The service thus has not gained wide popularity among investors.

To promote the service, the HKEx has, in recent years, adopted a number of improvement measures. For example, the requirement of a $1,000 deposit in opening an IPA and the fee of $200 charged for maintaining a dormant account have been abolished. This, coupled with a vigorous publicity campaign, has made a difference. The number of IPAs has steadily increased from about 15,600 in August last year to some 18,000 last month.

Separately, the HKEx has enhanced the functions of SSA this year. This includes streamlining account opening procedures, establishing an electronic access system, allowing clients to get informed of share movements through SMS or E-mail, introducing electronic voting services, providing money settlement service, and allowing investors to demand affirmation of share movements initiated by their brokers.

While we need to continue promoting the IPA and the SSA, and to explore further improvements to the services, what is more fundamental is to raise investors' awareness about protecting their own investments.

The SFC is to step up efforts to promote investor education through different means. In view of the new SSA functions launched this year, HKEx will promote the services in forthcoming briefings for the brokerage industry.

In fact, the purpose of increasing investor awareness is similar to that of promoting consumer rights. Since the establishment of the Consumer Council in 1974, the public has generally become more aware of the importance of consumer rights. I hope that our work in promoting education on protection of investors' own rights will also bear fruit soon. 

¹ An affiliated company fully owned by the HKEx.