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Policing the common law?

The role of financial sector regulators has come under intense scrutiny in the wake of the credit crunch. In the UK, for example, legislative changes have filled perceived gaps in financial regulation exposed by the crisis, and commenced a complete overhaul of the structure of financial regulation. In Asia, the fallout has been less dramatic. But while local law makers have largely left financial regulators to continue their regulation of the financial services industry against previous legislative frameworks, a number of events may demonstrate a move by the regulators themselves to step beyond what may be perceived as their traditional stomping ground.

In Hong Kong, the SFC recently published a report on the selling practices of licensed corporations. Among other things, the report considered the appropriateness of the use of exclusion clauses, which typically provide, for example, that a client is making its own independent decisions, is not receiving advice, and is capable of making its own assessment of the risks involved when entering into a transaction. The SFC concluded that the use of such clauses with the intent to restrict the client’s ability to make claims related to protections under the SFC’s Code of Conduct is likely to be contrary to the principle that intermediaries must act honestly, fairly and in the best interests of clients and the integrity of the market. The SFC will issue an appropriate regulatory response to address its concerns.

Any attempt to limit the efficacy of exclusion clauses so far as they seek to limit regulatory obligations is not likely to be controversial. But any broader attempt by the regulators to curtail their use could impinge upon the common law that has in many jurisdictions largely upheld their meaning and effect. In any event, existing legislation already provides a means by which their use can be restricted in particular circumstances due to the application of legislation governing contractual terms in the retail sector and liability for misrepresentation.

A similar move may be foreshadowed by the SFC’s consultation on electronic trading, in which the SFC proposed that a licensed or registered person is ultimately responsible for orders sent to the market through its electronic trading system and for the compliance of the orders with applicable regulatory requirements, regardless of who placed the order By providing for such responsibility as a matter of regulation, the SFC may go far beyond the liability that the common law would otherwise impose on such market participants.

It would be wrong to read too much into these developments. The SFC has already demonstrated that it is willing to step in to resolve private causes of action when it believes it is appropriate to do so, not least when it brokered a deal with banks who had sold Lehman minibonds to provide additional ex gratia payments to retail investors who had already settled their claims through private causes of action. Recent regulatory developments, however, demonstrate that local regulators will remain alive to the limitations of the law when imposing responsibilities on financial sector participants, and seek to fill the void when they deem it appropriate to do so.

Other topical risk issues include the bringing into effect of the statutory requirements for listed companies to release price-sensitive information (PSI), which will have a significant effect on the way that PSI is treated in future, and needs to be factored into banks’ dealing policies and procedures to ensure that the more likely “hair trigger” public disclosures are taken into account. The SFC has also released its consultation conclusions on its proposed enhanced regulatory regime for sponsors, designed to ensure that any IPOs brought to market will be properly guided as regards the regulators’ expectations and requirements for their conduct of the process. This includes the level of resources devoted to the transaction, verification arrangements and so on. This marks a significant raising of the bar for investment bank sponsors in the Hong Kong listing market in terms of the black and white requirements, although unsurprisingly there is the sense that the new regime will principally be designed to reflect the current market practices and behaviour of “fit and proper” market participants. There is an additional twist in the tail, in that there is an intention to change the legislation to ensure that sponsors are directly pinned with prospectus-type liability for the incorrect contents of offer documents, which is a codification of what is already arguably the case, but is essentially designed as a marking of the line in the sand by the SFC for what they regard as inappropriate conduct, following a number of recent scandals in the Hong Kong listing market.


Recent regulatory developments... demonstrate that local regulators will remain alive to the limitations of the law when imposing responsibilities on financial sector participants, and seek to fill the void when they deem it appropriate to do so.

Legal and Regulatory Risk Note