HONG KONG (Reuters) - Hong Kong may be closer to granting its market regulator more enforcement powers, giving it enough teeth to fine or even pursue criminal charges against company directors and officials for breaching listing rules.
Such authority is critical to becoming more competitive with regional peers such as Singapore, say market watchers, though an overly heavy-handed approach could also scare away some companies and investors, they warn.
Renewed discussions on beefing up Hong Kong's Securities and Futures Commission's power, first mooted in 2004, come amid a global push for tighter regulation of the financial sector following the meltdown of global markets last year.
Hong Kong investors have a newfound regulatory zeal after thousands lost millions of dollars by investing in supposedly low-risk structured products, backed by the since-collapsed Lehman Brothers.
Corporate governance in the city, meanwhile, suffered a blow in October when venerable Chinese conglomerate CITIC Pacific (0267.HK) came under fire from investors and regulators after waiting six weeks to reveal nearly $2 billion (1.36 billion pounds) in losses on unauthorised forex trades.
"While everything was going well in the market, which arguably it was until 18 months ago, people didn't really worry about those things. But when things start to go wrong people worry a lot more," said Martin Wheatley, chief executive of Hong Kong's Securities and Futures Commission.
"The problem with all of these things (regulation changes) is that they are quite complex and take quite a lot of time and there is always resistance to that sort of change. But given what has happened in the market it is quite likely it will become a high priority over the next year or so," he said.
Regulators here have long been accused of being too soft on Hong Kong's clubby financial market, which is dominated by tycoons and state-owned Chinese companies.
That perception stems partly from a mismatch in the roles and responsibilities of the SFC and bourse operator Hong Kong Exchanges & Clearing (0388.HK), which is itself a listed company.
Under the current regime, the exchange operator, which is the front-line regulator for locally listed companies, can only reprimand companies for offences which could be treated criminally in other centres.
Local lawmakers are expected to vote this year on a rule change that would convert select listing rules, including those on continuous disclosure, into law.
"Our company ordinance is based on an old British version and can't cope with the complexity of the system. There need to be statutory changes," said Albert Ho, the chairman of the opposition Democratic Party.
Opponents of a more muscular SFC warn of over-regulation.
"That could scare funds away and Hong Kong could lose its attractiveness and competitive edge," said legislator and lawyer James To.
Even without enhanced authority, the SFC has made headlines recently by seeking to block the privatisation of fixed-line telecom provider PCCW (0008.HK) by its controlling shareholders led by Richard Li, son of Hong Kong's richest man, Li Ka-shing.
The SFC argued that the company gained majority shareholder approval for the deal only by improperly distributing stock to hundreds of investors right before the vote.
Besides the PCCW appeal, the SFC scored its first-ever sentencing in an insider trading case this month, and followed with a second on Monday.
But the SFC says it has made no conscious effort to step up regulation and ascribes the increased interest in its activities to the high-profile nature of the companies involved.
Critics argue that Hong Kong's market regulations and enforcement are weaker than those in Singapore and mainland China. China, for example, requires quarterly reporting by companies and demands that companies make a warning if profit will rise or fall more than 50 percent.
Mark Dickens, the new head of the Hong Kong Exchange's listing division, expressed concern about local companies that lack "the culture of making continuous disclosures on price sensitive information" and called for tougher penalties for non-disclosure.
But Hong Kong's regulators have not always been able to hold firm in the face of opposition from local tycoons and brokers.
This year, the local bourse operator backtracked on two controversial proposals.
In one case, it scaled-back a proposed ban on trading by company directors ahead of corporate results after protests from powerful business people.
In the other, HKEx cancelled its post-market settlement auction in March after shares in HSBC (0005.HK) plunged, doubling its daily losses in the 10-minute session, prompting an uproar from many investors and brokers.
HKEx had earlier defended the closing auction session, introduced in May 2008, as an effective tool for price determination, but Dickens said the exchange was reacting to the changed environment.
"Those proposals were made during a bull market and the response we saw was coming out of a bear market. The climate had changed, so the attitudes had to change too."
(Editing by Lincoln Feast)