Visitors to Hong Kong’s financial district don’t have to wander far to be made aware of an inglorious episode in its recent history.

Demonstrations outside some bank branches are a legacy of the “minibonds affair”, in which tens of thousands of retail investors bought HK$20bn (US$3bn) of credit-linked notes that collapsed in value after Lehman Brothers imploded two years ago.

Protests have continued even after last year’s government-brokered settlement between holders of the notes and the banks that sold them.

That ensures the spotlight remains on Hong Kong’s unusual regulatory structure, where four main regulators govern four sub-regulators.

At its core, the structure is simple: a firm’s legal status – bank, broker or insurance company – determines which regulator is responsible for supervising its activities, from both a financial stability and consumer protection perspective.

But as institutions have strayed on to each others’ patches, gaps in supervision have opened up. Minibonds, for example, were investment products (approved by the Securities and Futures Commission) sold by banks (overseen by the Hong Kong Monetary Authority).

“The current situation is a mish-mash of overlapping responsibilities,” comments David Webb, a governance activist.

“There’s a strong case for a more consistent approach to the licensing, distribution and selling of financial products.”

Some have recommended that Hong Kong consider adopting a so-called “Twin Peaks” approach, similar to Australia’s, which allocates responsibility for prudential regulation and conduct of business regulation to two separate agencies, APRA and ASIC respectively.

Rather than tear up the structure, however, local regulators have simply resolved to do their jobs better.

“The lesson we all learnt from the minibonds affair was that to improve investor protection, we needed to improve the co-ordination between the HKMA and the SFC,” says KC Chan, chair of Hong Kong’s Financial Services and Treasury Bureau.

“All regulatory models were tested by the crisis, and all failed in some way,” adds Martin Wheatley, chief executive of the Securities and Futures Commission. “More important is how we’ve responded.”

Among the SFC’s changes are: a requirement for products to be accompanied by a simple “key facts statement,” and a new entitlement to a five-day cooling-off period, during which investors can be refunded almost in full if they decide to change their minds.

The difference between Hong Kong and some of the jurisdictions that are revamping their regulatory structures – such as the UK and New Zealand – was that – minibonds apart – there were few debits on Hong Kong’s ledger.

The HKMA slashed the rate at which it was prepared to lend emergency funds to banks, while easing collateral requirements. Meanwhile, the Deposit Protection Board extended its guarantee to cover 100 per cent of accounts.

The linked exchange-rate system with the US dollar, meanwhile, helped smooth trade frictions.

Hong Kong came through the crisis without big corporate failures and no failed lenders.

That is not to say that anyone should take for granted Hong Kong’s position as Asia’s premier international finance centre.

There are some obvious improvements to be made: the listing rules administered by the stock exchange, for example, lack the statutory backing of many other jurisdictions, while the listing regulator sits within the for-profit Hong Kong Exchanges and Clearing – an obvious conflict of interest.

But modifications can be made. “Change for change’s sake is painful and costly,” says the SFC’s Mr Wheatley.

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