FSDC comprises the wrong people

Updated: 2013-12-06 06:42

By Richard Harris(HK Edition)

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The Financial Services Development Council (FSDC) was established and funded by the government a year ago "in response to the financial industry's aspiration for a high-level government advisory body on the topic" (FSDC factsheet). Translated, this means using taxpayer's money to establish an industry-lobbying group, administered by industry. It is in danger of being seen as a talking shop for rich people to talk to other wealthy people about how to become even richer.

The platform tempts the council to recommend government legislation in favor of certain financial industry groups, not the sector as a whole. For instance one of their first reports has recommended that the law be changed to allow private equity partnerships to be set up as limited partnerships implied with (wait for it) exemptions from tax and regulation. How does this tinkering around the edges help Hong Kong people - in whose interest, cost and name this is purportedly done?

The decision by Chief Executive Leung Chun-ying to set up a financial development body was good because we need our financial sector to succeed. We are on the cusp of becoming the third leg, after London and New York, in the world's 24/7 global financial system. But it won't happen by accident. We should be doing much better.

FSDC comprises the wrong people

Hong Kong remains a "taker" as shown by the fact that the stock market shows relatively little direction until London wakes up. Only in the middle of a bull market, does the market show direction, taking off at high speed, only to create a few small fortunes (from some big ones) until it eventually collapses. As an Asian regional base for major global companies, we are way behind Singapore, and yet we have many more advantages.

The FSDC has fallen into the usual Hong Kong trap of chasing after the shiny things - and spending our money doing it. They have followed the form, but not the substance. So the council has been established with a huge original membership of 22 selected from the great and the good. They have, in turn, selected 36 people for sub-committees. A talking shop (so far) of 58 people is going to come up with a lot of hot air.

These members typically comprise the CEO-types from global financial institutions and service providers that grandiose public bodies like to have at "flower in buttonhole" formal functions. Yet many of these top people are "just off the boat", or in modern parlance, recently landed at the airport. They are intelligent, driven and successful people - but they are the wrong people. They have almost nothing invested in what Hong Kong will look like in 10 years time. They will be back on the boat once they have been promoted or retired. How does this help Hong Kong residents?

Few of these foreign-based companies are represented by someone with two of more decades of in-depth experience in the industry purely in Hong Kong, which one would have thought constituted a qualification for the board. How many members have traded securities or currencies for a client? With retail, private, institutional and sovereign clients? For how long? And how long ago? How many have worked in more than one asset class? In more than one financial discipline? Have they analyzed an insider dealing case? How many could explain a collateralized debt obligation? Or the sub-prime crisis? How many have gone through the process of regulating themselves or a company from scratch? Have they completed a "know your client form" for a client? Annually?

The FSDC, therefore, does not comprise the skills it claims or requires. You cannot learn about the industry by talking to CEOs, something that was largely proved in the recent banking investigations into the global financial crisis or LIBOR where most CEOs seemed to understand little of the basics. How could they? Their job is to spend their days in meetings about management of resources; budgets, bonuses, people and office space, not worrying about whether Hong Kong should become a financial center of excellence. It is people at the grassroots who do all the technical finance work in their companies who should be advising the council. Doing research by committee will seek to design a horse and recommend a camel.

The FSDC is becoming a taxpayer-funded, trade body mouthpiece. Taxpayer's money should not be used to tell the people of Hong Kong that firms who are impossibly rich must have breaks to become richer while living in one of the lowest tax environments in the world.

The best structure is one similar to a judicial review. A small panel headed by a single authoritative figure that directs independent financially specialized analysts to carry out independent and professional research on the industry. To provide high value for government money, in my next article I shall put myself in the shoes of such a figure - as might be selected to lead the "Government Commission on the Development of Hong Kong as the World's Third Financial Capital" ("GCD3").

The author is a pioneer of the modern investment management industry in Asia and is Founder of Port Shelter Investment Management in Hong Kong.

(HK Edition 12/06/2013 page9)