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Out of Touch and Unrealistic Securities Laws in Hong Kong

Updated: Apr 14, 2020

Hong Kong securities laws and regulations

The application of the concepts of fairness and equality in securities laws and regulations has been said to be inconsistent and have inappropriately distorted the commercial realities of the marketplace.  There are debates on whether it is wholly appropriate for market participants to engage in avoidance mechanisms in relation to the commercial problems created. 

Judicial & disciplinary power of SFC

Under Article 83 of the Basic Law, the courts of the HKSAR shall be the judiciary in the HKSAR, exercising the judicial power.  The regulatory objectives, powers, functions and duties of the SFC are prescribed by the Securities and Futures Ordinance (Cap.571) ("SFO"). The SFC is an independent statutory body outside the branch of civil service but empowered to regulate the securities and futures market.  The SFC is set up to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness, provide for investor protection, minimize crime and misconduct, etc. (see ss. 3, 4, 5 and 6 of the SFO).  However, the SFC is silent about whether the SFC has judicial power.  Yet the SFC can take disciplinary action against regulated persons (see ss. 4 and 5 of the SFO), and in some instances, unlicensed persons. 

In general, the SFC may apply its disciplinary power if its licensee or regulated person is found guilty of misconduct or has in its opinion become unbefitting to stay as a licensee or regulated person (see ss. 193 and 194 of the SFO; SFC Disciplinary Fining Guidelines (Gazette on 28.02.2003)).

Inquisitorial procedure adopted by SFC

In a court of law, it is a primary duty of the prosecution or the defence to state their respective points of view within the curtailment of the rules of evidence.  Nonetheless, a judge acts as an impartial referee.  He has a discretionary power to admit the evidence or fact emerged from this procedure.  The SFC plays a hybrid role and adopts an inquisitorial procedure.  It acts as an investigator, prosecutor and judge.  The Court of Appeal criticised in Tsien Pak Cheong David v. SFC [2001] that "... Quite unlike the role of a professional disciplinary tribunal, the SFC was both prosecutor and judge ...".

In handling cases, the SFC patently performs the dual role of prosecution and defence.  The SFC indisputably leads investigations, examines evidence and interrogates witnesses. Aside from these roles, the SFC serves as a body corporate with power to sue and be sued in the name of the SFC (see s. 3(1) of the SFO). The SFC can supervise and investigate intermediaries, impose disciplinary sanctions and apply to the court for an order to intervene in property administration. 

Inherent jurisdiction of SFC

The SFC can be regarded as an original jurisdiction as its decision may be subject to appeal to the Securities and Futures Appeals Tribunal (also known as "SFAT").  In delivery of its disciplinary decisions, the SFC will take into account its previously handed cases and decisions made based on the same or similar factual background.  Be that as it may, the SFC is not bound by its early made decisions and may assess and alter its penalties so made in its disciplinary decisions in light of different factors it thinks fit.

Use of self-incriminating evidence by SFC

The SFC may use incriminating evidence in some circumstances (e.g. perjury) but s. 187(2) of the SFO renders it inadmissible for direct use in criminal proceedings in a court of law (see ss. 166, 179, 184, 187(2), 219 and 254 of the SFO; Part V of the Crimes Ordinance (Cap.200); Koon Wing Yee v. SFC [2009]).  In general, self-incriminating evidence shall not be admissible in evidence against the person in criminal proceedings in a court of law (see ss. 10, 65 and 65A of the Evidence Ordinance (Cap.8)).

Plea Bargain

It is not permissible to get a judge involved in plea bargain in any circumstance.  It is inappropriate to seek a judge's or magistrate's direction or indication of the sentence that a court would be likely to deliver if a defendant pleads guilty (see HKSAR v. Yeung Kin-Man [2000]).  At most, an experienced legal practitioner may attempt to negotiate with the prosecution to explore whether a lesser offence can be acceptable to the prosecution.  If the prosecution accepts a guilty plea, it may possibly offer a one-third discount from the sentence that would have been imposed upon conviction after trial but subject always to the court's final determination.  Whilst there is a long-standing practice in the SFC of giving credit to licensees or regulated persons as a token of appreciation for their cooperation by offering to impose lighter disciplinary sanctions that would be imposed in the absence of cooperation (see SFC (2006), "Cooperation with the SFC"), it remains uncertain whether a licensee or regulated person offering full cooperation with the SFC would definitely lead to the SFC's treatment with leniency.  According to the SFC published Disciplinary Proceedings at a Glance, the maximum reduction of a disciplinary sanction can be either a reduction of the type of sanction by one order of magnitude (e.g. from a revocation of licence to a suspension) or 33% (see SFC (2004), "SFC Disciplinary Proceedings at a Glance").

Right to legal representation

Article 35 of the Basic Law provides that the HKSAR residents shall be entitled to confidential legal advice, access to the courts, choice of lawyers for timely protection of their lawful rights and interests or for representation in the courts.  In regulatory proceedings, a licensee or regulated or person is also entitled to seek legal advice and instruct his lawyer to make representation to the SFC on his behalf (see SFC (2004), "SFC Disciplinary Proceedings at a Glance").

Immunity & Contempt

Article 85 of the Basic Law provides that members of the judiciary shall be immune from legal action in the performance of their judicial functions.  While the SFO is silent about whether the SFC has judicial power, the SFO allows a person not to incur any civil liability in respect of any act done or omission made by reason of compliance or in his performance of the requisite duties and functions under the SFO (see ss. 380(1) and (3) of the SFO).  Unquestionably, the SFC has no power to punish for "contempt of the SFC" and it does not have such judicial power like that of a court of law.


Conclusion


No matter whether the concepts of fairness and equality are fully entrenched in securities laws and regulations in Hong Kong or not, it would not be worthwhile or advisable for market participants to lightly consider challenging any regulator's or law enforcement agencies' investigation, enforcement and disciplinary powers unless their cases have been carefully assessed on their own merits with cogent and tenable evidence in support.



Caution: Nothing herein shall constitute or can be deemed a substitute for specific legal advice. If in doubt please seek independent legal advice.

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