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Hong Kong regulator raises investor compensation limits

Nov 05, 2019

The Investor Compensation Regime operates in Hong Kong since 2003. As part of the regime, the compensation fund provides a compensation coverage but only covers losses in respect of securities and futures contracts that are listed on the SEHK (The Stock Exchange of Hong Kong) and HKFE (Hong Kong Futures Exchange), as well as any related assets. Likewise, only losses attributable to the default of a dealing or financing intermediary, or a person related to such an intermediary (e.g., its employee), are covered under the regime.

The Investor Compensation Regime is reviewed and complemented from time to time. The regulator conducts surveys of brokers to gather more relevant information, therefore, changes to the compensation regime are based on the survey data.

The SFC admitted that over the past 10 years, Hong Kong markets have undergone significant changes which require alterations in Investor Compensation Regime. Hong Kong markets have grown significantly. Also, the implementation of the Stock Connect, a mutual access programme between Hong Kong and Mainland, has expanded the reach of Hong Kong markets and investors. Also, according to the SFC, great importance is attached to risk management, notably after the global financial crisis of 2008.

Taking this into account, and after reviewing 1- submissions in response to the consultation, the SFC proposed the enhancements to the Investor Compensation Regime:

  • Increasing the compensation limit from $150,000 to $500,000 for each investor;
  • Raising the trigger levels for suspending and reinstating the ICF levies from $1.4 billion and $1 billion to $3 billion and $2 billion respectively;
  • adjusting the coverage of the ICF regime so that it covers the northbound leg of Stock Connect and excludes the southbound leg;

Reasons for raising the compensation regime include the growth in client assets. According to data from 2014 and 2017, the value of the client’s assets held with intermediaries increased from $598 billion to $918 billion. Along with this, international comparison has triggered the change in compensation limits. Raising it to $500,000 would bring Hong Kong within the mid-range.

The plan to increase the compensation limits were welcomed by individuals, intermediaries and industry association.

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