comparison of international experience and recommendations for china nicholas morris july 2008
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Investor Compensation Schemes. Comparison of international experience and recommendations for China Nicholas Morris July 2008. The importance of Investor Compensation. - PowerPoint PPT PresentationTRANSCRIPT
Comparison of international experience and recommendations for China
Nicholas MorrisJuly 2008
Investor Compensation Schemes
Slide Slide 22
The importance of Investor Compensation
“Research [shows] large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of capital markets, and in the access of firms to external finance. ….. [which depends on] how well investors, both shareholders and creditors, are protected by law from expropriation“
Investor Protection: Origins, Consequences, Reform – Financial Sector Discussion Paper 1, World Bank
Stock markets – such as those in the UK and US – play a crucial role in economic growth
Investors and fund managers require that their money is safe before they invest – otherwise they will not
China needs strong investor protection to attract crucial funds for development
The Securities Investor Protection Fund is a key element of this protection
Slide Slide 33
Recent capital market reforms in China
Restructuring of securities companies– CSRC actions from 2004 onwards – liquidation, restructuring,
stricter supervision, capacity building– 104 securities brokerage companies now profitable, with strong
asset base Reform of stock issuance
– improving transparency, approval system, strengthening market discipline, market-oriented share issuance pricing
Liberalisation of fund management– Funds under management $448.5 billion 2007 (up from $10
billion 2002) Refinement of legal framework
– Amended company law and securities law, 1 January 2006
Data source: CSRC China Capital Market Development Report 2007Data source: CSRC China Capital Market Development Report 2007
Slide Slide 44
Key capital market events I Fast growth of stock markets
– Shanghai/Shenzhen 1,550 listed companies, market cap. US$4.48 trillion (140% GDP)
– Large scale profitable enterprises: eg Baosteel, Sinopec, ICBC, China Life, China Ping An Group, and Daqin Railway
– Highest IPOs in world – US$62.1 billion 2007 CSRC implemented stronger regulation
– Committee on administrative sanctions, Chief Inspectors office and new Inspection bureau
Capital markets opening to foreigners– Commitment to allowing foreign companies to issue RMB stocks and bonds– Credit Suisse and Morgan Stanley establishing investment banking joint
ventures (33% maximum holding)– Goldman Sachs and UBS already established
Data source: CSRC China Capital Market Development Report 2007Data source: CSRC China Capital Market Development Report 2007
Slide Slide 55
Key capital market events II
First corporate bonds– Provisional rules for pilot issuance Aug 14 2007– Yanzi Power issued RMB 4 billion Sept 19 2007
Improved access for SME’s– Venture Board targetting high growth SME’s discussed at
Hangzhou meeting Nov 24 2007– “SME bundled bonds” (first in Shenzhen Nov 26 2007)
Housing Finance– Intra-government task force: urban/rural land policies,
urban planning, fiscal subsidies– Need to further develop credit information systems,
property registration, mortgage insurance
Data source: CSRC China Capital Market Development Report 2007Data source: CSRC China Capital Market Development Report 2007
Slide Slide 66
Four International Investor Compensation Schemes
We compare the history, legal and regulatory structure, governance arrangements, operations and detailed rules of:
UK – Financial Services Compensation Scheme (FSCS) US – Securities Investor Protection Corporation (SIPC) Canada – Investor Protection Fund (CIPF) Ireland – Investor Compensation Company Ltd (ICCL)
The Irish scheme is included because it is an example of a scheme set up in response to the European Investor Compensation Scheme Directive (97/9/EC)
Slide Slide 77
History, regulation and legal basis for Capital Market
RegulationUK - FSCS US - SIPC Canada - CIPF Ireland - ICCL
History
1986 - SIB and 5 SRO's established 2000 - FSA established 2001 - FSCS and FOS established
1934 - SEC established 1939 - National Association of Securities Dealers (NASD) founded 1970 - SIPC established 2007 - FINRA established (SRO replacing NASD)
1968 - National Contingency Fund (NCF) 1969 - CIPF changed name
2003 - Irish Financial Services Regulatory Authority (IFSRA) established 2007 - IFSRA assumed responsbility for regulating stockbrokers under MiFID
Regulatory StructureFSA, Bank of England and HM Treasury share responsibilities across all sectors
Brokers and Dealers muct register with SEC and join SRO
Provincial Securities Commissions Securities firms must join SRO - Investment Regulatory Organisation of Canada (IIROC), formerly Investment Dealers Association (IDA).
Both IFSRA and ICCL are departments of the Central Bank and Financial Services Authority of Ireland (CBFSAI)
Legal basis Financial Services and Markets Act 2000
Securities Exchange Act 1934 Maloney Act 1938 Investment Company Act 1940 Investment Advisers Act 1940 Securities Investor Protection Act 1970 Sarbanes-Oxley Act 2002
Financial Institutions Depositors Compensation Act 1985 Financial Institutions Act 1996 Financial Consumer Agency of Canada Act 2000 Provincial Securities Acts and MOU with CIPF
Investor Compensation Act 1998 Consumer Protection Code 2007
Reason for establishment of Compensation Scheme or Company
Mid 1990's collapse of two banks, miss-selling of pensions, industry pressure
1968-70 decline in stock prices, failures of broker-dealers
1968 Three Investment Dealer failures
Required by EU Investor Compensation Directive 1997
Slide Slide 88
Governance and Organisation
UK - FSCS US - SIPC Canada - CIPF Ireland - ICCL
Governance arrangementsPublic company Board, Committees Memoranda of Understanding
Board of 7 Directors, 5 appointed by US President
Board of Directors and Committees, Industry and Public Directors
Chair and Deputy Chair appointed by CBFSAI, other Directors by Ministry of Finance
Organisation and staffing Executive Board, 6 Divisions, 211 staff
President, General Counsel, Operations and Finance, 28 staff President and CEO, 15 staff
‘Investment Service Providers Supervision’ workgroup within CBFSAI
Responsibilities Securities, Banking, Pensions, Insurance Securities only Securities (including futures and
options) onlySecurities, insurance, bonds, futures and options
Slide Slide 99
Funding and other arrangements
UK - FSCS US - SIPC Canada - CIPF Ireland - ICCL
Funding and maximum
Compulsory levy on all firms as needed, to maximum of UKP4.4 billon(US$8.8bn). Funding arrangements revised 2008
Charges only $150 per year to firms Has funds of $1.5 billion and borrowing facility $1 billion If funds fall below $1 Billion, SIPC members assessed on percentage of net operating revenue
1987 Failure depleted NCF. Fees maximum 1% Gross Revenue per year, extra for firms with capital deficiency; Risk Review 2007, $100 million reinsurance policy acquired and new risk-based assessments on client net equity
New funding arrangements 2007 Target funding IRP10.16 million Twin Fund system for different categories of firm
Other compensation arrangements Lloyds General Fund
'Fair Funds' or disgorgement funds for each failure enforced by SEC
Federal banking, provincial and national insurance schemes for life, property and casualty
Deposit protection scheme Insurance compensation fund Credit unions compensation fund.
Advance payments?FSCS will pay if firms "unlikely to be able to pay", but only after validation
Funds provided in advance to Trustees; Direct Payment procedure for smaller claims
Often single payments to Trustee to transfer accounts and establish emergency payments system
None
Slide Slide 1010
Payment rules
UK - FSCS US - SIPC Canada - CIPF Ireland - ICCL
Limits to payments100% first UKP30,000, 90% next UKP20,000 per customer (max UKP48,000)
$500,000 per customer, cash limited to $100,000
Cdn$1 million per account, any combination of cash and securities, after distribution from estate
90% of amount lost, maximum IRP20,000
Payments made for Default, inappropriate behaviour, misrepresentation
Only on bankruptcy, certified by SEC Only for insolvency Only for inability to return cash or
securities
Maximum time before payment 90 days, unless extended by FSA 3 months, longer if records inaccurate 4-8 weeks for auditing process Three months
Normal time limit for claims Accept within 90 days of offer, claim within 6 years of event
Subject to court and/or Federal deadlines - 60 days to 6 months
Within 180 days of date of bankruptcy
Claims must be submitted within 5 months of court ruling or financial regulators determination
Slide Slide 1111
Costs, asset allocation and exclusions
UK - FSCS US - SIPC Canada - CIPF Ireland - ICCL
Treatment of costs Reasonable costs paid for insolvency Trustee costs paid Trustee costs paid Trustee costs paid
Customers assets Assigned to FSCS before payment
Trustee takes over assets during liquidation
Trustee takes over assets during liquidation No assignment of assets
Excluded claims> 5% shareholding, involvement in firm, contributory negligence, inadequate records
> 5% shareholding, involvement in firm - officers and directors, contributory negligence, inadequate records SIPC covers only custodial function - market losses from fraudulent selling are general creditor claims
> 5% shareholding, directors and contributory negligence
Not available to professional or institutional investors; firm must be member
Slide Slide 1212
Bankruptcy, claims and complaints
UK - FSCS US - SIPC Canada - CIPF Ireland - ICCL
Interaction with bankruptcy FSCS determines defaultSIPC can trigger bankruptcy; will only investigate cases if listed by SEC
CIPF contacted by SRO based on "reportable event" CIPF approaches court to request appointment of Trustee
ICCL only involved after Court or Regulator determination
2006/7 Claims experience 31,200 claims No failures during 2007 No failures during 2007 No failures during 2007
Complaints and Arbitration Financial Ombudsman Service (FOS)
Referred to SEC FINRA handles investor complaints and is responsible for arbitration
Referred to IIROC, formerly IDAFinancial Services Ombudsman; appeal to High Court; formal complaints procedure
Slide Slide 1313
Rules, investor education and external compliance
UK - FSCS US - SIPC Canada - CIPF Ireland - ICCL
Rules specified in Compensation Sourcebook in FSA Handbooks, FSCS website
SEC Rules of Practice; Claims Compensation Booklet; Securities Investor Protection Act 1970; SIPC rules
Coverage Policy document Investor Compensation Act, 1998
Investor Education Newsletter, website, brochures, free advisory service
Website, brochures, radio and TV public service announcements
Web portal, advertising policy for Members, annual report, trade shows, research report in 2008
Investor education through IFSRA
External compliance
European Convention on Human Rights European Union Investor Compensation Scheme Directive (97/9/EC).
N/A N/A
European Convention on Human Rights European Union Investor Compensation Scheme Directive (97/9/EC).
Slide Slide 1414
Common features of international schemes
1. Only pay claims to clients of authorised or member firms2. Check carefully whether the firm is in default or insolvent, or has breached
regulations, before payment3. Insist on the rights to assets being transferred (to FSCS, SIPC etc) before
claims are paid, and be active in recovering funds4. Where possible transfer the customer and his assets to another broker5. Limit claims to individuals and small businesses6. Exclude shareholders or those with influence in the firm, anyone who
contributed to the problem and other specific types of organisation7. Do not compensate for events which occurred before the scheme was set up8. Appoint Trustees (or other officials) to ensure all processes are complied with
and check all records9. Reject applications if information provided by the claimant is found to be
inaccurate or incomplete, or if there is suspicion of fraud10. Have strict time limits for claims submission and acceptance11. Set limits per customer and per claim, with detailed rules defining what is
meant by a single customer
Slide Slide 1515
Some relevant Chinese History
October 1992: State Council Securities Commission (SCSC) and the China Securities Regulatory Commission (CSRC) established
March 1995: Organisational Plan of the China Securities Regulatory Commission
August 1997: securities markets in Shanghai and Shenzhen under CSRC supervision
November 1998: National Finance Conference decided that local securities regulatory departments would be supervised directly, including those previously supervised by the People's Bank of China.
April 1998: SCSC and CSRC merged to form one ministry rank unit directly under the State Council
September 1998: Provisions regarding CSRC's Functions, Internal Structure and Personnel
Slide Slide 1616
China Securities Investor Protection Fund Co. Ltd. (SIPF)
Wholly State-owned financial institution established on approval from the State Council
Non-profit corporate body mainly in charge of raising, management and usage of the securities investor protection fund under the supervision of CSRC
SIPF was registered at the State Administration of Industry and Commerce on August 30th 2005
The State Council injected capital and the Ministry of Finance made a lump sum allocation of RMB 6.3 billion in registered capital
Slide Slide 1717
SIPF responsibilities Raising, managing and operating the securities investor
protection fund Monitoring and reducing the risks of the securities companies Repaying creditors (according to State polices) upon
securities company cancellation, closure, bankruptcy or administrative takeover/custodial operation by CSRC
Organizing and participating in the liquidation of the cancelled, closed or bankrupt securities company
Administering and disposing of the compensated assets and protecting the rights and interests of the fund
Proposing regulatory improvements to CSRC to improve the safety of investor's assets and the securities market
Establishing corrective mechanisms with the relevant authorities
Slide Slide 1818
Next steps for SIPF: recommendations
Considerable progress has been made in developing the administrative measures and rules for the Chinese compensation system
International experience can be used to consolidate these rules and develop a consolidated rulebook for the operation of the compensation system in China
Text from the FSA Handbook, from SIPA and from SEC and SIPC rules can be used as a basis for this work
Slide Slide 1919
Issues I Requirements for notification of SIPF, inter-relation between SIPF
and CSRC– Suggestion: develop detailed Memoranda of Understanding between SIPF
and CSRC (and possibly BOC and other relevant bodies) – as is usual in UK Detailed definition of which businesses are protected by SIPF.
– Observation: as the capital market develops, this will become increasingly important and the simple definition ‘broker-dealer’ may not suffice
Circumstances under which claims may be considered, including excluded categories and compensation limits.
– Observation: the UK limits compensation to individuals and sets the compensation per customer at quite a low level relative to US (or current practice in China)
Slide Slide 2020
Issues II Funding arrangements, including (a) the need for ‘emergency’
funding in the case of major failure and (b) regular levies from the Industry
– Suggestion: A detailed ‘Funding Review’ process, along the lines recently carried out in UK and including consultation processes, would be sensible.
Rationalisation of the assignment of claimants assets, and protective measures for reassignment etc
– Suggestion: Develop arrangements whereby SIPF becomes the sole custodian of assets during a liquidation to reduce inter-agency complexity
Consideration of an advance payments system along the lines of that in the US
– Observation: this could have considerable benefits for perceived security of investor assets in China’s capital markets.
Slide Slide 2121
Issues III Consideration of a ‘small claims’ or ‘direct payments’ system to minimise
administrative burden for smaller cases– Suggestion: develop and publicise detailed arrangements for smaller investors
Development, in collaboration with CSRC and the Chinese securities industry, of a ‘fair funds’ system which prevents the need for SIPF intervention
– Observation: this has been very successful in the US and has led to a reduction in the need for payments by SIPC, something that SIPF should have as a goal in the longer term.
Definition of time requirements for submission of claims, acceptance and processing of claims by SIPF
– Observation: this will assist in improving the efficiency of the Chinese compensation system and provide a basis for measuring and monitoring SIPF’s achievements
Strengthening SIPF powers in the case of fraudulent claims, inadequate records etc
– Observation: this is essential both to provide correct incentives in the capital markets and ensure efficient operation
Thank you
Questions and Discussion