A Red Flag for the Licensing Regime (A Postscript to ‘A Red Flag for Hong Kong Credit Ratings’)

AIIFL Working Paper No. 29

26 Pages Posted: 4 Aug 2018 Last revised: 9 Aug 2018

See all articles by Syren Johnstone

Syren Johnstone

Department of Law, University of Hong Kong; Asian Institute of International Financial Law

Date Written: July 1, 2018

Abstract

In July 2011 Moody's Investors Service Hong Kong issued a report that used a system of red flags to highlight corporate governance and accounting risks in a specified population of listed companies. Although the report is not itself a credit rating, it remains unclear whether Moody’s publication of it should be subject to the disciplinary powers of the Securities and Futures Commission (“SFC”). At issue is the construction of section 193(1)(d) of the Securities and Futures Ordinance (“SFO”), which provides that an act or omission relating to the carrying on of a regulated activity is liable to be regarded as misconduct subject to the disciplinary powers of the SFC under section 194 SFO. The earlier determination of the Securities and Futures Appeals Tribunal and the judgment of the Court of Appeal both supported a broad, purposive interpretation of relation to find that the SFC’s disciplinary oversight applied. Moody’s appeal to the Court of Final Appeal is likely to have ramifications that go well beyond the credit rating industry. As the case concerns the interpretation of a disciplinary provision that all regulated persons are subject to, the Court’s ruling will have significant implications on the ambit of the SFC’s disciplinary powers over all companies engaging in regulated activities that require a license from or registration with the SFC. This article examines the approach taken by the Tribunal and the Court of Appeal and suggests it is flawed and ill suited to the complexities of the business environment surrounding the undertaking of regulated activities. In the absence of an acceptable degree of legal and commercial certainty, there is a risk that regulatory oversight of a wide range of activities other than statutorily defined regulated activities may be introduced via a backdoor opened by the prospect of the SFC’s discipline. An alternative view of relation is proposed that may assist develop a test of relation that better serves statutory purposes, as well as regulatory and commercial needs. It is hoped the Court of Final Appeal will take the opportunity to clarify the law in this area in order to facilitate greater certainty as to the extent of the regulatory obligations of licensed corporations as well as the ambit of the SFC’s disciplinary powers.

Keywords: SFC, Moody’s, Credit Ratings, Regulatory Discipline, Court of Final Appeal, Hong Kong

Suggested Citation

Johnstone, Syren, A Red Flag for the Licensing Regime (A Postscript to ‘A Red Flag for Hong Kong Credit Ratings’) (July 1, 2018). AIIFL Working Paper No. 29. Available at SSRN: https://ssrn.com/abstract=3223425 or http://dx.doi.org/10.2139/ssrn.3223425

Syren Johnstone (Contact Author)

Department of Law, University of Hong Kong ( email )

Faculty of Law, Pokfulam Road
Pokfulam
Hong Kong
Hong Kong

HOME PAGE: http://www.law.hku.hk/faculty/staff/syren_johnstone.php

Asian Institute of International Financial Law ( email )

Faculty of Law, Pokfulam Road
Pokfulam
Hong Kong
Hong Kong

HOME PAGE: http://www.law.hku.hk/faculty/staff/syren_johnstone.php

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