Ashley Alder Chief Executive Officer Securities and Futures Commission

 

Ashley Alder took over as CEO of the SFC in October 2011, just as Hong Kong was emerging from the effects of the global financial crisis. In this wide-ranging interview with the Hong Kong Lawyer, he looks back at his time at the helm so far, and also discusses the SFC’s response to the current COVID crisis.

 

Ashley Alder first came to Hong Kong some 31 years ago. Educated at the University of London, and then at Cambridge, he began his legal career as a solicitor in London in 1984. Herbert Smith (now Herbert Smith Freehills) had opened its Hong Kong office in 1982, and Alder was sent here in 1989 on a two-year secondment. “I was due to go back after the two years were up, but that kept being extended. There were always good reasons to stay in Hong Kong!” he recalls. 

According to him, a major highlight of his career has been seeing China’s opening-up and reform story unfold from up close and having first-hand involvement in this, especially during his time as a regulator. “Hong Kong was basically a domestic financial market when I first arrived, with few connections with Mainland China,” says Alder. “That started to change with the first H share listings in the early 90s. Now about two-thirds of trading on our exchange is in Mainland companies. Not only that, but Stock Connect and other market access programmes over the last decade have been absolutely unique and transformative both in terms of who is trading in our markets and what they can invest in. The changes have been historic and really unprecedented.”

Alder practised law in Hong Kong for more than 20 years, serving as head of Asia for Herbert Smith between 2001 and 2004. “During my time at Herbert Smith we established offices across the region, including Tokyo, Jakarta, Bangkok and Singapore, and also in Shanghai and Beijing. I was able to see how Asia became increasingly integrated with the rest of the world through rapid changes in economies, trade and also local and international politics,” says Alder. “After you have been part of that, then working as a solicitor in the City of London might seem somewhat less dynamic.”

From Law to Policymaking

Alder says that while he has enjoyed being a lawyer, he does not envy the commercial pressures faced by lawyers today. “What I like most about being a lawyer is when you get to the point with a client where you become, in that well-worn phrase, a genuine trusted advisor,” he notes. “The foundation of trust in professional services rests on a client’s reliance on your competence and integrity, and is absolutely essential to a fulfilling career as a lawyer. You also have a commercial relationship with clients, of course, so it’s often hard to get the balance right. A great client relationship is hugely rewarding, but I think that the pressures facing lawyers and law firms in recent years to achieve ever more stretching revenue and profit targets can easily get in the way; if this gets out of hand, the reality is a decline in a firm’s long-term fortunes.”

Since 2016 he has also been Chairman of the Board of the International Organization of Securities Commissions (IOSCO) and sits on the Financial Stability Board's Plenary and its Steering Committee. “International policymaking is also something I enjoy greatly,” says Alder. “My role has helped Hong Kong play a larger part in developing the global policy agenda. Because Hong Kong is an open market, what happens elsewhere can have a dramatic impact on how business is conducted here. My work with IOSCO and the FSB has also given me exposure to a large number of leading market regulators and central bankers from all over the world; interesting and influential people I would never have come in contact with otherwise. All of those things make the work very rewarding, intellectually and personally. And I appreciate the fact that we can see the real impact of the decisions we make–whether for good or bad!”

Association with the SFC

This is not Alder’s first involvement with the SFC; he served a limited three-year term as Executive Director, Corporate Finance in the early 2000s. “The opportunity came around and looked interesting. I fully intended to go back to private practice afterwards,” he recalls. “The second go was when the CEO position became open in 2011. At that point I could clearly see that the significance of what the SFC does had grown enormously. It was clear that the organisation could have a major impact on Hong Kong as a far more important international financial centre connecting a rapidly developing China and the world. As this was just after the minibonds crisis, I thought it was also the right time for the SFC to take a good look at itself, how it is organised and how it does its job.”

He adds that from his first stint as Executive Director, he could appreciate the sheer breadth of the subject matter the SFC is involved in, and also the diversity of the people he dealt with across the financial industry, as well as his colleagues and fellow regulators across the world. “It’s very different from being a partner in a law firm,” says Alder. “We operate in a highly dynamic environment; over the last nine years, the SFC has had a major influence in shaping and driving the increasing connectivity between Hong Kong’s financial markets and those on the Mainland and the rest of the world, starting with the Qualified Foreign Institutional Investor scheme and then with Stock Connect in 2014. The way these programmes have developed is really unique and unprecedented, representing China’s often complex evolution as a global actor. No other regulator in the world gets to do this.”

When Alder started as CEO, Hong Kong was emerging from the effects of the global financial crisis. “That experience was still very fresh, and no doubt influenced the priorities I had in mind at that time,” he remembers. “The most important was that the SFC’s role should be to ensure that market development goes hand in hand with market quality and investor protection. Investor confidence in the regulatory system is a necessary condition for Hong Kong to flourish as an international financial centre. Separately, the SFC could not operate effectively without close communication and cooperation with local regulators and the broader international regulatory community. These relationships are especially significant for Hong Kong, with its relatively small domestic market but large financial sector footprint, in an age where market failures can quickly ripple through the financial system.”

A ‘Front-Loaded’ Approach

Since 2017, the SFC has been adopting a “front-loaded” or “real time” regulatory approach, which Alder describes as placing far greater emphasis on earlier, more targeted and more effective actions to tackle the greatest threats, or the most significant or systemic risks.

“It originated when we were considering how to address the extreme volatility we were seeing in the prices of some GEM and Main Board stocks a few years ago,” he says. “Shell-related trading activities and other undesirable market conduct were widespread. We started by setting up a cross-divisional working group pooling the expertise from our Intermediaries, Corporate Finance and Enforcement divisions to develop a properly coordinated response.”

Alder points out that all of this is complemented by a range of enforcement actions, where the SFC has frozen accounts associated with suspicious activity, sought disqualification orders against irresponsible directors, disciplined sponsors who have failed to discharge their duties and suspended the trading of shares where broader investor interests were at risk. 

“We have seen a lot of improvement as a direct result of this new approach. Our interventions and coordinated policy actions with The Stock Exchange of Hong Kong Limited (SEHK) have made it more difficult for listed companies to be used as vehicles for improper market activities,” he notes. 

“At the same time, we fine-tuned our supervision of licensed firms to adopt a more risk-based approach in that area of our work as well. We do more thematic inspections and offsite monitoring, and also stepped up our communication with the industry. We now place a stronger emphasis on senior management accountability under the Manager-In-Charge regime we introduced in 2016. We have disciplined large global firms as well as smaller players; recent examples included a $400 million fine for overcharging clients on product spreads, and another $400 million fine on a different bank for mis-selling structured products,” Alder adds.

A notable accomplishment during Alder’s time leading the SFC has been holding errant IPO sponsors accountable for their misconduct. “When a company which is unsuitable for listing is nevertheless listed and eventually fails, it may cause enormous losses to public investors and jeopardise the reputation of Hong Kong’s financial markets,” he says. “We believe this warrants deterrent penalties. Since the introduction of a revamped sponsor regime in October 2013, we have taken disciplinary action against 11 firms resulting in fines totalling over $900 million.”

Triggering Investigations

Alder says that a number of things could trigger an SFC investigation. “It may be something we find when we do our inspections of licensed firms. We also have specialist teams monitoring market activities on a daily basis, looking at trading patterns and listed companies’ disclosure announcements,” he notes. “If we think we need more information, for example, about a listed company’s public announcement, or how a broker’s client has traded, we have the authority to ask for this under the law. We use this power virtually every day, and it may lead to further enforcement action. We also follow leads from complaints we receive about market activities.”

He highlights that the SFC’s working relationship with the Independent Commission Against Corruption is excellent. “We conduct joint operations with them and also work very closely with the Hong Kong Monetary Authority (HKMA), Police and Department of Justice. We have arrangements with all of them for mutual assistance, case referrals and joint investigations. A lot of our work with HKMA centres on the supervision of the securities operations of banks. This is an area where we also work very closely with overseas regulators, either individually or as part of multilateral arrangements, including via IOSCO mutual assistance enforcement protocols,” says Alder. 

“Nowadays more of our investigations have a Mainland component, which is understandable as Mainland companies make up over 70 percent of our market capitalisation. Not only that, but since the launch of Stock Connect, more of our investors are located on the Mainland too. This is a complete change from thirty years ago, when the two markets were completely segregated. From an enforcement and supervision perspective, this means we are now in a much more complex environment,” he adds. “It also means it is now especially crucial that we have good cooperation with the China Securities Regulatory Commission (CSRC), our Mainland counterpart. Back when Stock Connect was first mooted, we realised that the degree of integration between the two markets needed to be matched by the degree to which the Mainland and Hong Kong regulators were able to cooperate to manage a range of new cross-market risks. We have made a lot of progress in this area and currently have a superb relationship with our CSRC counterparts, in large part because both sides have similar incentives to work on two-way cooperation whilst recognising the fact that we supervise very different legal and regulatory systems.” 

Alder adds that the SFC has also been working actively on combating money laundering, particularly when it comes to updating its guidance to licensed firms to make sure it stays aligned with what is happening internationally. “The Financial Action Task Force says in its latest report that Hong Kong’s regime to fight money laundering and terrorist financing is sound and delivering good results,” says Alder. “One issue we face here is that some small firms do not always understand the risks, or how to mitigate them. We are working to address this, for example, we have seminars to promote awareness of areas where there is a need to improve.” 

Combating the Covid Effect

Of course the big story this year for much of the world has been the COVID-19 outbreak. Alder says the SFC has responded proactively to the pandemic in order to keep Hong Kong’s financial markets functioning efficiently and effectively. “We maintained close communication with licensed firms and industry associations to make our regulatory expectations as clear as possible during a critical time,” he says.

“To ensure that firms, exchanges and clearing houses manage their risks and operate in a normal manner, we stepped up our supervisory efforts and stress tests to monitor their financial and operational resilience. We focused on what we knew to be potential vulnerabilities, for example, investment fund liquidity and redemption profiles,” Alder adds. “We also provided flexibility for licensing procedures and for fund authorisations, and issued joint guidance with SEHK to address market concerns about practical issues around the auditing of listed companies’ earnings results and also to do with their annual reports and shareholder meetings.” 

At the same time, the SFC took a balanced approach to ease pressure on an industry largely working from home. “We extended the implementation deadlines for some regulatory changes and announced that we would allow a degree of flexibility for staff working overseas as part of contingency arrangements,” he notes.

Alder also chaired very frequent calls of the IOSCO Board to help inform policy decisions to address the crisis. “IOSCO has also taken specific steps to help the industry manage the impact of the outbreak,” he says. “It issued a statement in April to address concerns that higher loan-loss provisions meant more money had to be set aside to cover loans to the increasing numbers of distressed borrowers. The following month, another statement highlighted the importance of making sure financial statements and corporate disclosures included high-quality information about the impact of COVID-19. And in July, IOSCO and the Basel Committee announced that new margin requirements for over-the-counter derivatives would be deferred by a year, freeing up operational capacity for firms to deal with the immediate effects of the crisis.”

In parallel, the SFC was also working to help firms in Hong Kong consider the implications for their businesses of the National Security Law and the imposition of US sanctions in Hong Kong and Mainland China. “In the normal course we supervise the way firms manage legal and business risks,” Alder explains. “We made it clear publicly that we were not aware of anything in the new law which should change how firms and listed companies access and disseminate financial and business information under our regulatory regime, or that would affect the rules and accepted practices governing market trading,” he notes. 

“Despite all the recent challenges Hong Kong has faced, the stock and derivatives markets in Hong Kong have operated in an orderly manner and trading has been very active. To be sure, the pandemic and geopolitics have presented unprecedented challenges.” But Alder concludes that “it is more important than ever that we stay focussed on our core values and continue to deliver world-class regulation in the same way we have always done.” 

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