Consultation Paper on the Review of the Investor Compensation Fund

  The SFC today publishes a Consultation Paper on the Review of the Level and Funding of the Investor Compensation Fund, Broker Defaults since 1998 and the Operation of the Investor Compensation Arrangements.

The Investor Compensation Fund (ICF) was established on 1 April 2003 under the Securities and Futures Ordinance to replace the old compensation arrangements.  The ICF is funded by transfers of the balances in the two old compensation funds (i.e. the Unified Exchange Compensation Fund and the Commodity Exchange Compensation Fund) and by investor compensation levies of 0.002% on securities transactions executed on the Stock Exchange of Hong Kong Limited and $0.5 ($0.1 for smaller size contracts) per contract on futures transactions executed on the Hong Kong Futures Exchange Limited.  As of the end of October 2004, the total assets available to the ICF were $1.36 billion.

Mr Mark Dickens, SFC's Executive Director of Supervision of Markets, said: "In order not to accumulate amounts beyond what is necessary for the ICF and to reduce the burden on investors, the Consultation Paper proposes to suspend the investor compensation levies as soon as practicable when the net asset value of the ICF reaches $1.4 billion which is the self-funding level based on our estimation on the annual expenditure (including compensation payments) and rate of return for the ICF. We expect that at the current level of market turnover, the ICF will reach $1.4 billion soon."

To provide transparency and certainty to the funding arrangements of the ICF and promote investors' confidence, the Consultation Paper proposes to introduce an automatic levy triggering mechanism with the following key features:
  • The current investor compensation levies will be imposed if the net asset value of the ICF falls below $1 billion, which is the minimum prudent level which the ICF should maintain in order to cover its potential obligations;
  • The current investor compensation levies will be suspended if the net asset value of the ICF exceeds $1.4 billion;
  • A month-end net asset value of the ICF which is certified through an audit by the auditors of the ICF will be used for the purposes of applying the levy triggering mechanism;
  • The SFC is responsible for implementing and monitoring the operations of the levy triggering mechanism as well as informing the public and the market by way of a notice of any changes to the prevailing levy arrangements including the date of implementation of such changes;
  • For imposition of levies, the implementation date is set at at least two months after the date of the issue of the SFC's notice.  For suspension of levies, the implementation date is set at one month after the date of the issue of the SFC's notice.
In addition, the Consultation Paper examines the current $150,000 per investor limit, which was first adopted in 1998 and concludes that the $150,000 per investor limit, which provides a similar level of coverage to that in and since 1998, should be maintained.

The Consultation Paper also summarises the key facts and results of a number of broker defaults since 1998 as well as the key decisions made by the courts to facilitate better understanding by the public of the status of these cases and the complex legal issues relating to broker defaults.

The Consultation Paper also reviews three suggestions which might help improve the existing procedures in handing broker defaults (i.e. for the ICF to advance funds to liquidators for the purpose of facilitating the return of clients' shares pledged by a broker to a bank as security for a loan; to give power to liquidators to sell securities and distribute money; and use of ICF funds to pay for an administrator) but concludes that they should not be pursued because the suggestions would introduce additional financial exposure to the ICF, involve alterations to the existing individual proprietary rights of investors in securities held by brokers and have implications for the current law dealing with trust property and insolvency.

The public are invited to submit comments by 4 February 2005.  A Consultation Conclusions Paper will be published as soon as practicable after the end of the consultation period.

The Consultation Paper is available on the SFC website and at the SFC office.

Written comments may be sent:

By mail to:
The Supervision of Markets Division
The Securities and Futures Commission
8th Floor, Chater House
8 Connaught Road Central
Hong Kong

By fax to: (852) 2521 7917

By on-line submission:
(Please go to subsection "Publications - Consultation papers and Conclusions" under "Speeches & Publications")

By e-mail to:

(This news is extracted from the SFC Website "Speeches & Publications")