Cai Jin

Making SGX RegCo 'truly independent'

Unit's independence from SGX is key to its success in fulfilling regulatory functions

More than one year in the works, Singapore Exchange Regulation, or SGX RegCo for short - the unit which the SGX is hiving off to house its regulatory functions - is scheduled to start operations by the end of next month.

This move is not expected to garner much excitement from investors. But RegCo plays an important role, taking over functions such as ensuring that the 770-odd listed firms with an estimated total market capitalisation of $1 trillion play by the rules.

It will also oversee the policing of the stock market, guarding investors from illegal activities such as share-price rigging with its market surveillance activities.

And if it plays its cards right, it will have a far-reaching impact, since it will have a say on a wide range of issues from vetting applications from companies which want to list here to imposing sanctions on listed firms for any wrongdoings.

RegCo's establishment will put the local stock market's regulatory practices in line with those of other major markets such as New York, where the New York Stock Exchange has a not-for-profit arm, NYSE Regulation, which performs a similar policing role.

It also helps to quell the criticism levelled at the SGX for the perceived conflicts which currently arise from its dual role as a profit-making body accountable to shareholders and its function as a front-line regulator.

Why is this important? As I noted last year before the announcement of RegCo's setup, the existing model of combining both roles puts the SGX in a no-win situation. If things are humming along smoothly, the SGX gets no pat on the back as it is seen to be doing what is expected of it.

One big game-changer is that SGX RegCo, the unit that the Singapore Exchange is hiving off to house its regulatory functions, will have its own board with a chairman and majority of directors who are independent of the SGX or commitments to other SGX
One big game-changer is that SGX RegCo, the unit that the Singapore Exchange is hiving off to house its regulatory functions, will have its own board with a chairman and majority of directors who are independent of the SGX or commitments to other SGX-listed firms. ST FILE PHOTO

But if things go wrong, as they do once in a while for every bourse operator (just look at Hong Kong which is struggling to cope with a penny stock scandal with billions of dollars in market value evaporating in hours), the accusations fly that the SGX is a conflicted regulator, cutting corners for commercial reasons.

Now that RegCo is about to become operational, I feel that one important task it should set for itself is to be seen to be independent of the SGX - and that the actions it takes are by no means constrained by SGX's commercial considerations.

To that end, one big game-changer is that RegCo will have its own board with a chairman and majority of directors who are independent of the SGX or commitments to other SGX-listed firms.

Also, Mr Tan Boon Gin, the SGX's chief regulatory officer who moves over to become RegCo's chief executive, will find himself answering to the new board, rather than the SGX.

That this change in reporting structure is important is belied by Mr Tan's observation that RegCo will be driven purely by regulatory considerations as its board has no financial commitment or profit and loss considerations to worry about.

So far, RegCo has appointed as its chairman Professor Tan Cheng Han, a former dean of the National University of Singapore law faculty. Other board members are expected to be named when it becomes operational.

But having a separate board is not going to make much of a difference - at least not in the public eye - unless efforts are made to show that RegCo will be run differently.

To this end, it augurs well for RegCo that far from shying away from the spotlight, Prof Tan is already making waves with his views as to how the new regulatory unit should be looking into issues concerning investors.

In a recent speech, he expressed some of his thinking on RegCo, pledging that it "will strive to be a learning organisation by learning from its mistakes and improving".

He also openly welcomes feedback on how RegCo can improve. "Even though we may not be in agreement with each other all the time, any views you provide will be internalised and analysed carefully," he said.

That RegCo is receptive to feedback will mark a significant change - as this may turn it into a more accessible body to the investing public - and a departure from the usual way in which regulatory bodies operate, used as they are to working in anonymity behind the scenes.

Prof Tan has also sent a clear message that no cow is too sacred to be slaughtered, as he reiterated the need for RegCo to undertake a review of the rules - some of which may have outlasted their usefulness.

He said: "If a rule is necessary, it should be in force, even if it is a pain point. If not, let us not hesitate to modify or remove it."

One example he cited was the quarterly reporting requirement whose usefulness ought to be re-evaluated, given "the widespread views that it adds little value today and adds to significant compliance costs".

To me, it is the view that he holds on corporate disclosures that will prove to be the biggest game-changer for retail investors if he can swing significant reforms in that area.

He said: "RegCo in its focus on openness and transparency would like to see the quality of disclosure improve so that they are kept clear and concise, and in plain and simple language."

Prof Tan also observed that it is time to do some soul-searching on how disclosures are drafted here. While Singapore's disclosure-based regime is still a work-in-progress, it must rank among the more developed markets in terms of the thickness of its public offer documents.

What is interesting is his revelation that it is not just the investing public which has difficulties grappling with difficult-to-understand prospectuses but the SGX regulatory staff who have the unenviable task of vetting them.

He said: "According to my regulatory colleagues, some shareholder circulars contain language so technical and convoluted that you need dictionaries containing both legal and financial terms to plough through them."

And in case investors have unrealistically high expectations of RegCo, Prof Tan argued that "no regulator - statutory or front-line - can be everywhere all the time".

He noted that for the market to function smoothly, every participant has a role to play, whether it involves well-informed investors prepared to vote with their wallets or their feet, insiders who are prepared to become whistle-blowers, or market professionals who are prepared to take action if they find something irregular.

And there is only so much a regulator can do. As he put it: "We are by no means omniscient and will no doubt make mistakes. When we do, I hope the market place will understand that we are only human."

Still, at the end of the day, the proof of the pudding is in the eating. Prof Tan has articulated some objectives for RegCo that will make it distinctly different from the current SGX regulatory set-up. If they are successfully executed, these new arrangements will give RegCo the much needed credibility boost that it is indeed independent of the SGX, not just in form but in substance as well.

A version of this article appeared in the print edition of The Straits Times on August 14, 2017, with the headline 'Making SGX RegCo 'truly independent''. Print Edition | Subscribe