Stockbrokers who are also shareholders of Hong Kong Exchanges and Clearing Ltd (HKEx), which owns the stock exchange monopoly, are fighting a proposal to reform the IPO (initial public offering) market. At stake are hundreds of millions of dollars a year in sponsorship fees and sales commissions in new shares transactions. The large number of new listings of Chinese mainland enterprises has catapulted Hong Kong to the forefront of IPO markets, surpassing New York and London.

But, the unacceptably large proportion of newly listed companies that are later deemed to be unfit for public listing is seen to reflect the shortcomings of the current system of voluntary disclosure in protecting investors’ interests. This has apparently prompted the Securities and Futures Commission to work with the exchange’s listing division to produce a reform plan that gives the regulatory agency a bigger say in the IPO approval process.

The reform, which must be ratified by HKEx’s board of directors, represents a major step forward in addressing the potential conflict of interest of the stock exchange which is sometimes criticized for putting too much emphasis on advancing the interests of its shareholders and members as a publicly listed company, and too little on fulfilling its fiduciary duty to the public as a monopoly.

This issue is not unique to Hong Kong. London has established an independent body consisting of representatives from the regulator, profession and the investment public, to vet IPO applications.

But, it’s not a proposal that goes down well with Hong Kong’s stockbroking community. A HKEx director, Vincent Lee, who is also a stockbroker, told a local newspaper he’s “personally (and) totally” opposed to the reform, adding: “I don’t know anyone on the HKEx board or any broker who has agreed to the reform plan.”

Opposing the proposed reform for fear of losing business, stockbrokers have ignored the fact that many overseas companies are seeking a listing in Hong Kong to tap into the market for long-term institutional investment funds. To attract these funds, Hong Kong must maintain a transparent and well-regulated market.

Failing to do that would result in an outflow of foreign institutional investment funds to other markets. When that happens, the IPO market in Hong Kong will dry up.