The government recently announced the plan to establish an Investor Education Council (IEC) and a Financial Dispute Resolution Centre (FDRC) to enhance education and protection for investors. In this issue, Prof. Louis Cheng of the Department of Accounting and Finance will share his views on how the IEC and FDRC can effectively perform their responsibilities.

Q1. How can the establishment of the IEC help provide more protection for investors?

For the establishment of the IEC, the government has to work together closely with regulators including the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA), the Office of the Commissioner of Insurance (OCI) and the Mandatory Provident Fund Schemes Authority (MPFA), for the benefits of the community. The IEC should aim at educating investors as well as the industry practitioners who serve the investors. Investors should know what questions to ask when considering various investment products and the serving practitioners should have good knowledge of the products so that they could provide detailed explanation to the investors.

First, the IEC should educate industry practitioners working in banks and insurance companies to provide investors with their credentials when selling investment products. Secondly, practitioners should be educated on professional ethics. They should explain to investors the fees involved in purchasing investment products and the various fees involved should be disclosed in accordance with the industry’s standardized norms. Also, practitioners should disclose their conflict of interests, if any, when selling those products.

Investors, on the other hand, should be educated on the essential questions to ask, such as the various licences of practitioners, the difference between financial products, risk levels and the fees involved.

Q2. Nowadays, there are so many different financial products in the market. How can the IEC effectively educate investors on the risks associated with these products?

As a regulator, HKMA has the responsibility to make sure the names of financial products genuinely reflect the risks associated with the products since the names will affect investors’ perception of those products. The existing disclaimer/disclosure/footnotes listed on the application forms of financial products are just not enough to make investors understand the associated risks. For example, equity-linked note (ELN) involved investment elements such as options/futures and should not be called high-interest bond/note. In addition, IEC should educate investors to estimate the overall risk of the whole investment portfolio, not only individual products. Only when regulators and IEC work together will education to investors be effective.

Q3. Do you agree that investors’ education be centralized under one single institution, i.e. the IEC? What are the keys to the success of the IEC?

Yes, I think IEC can play a more important role in educating investors than individual small institutions since investors’ education is a long-term and resource-demanding task. To achieve effective results, the government must take up this responsibility.

The IEC must have a leading regulator to balance the interests of related parties, including investors, HKMA, OCI, IFPHK and MPFA. In addition, the government has to outsource investors’ and practitioners’ education programmes to professional bodies such as universities, and take up the monitoring role.

Q4. The government said that FDRC will offer a speedy and affordable way to handle financial disputes. Do you think the establishment of the FDRC will benefit small investors?

The establishment of the FDRC is no doubt a good initiative. It will provide an alternative channel for investors and financial institutions to handle disputes through mediation or arbitration, other than going through the existing legal mechanism. FDRC may facilitate and speed up the process of negotiation and reaching solutions between the disputing parties and, therefore, small investors may be able to get justice within a shorter period of time.

However, whether small investors will be benefited from this centre relies very much on how much human and financial resources are poured into the mechanism and whether the procedures will create a financial burden to investors. The operation of FDRC has to be supported by professionals with good knowledge in mediation and arbitration, such as judges, lawyers, mediators, arbitrators, law professors of universities and professional witnesses.