Protecting Securities Investors

For the banking system, if a bank becomes insolvent, dissolved or bankrupt, deposits of customers are still guaranteed. This is the protection mechanism provided by the Government. However, there is no such a regime or policy for the securities sector. This is the main concern of all securities investors because they will not know where their money is if a securities company collapses. Many investors and experts are hoping and waiting for a proper mechanism.

 

The Vietnamese stock market now has more than 100 operational securities companies. This is a pretty big number in a market like Vietnam. Thus, it leads to disintegration of high-quality business administrators and the operating quality in many companies is rated unsatisfactory. Securities companies compete to attract investors at any cost, even excessive offering of financial leverages - the riskiest business option. This service not only influences the sustainable development of the stock market but also relates risk management of capital of securities companies, cash risks and securities risks posing to investors Worse, the State Securities Commission (SSC) - the market regulator - saw many difficulties in State management activities. One of the activities the SSC fails to manage is the use of financial leverages in securities companies.

 

According to the Vietnam Association of Financial Investors (VAFI), some securities companies may encounter various circumstances leading to dissolution, bankruptcy and loss of investors’ money and capital. Take example of poorly managed companies, their heavy debt burden and customers’ capital appropriation for their own business purposes may possibly cause investors’ capital loss.

 

Another common case is when securities companies fail to manage their own employees who might appropriate investors’ capital and assets for stock trading but unfortunately suffer huge long-term loss. Then, who will be to blame for compensating investors if the loss exceeds the securities’ assets?

 

Besides, according to VAFI, risks related to listed companies, or domestic business environment or impacts of the global economy, etc. may cause a wild volatility of stock market and a steep slump in stock prices, leading to a bad loss of liquidity. Then, securities companies cannot take back debts used as financial leverage. This will lead to bad impact on operations of securities companies and interests of investors will be influenced.

 

"If commercial banks have a clear and transparent deposit insurance regime, the stock market also needs such a mechanism to protect money and securities of investors in case securities companies come to dissolution, bankruptcy and fall into financial dilemma which may lead to failure to offset losses of investors,” VAFI said.

 

According to Lawyer Phung Anh Tuan, Vice Chairman of VAFI and Managing Lawyer of VCI Legal, Vietnam can learn experiences to set up investor protection funds and mechanism. The United States founded the Securities Investor Protection Corporation (SIPC), a non-profit organisation established under the Law on Investor Protection 1970. Its members include brokers, leaders and intermediary entities.

 

SIPC’s main responsibilities include payment for investors in case securities companies are out of business, in financial difficulties leading to loss of investors’ assets with the fundamental source of finance from the members’ contribution.

 

In addition to finance contributed by its members, SIPC is also funded by loans from the Securities Exchange Commission or issue of debentures. SIPC also has incomes from its business activities.

 

Besides, Taiwan has set up Securities and Futures Investor Protection Centre (SFIPC). This entity was established and operated under the Securities Investors and Futures Traders Protection Act 2002 by the Taiwan Securities Commission-nominated members including the Taiwan Stock Exchange Corporation, Taiwan Futures Exchange Corporation, GreTai Securities Market (a market for unlisted stocks and bonds), Taiwan Securities Central Depository, Taiwan Securities Association, Securities Investment Trust and Consulting Association, Taipei Futures Association, all financial securities companies and other organisations.

 

Donors to the SFIPC include the Taiwan Stock Exchange, Taiwan Futures Exchange, GreTai Securities Market, Taiwan Securities Central Depository, the Taiwanese Securities Association, Securities Investment Trust and Consulting Association, Taipei Futures Association, securities firms and futures firms. The centre will provide consultation on the trading of securities and futures as regulated by related laws and regulations; mediation of disputes arising from the trading of securities and futures; and litigation services on behalf of investors. In addition, the centre manages a protection fund to compensate investors if a securities or commodities firm is unable to do so due to financial difficulties.

 

In Hong Kong, the Investor Compensation Company Limited (ICC) was established for the administration of claims against the Investor Compensation Fund. ICC is a wholly-owned subsidiary of the Securities and Futures Commission (SFC). The company is responsible for receipt, determination and payment of compensation relating to defaults of licensed intermediaries and authorized financial institutions. This fund was merged by the Unified Exchange Compensation Fund and the Commodity Exchange Compensation Fund. The source of money comes mainly from the Investor Compensation Levy on exchange-traded product transactions. The current levy on securities transactions is 0.002 percent payable by buyers and sellers. For futures contracts, it is HK$0.5 per side of a contract or HK$0.1 per side of a mini contract or stock futures contract.

 

According to Mr Tuan, Vietnam needs to set up an investor protection company. The foundation for this mechanism is regulations on establishment and governance of a publicly-managed non-profit compensation fund financially supported by its members and possibly by the state if necessary. Finally, a mechanism for litigation through which an organisation delegated by members can actively take part in the claim process should be established.

 

Mr Tuan said all above tasks could be carried out by a task force nominated by the Government and/or an investor association and market participants.