The role of public enforcement in investor compensation

Abstract

In the last decade, the Securities and Futures Commission (SFC) of Hong Kong has made an important shift in its enforcement strategy. Instead of initiating criminal and disciplinary proceedings to deter market misconduct, it has brought an increasing number of civil actions to obtain compensation for victims of misconduct. This article responds to criticisms against achieving investor compensation through public enforcement and explains why it can be both necessary and desirable for the SFC to bring compensation actions. These actions make up for the lack of private enforcement against certain types of misconduct and sometimes serve as a more effective tool to credibly commit to strong investor protection. Nevertheless, there is sometimes a divergence in interests between the SFC and the investors it is charged with protecting. As a result, some investors may benefit from such compensation actions at the expense of other equally deserving investors.