Flunkies: Hong KongÆs new licensing exam is a killer

With barely a fifth of securities dealers passing the test, is the brokerage industry in peril?

Sour stock markets? No problem, ride it out. SARS? Been there, done that. Wars in the Middle East? Par for the course.

A securities dealing exam in Hong Kong? Run for your life!

The brokerage industry in Hong Kong faces, by some accounts, the biggest menace to careers and fortunes it's seen all year. "There are a lot of guys who have to take this exam and they're shitting their pants," says a dealer at a brokerage.

He adds that he failed it on the first go and now must sit for it again this Saturday. "I took a prep course but no one realized how hard it is to pass."

This man's not alone. Since the new exam regime was put in place this year, only 21% of people taking the basic test, "Fundamentals of securities and futures regulation", have passed.

In April the new regime took effect as part of Hong Kong's new Securities and Futures Ordinance. The monthly exams began in June and are administered by the Hong Kong Securities Institute. The idea of the SFO was to create a single licensing regime in which a market participant needs only one licence to conduct a certain activity. Previously to deal in securities, futures and so on could require multiple licenses.

The Securities and Futures Commission (SFC) has come up with nine areas in which all market players need to qualify for a licence, including being a securities advisor, leveraging foreign exchange transactions, managing assets or financing margins.

The SFO stipulates that every dealer or advisor must sit for this new exam, although there is a somewhat complicated opt-out clause depending on prior market experience. But even people with up to five years of experience may need to sit for some exams. And any new hire or recently arrived expat must also qualify.

The bar may have been set too high, however. According to the HKSI, there are two "core" papers that must be passed, along with a menu of others. Paper 1, the fundamentals of regulation, has a pass rate of 21%. The other core exam, Paper 7, "Financial markets", has a more reasonable 62% pass rate so far. Other exams vary, although only 25% have passed the paper on asset management.

Some months are better than others; in August only 14% passed the Paper 1 exam. Both Paper 1 and Paper 7 consist of 60 questions; students have 90 minutes to complete the test and need to get 70% correct to pass.

The upshot? "We have clients and brokers who haven't been able to pass," says the head of a securities company. "The regulators have gone overboard in terms of the syllabus and requirements. I have dealers who could lose their jobs. We're trying to hire international talent. Our chaps here have education and US experience. I've got a Harvard grad who hasn't been able to pass."

One may argue that standards at Harvard aren't what they're cracked up to be, but it does seem that when four-fifths of applicants flunk the exam, something is amiss. The United States and United Kingdom have their securities examinations; pass rates there tend to be in the 60-70% range.

The broker who must sit again for the exam this weekend says if the well-educated bright people are struggling, then the exam must be hell for the average broker or insurance agent, the masses in financial service firms' sales forces. "Merrill Lynch has 35,000 brokers in the United States. If they had to sit for this exam, the firm wouldn't be able to hire more than 20% of them."

Although a student can take the exam as many times as he or she needs to, they can only continue working under six-month grace periods granted by the SFC. These grace periods can be extended another three months. But some people could get stuck and not fulfil the requirements in time, resulting in penalties against the firm. Each exam costs HK$600 to sit.

The HKSI exam is not straightforward, say critics. Whereas in the US questions are designed to help the student understand what the right answer is, the Hong Kong version is loaded with tricky questions. "You have to literally memorize the entire handbook," a broker says.

Calls to the HKSI were referred to the SFC. A spokesman at the SFC says the regulator approves the test that is designed in conjunction with the HKSI. When informed of the failure rates, he said the SFC would ask the HKSI to look into the issue.

In the meantime, expect Lan Kwai Fong to be full of brokers crying in their beers on Saturday night.