Policy-makers, particularly in the financial field, face a deep-rooted dilemma on how to resolve the conflict between public and sectoral interests, Monetary Authority Chief Executive Joseph Yam says.

In his latest Viewpoint column published today, Mr Yam said an effective financial system is one that gives a high rate of return to those saving or investing money, and a low cost of funds for those raising money. But a reasonable level of remuneration for the intermediaries is needed for them to play their specialised role effectively.

Mr Yam said to ensure reasonableness, policy-makers often rely on the competitive forces of the market. But this is not always possible, because the specialised role of the intermediaries, in handling other people's money, can only be performed by those with a high degree of integrity.

"This means there is a need for appropriate entry or licensing criteria, a degree of supervision of the activities of the intermediaries, and market regulation," Mr Yam said.

"This also means a somewhat protected mandate for the intermediaries that may be strengthened by the existence of industry associations, which pursue vigorously their private, profit-maximising interests, among other things."

No easy solution

The more successful the intermediaries are in their business, which is measured by the profits they make, one can argue the less effective is the financial system in financial intermediation. This then is the deep-rooted dilemma often faced by policy-makers, Mr Yam said, adding there is no solution that pleases everybody.

"Often the intermediaries, being well organised, perhaps even at the political level, have quite a strong voice. This is not to say that the intermediaries pay no attention to the public interest at all.

"Some will agree with the policy-makers that, in the long run, the private interest of profit maximisation by the financial intermediaries and the public interest of effective financial intermediation should converge. But, realistically, achieving the short-term profit forecast is always a very high priority for the intermediaries."

He said this deep-rooted dilemma is likely to resurface as information technology leads to a fundamental change in the mechanism for delivering services from financial intermediaries.

Taking the stock market as an example, Mr Yam said the totally computerised trading and custodian system linked with the electronic money payment and settlement system allows real-time delivery versus payment to happen instantaneously when a transaction is made, even at the retail level.

He said with this market structure, the most robust and desirable from the risk management and efficiency points of view, the role of the intermediaries will diminish.