Hong
Kong Structure and Regulation of the Legal Profession
The
legal profession in Hong Kong bears a strong resemblance to
that of the UK, on which it is modelled. Thus, it is a split
profession, with barristers and solicitors. It is largely
autonomous, and its rights to be self-regulating were explicitly
preserved in the Basic Law introduced in 1997 when Hong Kong
reverted to Chinese rule.
Hong
Kong is home to over 7,000 solicitors and over 1,100 barristers.
In addition, there are nearly 1,300 registered foreign lawyers
from 28 jurisdictions. Barristers have a right of audience
in all courts, whereas solicitors' rights of audience have
traditionally been limited to the lower courts; a client must
approach a barrister through a solicitor; and a solicitor
must be present when a barrister is in court, takes instructions
from a client or interviews a witness.
As
in the UK, this antiquated system needs loosening up, but
the lawyers who benefit from it will not accept change very
readily. A relaxation of the differences between solicitors
and barristers would increase competition, improve access
to barristers and lead to reduced costs. New laws have begun
to break down these traditions to the benefit of litigants,
however.
While
recognizing that there is a need to retain and develop a strong
group of specialist advocates, the Administration thinks that
rights of audience should be based on competence, not on whether
a lawyer is a barrister or solicitor. There are proposals
for change:
-
to
allow solicitors to acquire rights of audience in all
courts, if they have relevant experience and have passed
necessary examinations;
-
views
are to be sought as to whether any limitations based on
years of experience should be imposed on barristers' rights
of audience in the higher courts;
-
as
in some other jurisdictions, members of recognised professional
bodies and employed barristers should have direct access
to barristers;
-
barristers
should be able to decide whether the interests of the
lay client or the interests of justice require the attendance
of a solicitor in court; and
-
the
two-counsel rule which prevents Queen's Counsel (senior
barristers) from appearing in court without a junior barrister
should be abolished.
Retaining
the two branches of the profession but eliminating the practices
that can no longer be justified would both benefit consumers
and continue to provide a choice for legal practitioners.
However, barristers have continued to oppose modernisation
of the profession, and so far these proposals have only
been adopted to a small extent.
In
January 2010, the Hong Kong Legislative Council passed the
Legal Practitioners (Amendment) Bill 2009, which allows
solicitors to apply for higher rights of audience before
the Court of First Instance, Court of Appeal and Court of
Final Appeal, in civil and criminal proceedings. Solicitors
who have at least five years' post-qualification experience
and who satisfy other eligibility requirements may apply
to the Higher Rights Assessment Board for higher rights
of audience. The changes will allow litigants to choose
between instructing barristers or engaging suitably qualified
solicitors to appear for them in court. It was expected
that the Higher Rights Assessment Board would begin accepting
applications from solicitors in early 2011.
In
addition to its structural problems, Hong Kong's legal sector
is plagued by under-capacity. The average waiting time between
a request for a court date and the actual hearing is 216
days in the civil court, although time spent on preliminary
matters means that the average litigant will have to wait
for about 400 days to have a case heard.
A
recent paper on civil justice reform said the number of
judges in Hong Kong had not changed significantly in the
past decade despite sharp increases in workload.
The
caseload of the High Court has increased 82% since 1991,
so that judges have thus had to cope with higher pressure
and bigger workloads.
The panel of Masters will deal with work in the High Court
that encompasses summary judgments, where a case is instantly
disposed of, and interlocutory applications, ie technical
queries that don't require a court hearing as such. They
will also dealing with so-called 'taxation', meaning the
scrutiny of legal bills to allocate costs between litigants.
Under
the Hong Kong judiciary's 'Performance Pledge,' the Court
of First Instance pledges to set a hearing date for criminal
cases within 120 days from the filing of an indictment,
and within 180 days from the application to fix a date in
civil proceedings. The Judiciary has stressed, however,
that these are "targets" and they may fluctuate
according to the year's particular circumstances.
Evidently
wanting yet more work, in September, 2003, the Hong Kong
Bar Council met with the Chinese Ministry of Justice, in
order to attempt to persuade the Chinese authorities to
allow Hong Kong's barristers the same rights to practice
on the mainland as have been afforded to the territory's
solicitors.
Under
the auspices of the Closer Economic Partnership Agreement
(CEPA), Hong Kong lawyers will be permitted to study for
qualifications as mainland lawyers with a view to practicing
there. However, SAR-based solicitors are prohibited from
practising any kind of litigation work, and barristers have
been excluded from the agreement altogether.
Alan
Leong SC, head of the Bar Council's mainland practice relations
committee suggested that there were several reasons, both
socio-economic and political, why barristers have been excluded
from the draft agreement thus far. He observed that: "Litigation
is the bread and butter for most mainland China lawyers,"
and went on to explain that: "The Chinese mainland
does not practice adversarial or hostile litigation like
we do. I do not rule out that our style and concepts of
litigation would have an impact." However, he added
that in light of the fact that the SAR is prepared to allow
mainland lawyers to practice litigation in the territory,
a degree of reciprocity should be expected.
In
December, 2003, it was announced that, as from January 1,
2004, Hong Kong law firms will be permitted to form alliances
with Chinese firms. Major international law firms took great
notice of this development, which was expected to lead to
a major increase in the size and prestige of the Hong Kong
legal profession. However,
only lawyers born in Hong Kong are allowed to re-qualify
to practice local law on the mainland, and even they are
only permitted to practice commercial law. Many US and UK
law firms were nonetheless said to be looking to register
locally as Hong Kong practices in order to take advantage
of the opening-up of the Chinese legal sector.
Finally,
in June, 2004, a working party was established to examine
the ending of the monopoly held by the territory's barristers
on conducting trials in the High Court. Although the announcement
that a think-tank was to examine the issue was cautiously
welcomed by solicitors, many within the legal community
were doubtful that this new initiative would yield positive
results, or even cover new ground compared to earlier reviews.
Among other concerns, solicitors feared that the choice
of appointments to the working party was likely to influence
its conclusions, with the possible appointment of more traditional
judges likely to swing the debate in favour of barristers
retaining their monopoly.
In
August, 2004, Hong Kong law firm Woo Kwan Lee & Lo became
the first SAR-based organisation to create an alliance with
a Chinese law firm under the auspices of the Closer Economic
Partnership Arrangement (CEPA) between the jurisdiction
and the mainland. Under the alliance, Woo Kwan and the Beijing-based
Grandall Legal Group were to share office costs, resources,
and staff. The move was closely watched by the various international
law firms who see the alliances permitted under CEPA as
a potential gateway into the Chinese market, which has traditionally
been off-limits to them due to restrictive practice rules.
Chinese
law firm Duan and Duan, the first independent partnership
law firm to establish itself in China, announced its expansion
into the Hong Kong market, with the opening of its first
office in the city in May 2007.
The
main focus of the firm's business will be to help international
companies wishing to invest in China to navigate the country's
complex legal, cultural and linguistic environment. It plans
to provide advice in the fields of corporate law, international
investments and trade, finance, mergers and acquisitions,
arbitration and litigation.
Duan
Duan has partnered with J. Lai and Company, an established
Hong Kong law firm, to further enhance their cross-border
strengths and connections.
Speaking
at the opening, Mr Duan Qi-hua, a partner in Duan and Duan
observed that: “Hong Kong is the ideal base to set
up operations. The city provides a platform for the international
community to gain access to opportunities in China. Equally
Chinese companies are able to use Hong Kong to launch themselves
globally.”
Duan
observed that since China’s accession to the World
Trade Organisation, a greater number of foreign companies
have been looking to invest in the Mainland. The country’s
new found confidence was also reflected in the number of
Chinese companies looking to expand on to the international
stage.
In
June 2010, an amendment was introduced into the Legislative
Council that would introduce the limited liability partnership
(LLP) for solicitors firms,
bringing Hong Kong into line with other major
financial centres such as London and New York. The proposal
changes the existing law under which every partner in a
solicitors firm is liable jointly and severally with other
partners for all partnership obligations, including those
arising from any wrongful act of other members of the firm.
A
spokesman for the Department of Justice said, "the
bill is not intended to change the common law position with
respect to the general principles of negligence. A partner
in an LLP may still be held responsible under the common
law for vicarious liability arising from a default of an
employee who is under the supervision of the partner. Besides,
a failure to establish a proper system of staff supervision
can be the basis for a claim that all partners of an LLP
are collectively liable for negligence."
Hong
Kong Solicitors 'Accounts' Rules
Hong
Kong solicitors earn interest on clients' money held by them
and usually retain this by virtue of a contractual provision
entitling them to do so. In the absence of such a provision,
the interest belongs to the client.
This
situation is anomalous, since in England there have been rules
since 1965 requiring solicitors to pay interest to clients
when it is reasonable for them to do so, while in many other
common law jurisdictions interest on client monies is paid
to a central fund and used for improvement of the profession.
There is no statutory client protection or indemnity fund
in Hong Kong. Solicitors are required to have professional
indemnity cover, but barristers are not. It is proposed that
barristers should fall into line with solicitors, and also
that a compensation fund should be set up.
Hong
Kong Advertising
Solicitors
are prohibited from promoting their practices except in accordance
with the Solicitors' Practice Promotion Code. This code prohibits
(amongst other things):
-
advertising
on television or radio, in the cinema, or on any public
display;
-
advertising
that is reasonably considered to be in bad taste; and
-
advertising
that is inappropriate having regard to the best interests
of the public or the solicitors' profession.
Barristers
are generally prohibited by their Code of Conduct from any
form of advertising.
The
rules in force in England and Australia are much less restrictive.
Advertising of services is in the public interest and makes
for greater transparency in the delivery of professional services,
which helps consumers to make an informed choice.
It
is proposed that the only restriction on advertising and promotion
by lawyers should be that it must not be false, misleading
or deceptive, that restrictions based on subjective criteria
should be removed, and the Bar Association should actively
encourage the dissemination of information about the services
offered and fees charged by barristers.
Hong
Kong Fees and Disputes
Solicitors are generally under no duty to explain to a client
the amount of fees he will be charged, or the basis on which
they will be charged.
Solicitors'
fees relating to non-contentious work (such as the sale
and purchase of a flat) are charged according to the standard
scales laid down by a statutory committee. The committee
is chaired by a High Court Judge. Half of the members are
solicitors. At the time of writing, a person buying a flat
for $3 million, with a 70% mortgage, would pay scale fees
of about $36,500.
Conditional
fees were not permitted in Hong Kong until 2005 (see below).
Notarial fees, where relevant, are included in the final
bill to the client.
There
are some hundreds of complaints every year about solicitors
and barristers in Hong Kong, and these are handled by the
Law Society and the Hong Kong Bar. However the guidance
to solicitors provided by the Law Society, and the Bar's
Code of Conduct, do not contain requirements in respect
of "client care", i.e. the information to be given
to clients about the cost of services, and procedures for
dealing with complaints.
The
two professional bodies do not have a general power to provide
a remedy for shoddy work that does not amount to professional
misconduct. The English Law Society has had such a power
since 1985 and the English Bar plans to create a similar
power. In addition, English solicitors are required to have
complaints-handling procedures. It is proposed that the
two professional bodies in Hong Kong should have the power
to provide a remedy for shoddy work, and solicitors' firms
should be required to establish complaints-handling procedures.
A
consultation paper released in September, 2005, by the Law
Reform Commission (LRC) of Hong Kong recommended that existing
prohibitions against the use of conditional fee arrangements
should be lifted for certain types of litigation, thereby
helping improve access to the law for middle income groups.
Conditional
fees are a form of “no-win, no fee” arrangement. If the
case is unsuccessful, the lawyer will charge no fees. In
the event of success, the lawyer charges his normal fees
plus a percentage “uplift” on the normal fees. Conditional
fees are different from the American form of contingency
fee, where the lawyer’s fee is calculated as a percentage
of the amount of damages awarded by the court.
At
present, conditional fees, like other forms of “no win,
no fee” arrangements, are unlawful for civil legal proceedings
involving the institution of legal proceedings. The restriction
has its origins in the ancient common law crime and tort
of champerty and maintenance.
Given
the high cost of litigation in Hong Kong, those in the middle-income
group whose means are above the limits set down by the Legal
Aid Scheme and the Supplementary Legal Aid Schemes would
have difficulty financing litigation.
The
consultation paper recommends that lawyers should be allowed
to use conditional fees in certain types of civil litigation,
including: personal injury cases, family cases not involving
the welfare of children, insolvency cases, employees’ compensation
cases, professional negligence cases, some commercial cases,
product liability cases and probate cases involving an estate.
The
paper cautioned against the introduction, at least initially,
of conditional fee arrangements for defamation cases, criminal
cases, and cases in which an award of damages is not the
primary remedy sought.
To
maintain a healthy balance between the rights of claimants
and defendants, the sub-committee also recommended some
mechanisms to safeguard defendants against nuisance claims.
The
consultation paper points out that conditional fee arrangements
cannot function properly without the availability of “After-the-Event”
insurance (“ATE insurance”). However, the indications are
that it is possible that ATE insurance may not be available
at an affordable level and on a long-term basis in Hong
Kong.
To
cater for the possibility that conditional fees cannot be
successfully launched without ATE insurance, the sub-committee
recommends that the government should increase the financial
eligibility limits of the Supplementary Legal Aid Scheme,
as well as expanding the types of cases covered by the scheme.
The
sub-committee has further recommended the setting up of
a “non-government contingency legal aid fund” (“CLAF”),
which would probably be run by an independent body, and
that applicants would have to satisfy a “merits” test in
respect of their proposed litigation, but would not be subject
to any means test. The scheme would take a share of any
compensation recovered, so that it would be self-financing.
Lawyers working for the scheme would be paid on a conditional
fee basis. The scheme would also pay the defendants’ legal
costs in unsuccessful cases and so would, in effect, take
over the role of ATE insurance.
Professor
Edward K Y Chen, chairman of the LRC’s Conditional Fees
Sub-committee stressed that the recommendations in the consultation
paper were put forward for discussion and did not represent
the sub-committee’s final conclusions.
The
Administration's response to the proposals in the LRC's
July 2007 report on Conditional Fees was set out in papers
presented to the Legislative Council's Panel on Administration
of Justice & Legal Services in June and October 2010.
The
Administration's June 2010 AJLS Panel paper considered and
rejected the LRC's proposal that a privately-run CLAF be
established, together with a new body to administer the
CLAF and to screen applications for the use of conditional
fees, to brief-out cases to private lawyers, to finance
the litigation and to pay the opponents’ legal costs
should the litigation prove unsuccessful. The Administration
referred to the concerns about the proposal expressed by
the Bar and the Law Society and concluded:
"Since
a privately-run CLAF could only operate with the support
of the legal profession, there appears no prospect of establishing
a CLAF in Hong Kong for the time being. In the circumstances,
the Administration does not propose to take the recommendation
of the Report that a CLAF be established any further."
On
the proposed expansion of the scope of the Supplementary
Legal Aid Scheme (SLAS), the Home Affairs Bureau's October
2010 AJLS Panel paper advised as follows:
"To
complement the SLAS review soon to be completed by the Legal
Aid Services Council (LASC), and to benefit more people
from the middle class, the Government will earmark $100
million for injection into the SLAS fund when necessary
to expand the scheme to cover more types of cases, such
as claims for damages for professional negligence in a wider
range of professions, and claims to recover outstanding
wages and other employee benefits.
The
Home Affairs Bureau was due to report to the Panel on Government's
specific proposals on the expansion of SLAS in the first
half of 2011.
Hong
Kong Table of Statutes
This is a non-exhaustive list of the main Hong Kong statutes
affecting international business and investors. The statutes
are listed in alphabetical order – click on the statute
for a fuller description of the statute, the legal regime
it forms part of, or in some cases the text of the law.
The
Banking Ordinance 1964
The Basic Law
The Business Registration Ordinance
The Companies Ordinance 1984
The Drug Trafficking (Recovery of Proceeds
Ordinance)
Employees Compensation Ordinance
Employment Ordinance
Estate Duty Ordinance
Factories & Industrial Undertakings Ordinance
The Inland Revenue Ordinance
The Limited Partnership Ordinance
Mandatory
Provident Fund Ordinance
Occupational Retirement Schemes Ordinance
Revenue
(Abolition of Estate Duty) Ordinance 2005
Revenue (Profits Tax Exemption for Offshore Funds) Ordinance
2005
The Organized and Serious Crimes Ordinance
The Professional Accountants Ordinance
The Rating Ordinance
The Composite Securities and Futures
Ordinance 2002
The Securities and Futures Commission
Ordinance
The Securities (Insider Dealing) Ordinance
The Stamp Duty Ordinance
The Trustee Ordinance
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During
a November 2010 speech delivered by the Financial Secretary,
John C Tsang, at the First Pan-Asian Regulatory Summit in
Hong Kong, he reviewed the advances made by Hong Kong in its
regulatory regime.
He said that, while Hong Kong’s positioning as China's
global financial centre under the principle of "one country,
two systems" gives its markets a distinct edge, Hong
Kong has a role to play in safeguarding financial security
for the whole country, with Hong Kong maintaining its own
legal, taxation and regulatory systems.
Adding that, while the “city has built its reputation
on providing a business-friendly environment that is fully
integrated with the rest of the world,” he pointed out
that “this includes a highly open and internationalized
market and a transparent regulatory regime.”
He added that “Hong Kong was one of the few developed
markets that did not have to impose new, emergency short selling
regulations during the financial crisis because our rules,
which were introduced back in 1998, subsequent to the Asian
financial crisis, remain applicable under the current situation.”
With regard to future developments, Tsang then confirmed that
Hong Kong has “mapped out a multi-pronged strategy to
improve our market quality, promote investor protection, facilitate
market development, and enhance our regulatory system.”
“To improve market transparency and quality, our aim
is to require listed corporations to disclose price sensitive
information in a timely manner,” he stated. “This
will bring our regulatory regime for listed corporations more
in line with overseas jurisdictions. We plan to introduce
a bill into our Legislative Council to codify the disclosure
requirements in the Securities and Futures Ordinance in this
legislative session.”
“Another goal is to introduce a scripless securities
market in 2013. Our regulators, led by the Securities and
Futures Commission, have outlined details of this proposal.
The government will lend support to the initiative by introducing
the necessary legislative amendments. Paperless trading will
improve the efficiency and competitiveness of our securities
market. It will also help to enhance shareholder transparency
and promote corporate governance.”
With regard to the insurance industry, Tsang disclosed that
Hong Kong is proposing to establish an independent Insurance
Authority. “Our aim here is to better protect policyholders
and provide effective regulation on a par with international
standards,” he said. “A public consultation exercise
ended last month. We are now preparing detailed proposals
taking into account the views received.”
Hong Kong also plans to establish a Policyholders' Protection
Fund. It is expected that this will help improve insurance
market stability and safeguard the interest of policyholders
in the event of insolvency of an insurer.
Tsang also described measures that are proposed to aid investors,
primarily through the relevant regulators stepping up their
efforts to educate investors on the risks and strategies involved
and through a plan to introduce a financial dispute resolution
scheme. The latter would provide an impartial, speedy and
affordable way to resolve monetary disputes between investors
and financial institutions.
Lastly, he mentioned the action in hand to update Hong Kong’s
company and trust laws. Having completed two phases of public
consultations on the draft Companies Bill, the present aim
is to introduce it into the Legislative Council early next
year.
The Trustee Ordinance is also being modernized to strengthen,
hopefully, the competitiveness of Hong Kong’s trust
services industry. Relevant amendments to the Trustee Ordinance
are being prepared and the aim is to introduce an amendment
bill into the Legislative Council next year.
Recent
Regulatory Developments
Recent
regulatory developments in Hong Kong include a new regime
governing credit rating agencies (CRAs) operating in the territory,
which became effective on June 1, 2011. This regime requires
that all CRAs and their rating analysts providing services
in Hong Kong to be licensed and subject to supervision by
the regulator (see below).
In
its 2010-11 Annual Report published on June 8, 2011, the Securities
and Futures Commission (SFC) recounts how it introduced regulatory
reform to revitalise the markets and responded to challenges
both locally and internationally.
The
report notes how the disclosure requirements for investment
products were modernized and the guidelines governing the
sales practices of intermediaries were fine-tuned. As well
as expanding the licensing regime to cover credit rating agencies,
the SFC is also working to develop regulation for the over-the-counter
derivatives market. In the reporting year, the SFC also made
breakthroughs not just in the area of enforcement through
swift and firm actions but also in the monitoring of listing
sponsors by launching a theme inspection.
“Through
revitalisation, the SFC restores order to the markets, and
confidence in the securities and futures markets,” said
SFC Chairman, Dr Eddy Fong. “The SFC also has statutory
obligations to safeguard investor interests as well as to
facilitate Hong Kong as an international financial centre.
The approach of the SFC is always to strike a fine balance
between the effectiveness of regulation and market development.
The balancing act gets more demanding as investment products
and financial markets get more complicated.”
To
help foster growth, the SFC continued to expand the scope
and depth of the markets through enriching product variety.
Collaborative moves were made also to help develop Hong Kong
into an offshore renminbi centre, resulting in the first-ever
listing of a renminbi-denominated real estate investment trust
on the Stock Exchange of Hong Kong Ltd.
The
SFC also launched a consultation excercise on May 30 to determine
the best approach to a proposed reporting regime for short
positions, which would apply to the constituent stocks of
the Hang Seng Index, the Hang Seng China Enterprises Index
and other financial stocks specified by the SFC. Draft legislation
in this area proposes that short positions hitting a threshold
of 0.02% of the issued share capital of a listed company or
a market value of HKD30m (whichever is lower) would have to
be reported to the SFC on a weekly basis (see
below).
On
April 27, 2011, the Hong Kong Monetary Authority (HKMA) announced
that Mainland China’s National Association of Financial
Market Institutional Investors (NAFMII) and Hong Kong’s
Treasury Markets Association (TMA) had signed a memorandum
of understanding (MOU) to establish a formal bilateral co-operative
relationship. The signing of the MOU therefore provides a
platform on which market practitioners from the Mainland and
Hong Kong can interact, paving the way for the members of
the two organizations to establish a comprehensive, co-operative
relationship and to contribute to the mutual development of
the financial markets of the Mainland and Hong Kong. Through
the MOU, the NAFMII and the TMA have agreed to strengthen
co-operation in a wide range of areas such as market development,
establishment of codes, research, visits, exchanges and training.
Hong
Kong Money Laundering Law
Hong
Kong has two major pieces of legislation to control money
laundering: the Drug Trafficking (Recovery of Proceeds)
Ordinance ("DTRPO"); and the Organised and Serious
Crimes Ordinance ("OSCO")
Since
being enacted, these Ordinances have been amended in order
to:
-
extend
the government's power to attack money laundering associated
with drug trafficking and other serious offences; and
-
impose
statutory duties on providers of financial and professional
services to disclose and to make proper inquiries into
suspicious transactions.
The
amendments make it an offence for professionals such as bankers,
lawyers or accountants to deal with property that they know
or have reasonable grounds to believe represents, directly
or indirectly, the proceeds of drug trafficking or other serious
crimes. The maximum penalty for the offence is 14 years imprisonment
and/or a fine of HKD5m.
It is also an
offence if a person who knows or suspects that any property
represents the proceeds of drug trafficking does not report
his knowledge or suspicion to the authorities.
Therefore
the onus is on financial institutions and professionals to
act as watchdogs and control systems have been established
by many companies to ensure that they are fulfilling their
responsibilities under the new amendments. However, no offence
will have been committed if proper disclosure is made before
the prohibited act occurs and the act is done with the consent
of the authorised officer. Similarly, if disclosure is made
to an authorised officer voluntarily and soon after the act
has been committed, there is no offence. It is an offence
to disclose anything which is likely to prejudice an investigation
into the suspected money laundering.
The
new amendments ensure that disclosures will not be treated
as a breach of any restriction imposed by contract (such as
a bank's duty of confidentiality to its customers). Those
making any disclosures will not be liable for any loss arising
from the disclosure even if the suspicion is later shown to
have been unfounded, although reasonable.
Furthermore,
the amendments require money changers and remittance agents
to follow anti-money laundering measures such as customer
identification and keeping transaction records for transactions
over HKD8,000. This has helped
to prevent criminals from using non-bank financial businesses
as conduits for money laundering.
Informants are
not required to reveal in civil or criminal proceedings that
they have made disclosures under the legislation.
In
July 2009, Hong Kong's Financial Services and the Treasury
Bureau announced the launch of a consultation on the conceptual
framework of a legislative proposal on the anti-money laundering
regulatory regime for the financial sectors.
The
proposal aims to address issues identified by the Financial
Action Task Force (FATF) during an evaluation of the SAR's
anti-money laundering regime undertaken in 2008.
The
consultation document contains details of:
- The
financial institutions which would be subject to the proposed
legislation;
- The
customer due diligence and record-keeping obligations would
have to be met; the liability and offence for breaching
such obligations;
- The
regulatory authorities' powers in supervising compliance,
with appropriate checks on the exercise of such powers;
- Criminal
and supervisory sanctions for breaches of the obligations;
and
- A
proposed licensing system applicable to entities engaging
in remittance and money-changing services for anti-money
laundering regulatory purposes.
These
views were to be taken into account in drawing up detailed
legislative proposals, and another round of consultation on
the detailed legislative proposals was planned for the end
of 2009.
In
October 2010, the HKMA wrote to all authorized institutions
to inform them that the Anti-Money Laundering and Counter-Terrorist
Financing (Financial Institutions) Bill (the Bill) would be
put before the Legislative Council on November 10, with a
view to implementation on April 1, 2012. Compared with the
earlier proposal, the key changes made in the Bill include
removing the across-the-board requirements to conduct customer
due diligence on all pre-existing accounts and removal of
personal civil liability of officers of financial institutions.
The customer due diligence requirements for beneficiaries
of life insurance policies have also been clarified.
The Hong Kong
Monetary Authority, Hong Kong Stock Exchange and Securities
and Futures Commission have also established guidelines for
their members aimed at helping them to avoid facilitating
money laundering.
In
February, 2004, the Hong Kong Monetary Authority (HKMA) urged
banks in the jurisdiction to be alert to the possibility of
money laundering as they geared up to offer yuan-denominated
banking services. "Participating banks are requested to heighten
the awareness of their staff involved in such business to
possible money laundering transactions," the regulator announced.
In
order to reduce the possibility of money laundering activity
taking place, the HKMA ordered banks to record whether yuan
deposits are made in cash, or via the conversion of other
currencies. It also urged the financial institutions to keep
track of multiple accounts opened by the same customer, and
to ensure that the 20,000 yuan per day exchange limit is not
breached by spreading the transactions across several accounts.
In
June of that year, the HKMA issued a supplement to the territory's
anti-money laundering guidelines, setting out the latest "Know-Your-Customer"
principles, taking account of the requirements of the paper
on "Customer Due Diligence for Banks" issued by the Basel
Committee on Banking Supervision in October 2001 and the revised
Forty Recommendations issued by the Financial Action Task
Force on Money Laundering in June 2003.
Under
the guidelines, banks and financial service providers are
urged to subject the transactions of higher risk customers
to enhanced due diligence. Those deemed by the HKMA to fall
into the high risk category include politically exposed persons,
correspondent banks from "non-cooperative jurisdictions",
and offshore companies established in order to disguise beneficial
ownership.
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Hong
Kong Financial Services Law
Until 1964 there were virtually no regulations governing the
financial sector in Hong Kong. A banking crisis in the 1960s
led the authorities to enact the Banking Ordinance 1964, which
introduced basic standards such as minimum capital requirements
and rudimentary disclosure laws. However, bank failures, caused
by poor management and excessive investment in the real estate
market in the early 1980s, coupled with the stock market crash
in 1987, resulted in a complete overhaul of Hong Kong financial
market regulations. The country now has a transparent legal
and regulatory environment that has facilitated its role as
a modern regional and international financial center.
Under the Sino-British
Joint Declaration on the Future of Hong Kong, Chinese authorities
were committed to enact the Basic Law of the Hong Kong Special
Administrative Region. The Basic Law is the legal basis for
the "One Country, Two System" guarantee and provides
for the continuance of Hong Kong’s system of common law
and free market economic system after July 1, 1997. The Law
stipulates that the Hong Kong dollar will remain freely convertible;
that markets for foreign exchange, securities, futures, and
other financial products will remain open; and that no controls
will be placed on the flow of capital into or out of Hong
Kong.
Three government
agencies are responsible for regulating Hong Kong’s financial
market: the Hong Kong Monetary Authority (HKMA), the Securities
and Futures Commission (SFC), and the Insurance Authority.
In addition to being regulated and supervised by the HKMA,
banks are required to become members of and adhere to the
rules of the Hong Kong Association of Banks (HKAB).
The Hong
Kong Monetary Authority
Hong Kong has
no central bank as such, but the HKMA does assume many of
the responsibilities typically assigned to a central bank,
including ensuring the safety and soundness of the banking
system and the stability of the currency.
Three private
banks—the Hongkong Shanghai Bank, the Bank of China,
and Standard Chartered—are authorized to issue HK dollars.
Under the currency board system, these banks are allowed to
issue HK dollars only upon depositing US dollars in the Exchange
Fund, which is regulated by the HKMA. In 1990, the HKMA began
to issue Exchange Fund Bills and, in 1993, Exchange Fund Notes,
which are both HK dollar debt securities. The issuance of
debt securities through open-market operations provides the
HKMA with a mechanism for adjusting interbank liquidity.
The clearing
and settlements system in Hong Kong changed in April 1997.
Until that time, the Hong Kong Shanghai Bank managed the Clearing
House of the Hong Kong Association of Banks and settled interbank
payments. The Clearing House is now managed by Hong Kong Interbank
Clearing Limited, which is jointly owned by HKMA and HKAB.
Under the new system, interbank payments are cleared through
the Exchange Fund.
In
a circular released in July, 2002, HKMA outlined the principal
points of new regulations governing securities business undertaken
by banks.
Currently,
Hong Kong's banks are known as 'exempt dealers', because their
securities departments are not regulated by the Securities
and Futures Commission. However, under the Banking (Amendment)
Ordinance 2002 and the Securities and Futures Ordinance implemented
in 2003, a raft of new rules governing banks' securities business
have been introduced.
The
main points of the regulations, as outlined in the HKMA circular
are as follows:
-
Banks and any of their staff involved in securities business
must register with the HKMA, and personnel must meet the
SFC's fit and proper person requirements;
-
Banks will need to appoint two senior executives to supervise
the way in which securities activities are conducted
Under
this regulatory regime, the Monetary Authority is in charge
of the day-to-day supervision of banks' securities divisions,
but cases of suspected malpractice are handed to the Securities
and Futures Commission for investigation.
"This
is in line with the concept that the SFC remains the ultimate
authority to regulate the securities and futures industry,"
the circular explained.
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Hong
Kong The Securities And Futures Commission
The
principal regulator of Hong Kong’s securities and
futures markets is the Securities and Futures Commission
(SFC), which is an independent statutory body established
in 1989 by the Securities and Futures Commission Ordinance
(SFCO).
The
SFCO and nine other securities and futures related ordinances
were consolidated into the Securities and Futures Ordinance
(SFO), which came into operation on 1 April 2003.
The SFC is responsible for administering the laws governing
the securities and futures markets in Hong Kong and facilitating
and encouraging the development of these markets. Its
regulatory objectives as set out in the SFO are:
- To
maintain and promote the fairness, efficiency, competitiveness,
transparency and orderliness of the securities and
futures industry;
- To
promote understanding by the public of the operation
and functioning of the securities and futures industry;
- To
provide protection for members of the public investing
in or holding financial products;
- To
minimise crime and misconduct in the securities and
futures industry;
- To
reduce systemic risks in the securities and futures
industry; and
- To
assist the Financial Secretary in maintaining the
financial stability of Hong Kong by taking appropriate
steps in relation to the securities and futures industry.
The
SFC is divided into four operational divisions:
- The
Corporate Finance Division is responsible for the
dual filing functions in relation to listing matters,
administering the Takeovers and Mergers Code and Share
Repurchases Code, overseeing the Stock Exchange's
listing-related functions and responsibilities, and
administering securities and company legislation relating
to listed and unlisted companies.
- The
Intermediaries and Investment Products Division is
responsible for devising and administering licensing
requirements for securities and futures, and leveraged
foreign exchange trading intermediaries, supervising
and monitoring intermediaries' conduct and financial
resources, and regulating the public marketing of
investment products.
- The
Enforcement Division is responsible for conducting
market surveillance to identify market misconduct
for further investigation, undertaking inquiry into
alleged breaches of relevant ordinances and codes,
including insider dealing and market manipulation,
and instituting disciplinary procedures for misconduct
by licensed intermediaries.
- The
Supervision of Markets Division is responsible for
supervising and monitoring activities of the exchanges
and clearing houses, encouraging development of the
securities and futures markets, promoting and developing
self-regulation by market bodies.
The
Stock Exchange of Hong Kong (SEHK) operates as a private
entity. Thus when the stock market crashed in 1987, the
Securities Commission had no legal authority to intervene
in the affairs of the SEHK. The regulatory infrastructure
for the securities industry has since been revamped and,
in 1989, the Securities and Futures Commission Ordinance
was enacted. The Ordinance provides the legal basis for
the SFC to supervise and regulate the securities industry.
The SFC now has the authority to take actions necessary
to protect the safety of the securities market and to
prosecute individuals who breach securities market ordinances
and codes.
The
September 2010 edition of the Enforcement Reporter published
by the Securities and Futures Commission (SFC) reported
that the demands of enforcement work have surged since
2007 with the number of cases having risen by over 100%.
To tackle an increasing percentage of complex cases, the
SFC has adopted a multilateral approach and is prepared
to employ the full spectrum of remedies, both criminal
and civil.
For
the first time, the District Court jailed warrant traders
for market manipulation, and remarked that sufficiently
deterrent sentences should be passed against manipulators
to protect investors and restore public trust in the financial
markets. The SFC said it is "fully committed to stamping
out market manipulation."
This
issue reports that the SFC reached another resolution
regarding Lehman Brothers-related structured products.
The resolution enables about 2,160 eligible customer accounts
of the bank concerned to get back their investment and
other investors to obtain a full review of their cases
under enhanced complaint-handling procedures.
The
Reporter also gives an account of how recent decisions
of the Hong Kong courts support the SFC's enforcement
actions in combating unlicensed leveraged foreign exchange
trading.
The
Enforcement Reporter is a newsletter that highlights key
enforcement outcomes and issues. It is available on the
SFC website under “Speeches, Publications &
Consultations” – “Publications”.
The
Stock Exchange of Hong Kong (SEHK) operates as a private
entity. Thus when the stock market crashed in 1987, the
Securities Commission had no legal authority to intervene
in the affairs of the SEHK. The regulatory infrastructure
for the securities industry has since been revamped and,
in 1989, the Securities and Futures Commission Ordinance
was enacted. The Ordinance provides the legal basis for
the SFC to supervise and regulate the securities industry.
The SFC now has the authority to take actions necessary
to protect the safety of the securities market and to
prosecute individuals who breach securities market ordinances
and codes.
There
were four stock exchanges in Hong Kong until 1986, when
the four were merged into the Stock Exchange of Hong Kong
(SEHK) in an effort to consolidate management and control
of the market. By the end of 1996, the SEHK was the second
largest stock exchange in Asia and the seventh largest
stock exchange in the world, with total market capitalization
of USD446 billion. The Hong Kong Futures Exchange offers
futures contracts in finance, properties, utilities, and
commerce and industry.
After
the stock market crash of 1987, the SFC was charged with
overhauling the regulations that govern securities market
participants. Applicants for a license to deal in securities
or operate as an investment adviser are now required to
meet the "fit and proper person" criterion.
Applicants seeking a dealer’s license must also have
minimum net capital of HKD5 million. Although there is
no deposit insurance for bank customers, there is a compensating
fund for individuals whose brokers default on funds owed.
In
1991 the Securities (Insider Dealing) Ordinance was amended,
resulting in higher penalties for insider trading. Fraud
and misrepresentation are also punishable by the SFC.
Another ordinance enacted in 1991 calls on a company’s
directors and executives, as well as those who acquire
more than 10% of a company’s voting shares, to publicly
disclose their dealings. Firms seeking to list on the
SEHK must make a prospectus publicly available. The SFC
has the authority to determine which clearinghouses are
permitted to settle accounts and their rules of operation
in order to ensure a sound clearinghouse system.
Foreign-owned
financial services firms can engage in securities market
activities in Hong Kong in one of two ways. Firms that
do not deal in the securities market as their primary
business may engage in securities market transactions
through an "exempt" license. Foreign-owned securities
firms are also free to establish branches or subsidiaries
in Hong Kong subject to approval from the SFC. Securities
firms offer a wide range of services, from managing portfolios
to selling foreign mutual funds to administering local
pension plans.
In
the late 1990's the HKMA conducted a thorough study of
the SAR's banking sector and drew up a package of policy
measures which were installed over a three-year period
beginning in 2000. The details of these reform measures
and the implementation timetable were contained in the
HKMA's Policy Response to the Banking Sector Consultancy
Study.
In
November 2000 the Hong Kong government introduced the
Composite Securities and Futures Ordinance which combined
and replaced all ten pre-existing pieces of securities
and futures legislation. The law, which was passed in
2002 and came into effect in 2003 gives the Securities
and Futures Commission (SFC) the power to regulate Internet
trading. In addition the SFC is also able to seize the
working papers of market professionals during investigations.
An independent non-statutory body, known as the Process
Review Panel, has been established to ensure that the
SFC's internal operations, including its investigative
and disciplinary procedures, are fair and consistent.
The
Ordinance makes the SFC responsible for regulating the
securities business of banks; their securities departments
were previously regulated by the Hong Kong Monetary Authority,
not by the SFC, which regulates brokers. The law allows
the SFC to penalise banks if their securities businesses
are found to be in breach of regulations while allowing
the HKMA to continue to operate as the frontline regulator
conducting routine inspections.
In
August, 2005, the SFC released the consultation conclusions
of a review of the territory's Code on takeovers, mergers
and share repurchases, the main revisions to which took
effect on October 1, 2005.
The
main revisions are:
- 'Low-ball'
offers - such offers might be used as a tactic to
frustrate the offeree company’s business where there
is no genuine intention to takeover the offeree company.
The new provisions provide that a voluntary offer
at a discount of more than 50% to the market price
of the shares will not normally be allowed to proceed.
- Frustrating
actions - the Code has been amended to address concerns
about risks to shareholders arising from an incumbent
board taking deliberate but lawful action to frustrate
a successful offeror from exercising board control.
The revised Code provides that once a successful offeror
calls a general meeting to appoint directors of the
offeree company, the existing board must co-operate
fully and convene a general meeting as soon as possible.
During this period the existing board will also be
restricted from taking any frustrating action such
as issuing new shares, or selling or acquiring assets
of material amounts without shareholder approval.
- Telecom
mergers - the Code has been amended to provide a broad
framework for dealing with telecom mergers that are
subject to review by the Telecommunications Authority
under the laws introduced in July 2004. The SFC will
keep this area under review and may amend the Code
further in light of experience in dealing with such
takeovers.
The
SFC also consulted the public about whether the Code should
be amended to provide for whitewash waivers of general
offer obligations triggered as a result of on-market share
repurchases.
The
majority of respondents disagreed that such waivers should
be permitted. Some suggested that the uncertainties as
to the price and timing of on-market repurchases contributed
to the undesirability of such an amendment.
One
respondent emphasised that, in light of the prevalence
of the controlling shareholder environment in Hong Kong,
Hong Kong regulations have historically and justifiably
placed greater attention on ensuring that the interests
of minority shareholders are not unfairly prejudiced than
regulations in other markets.
There
was a concern that minority interests would be prejudiced
in the guise of increasing shareholder value if the proposal
was allowed. The Takeover Executive agreed with these
concerns and believes that it is in the overall best interests
of minority shareholders not to amend the Code in this
respect.
Mr
Peter Au-Yang, SFC’s Executive Director of Corporate Finance,
noted that: "By keeping the Code up-to-date with market
developments and international practice, the changes help
to ensure continued fair treatment for shareholders who
are affected by takeovers and mergers."
In
September 2009, the SFC solicited views on proposals to
enhance existing regulations governing the sale of unlisted
securities and futures products, and thereby improve Hong
Kong’s existing investor protection regime. The
Commission said the proposals cover each stage of the
investment life-cycle and are designed to enhance the
current regulatory regime for the sale of investments
to the public.
Another
consultation, launched by the SFC in January 2010, solicited
public comments on extending the existing corporate codes
on takeovers and mergers, and share repurchases, to real
estate investment trusts (REITs). After the consultation
period, the SFC has said that it will analyze the comments
received and aim to adopt a balanced and pragmatic approach
for the purposes of enhancing investor protection and
assisting the further development and growth of the Hong
Kong REIT market.
In
March 2010, Hong Kong’s Secretary for Financial
Services and the Treasury, Professor K C Chan, announced
a proposal to oblige listed corporations to disclose price
sensitive information (PSI) in a timely manner to facilitate
investors in making informed investment decisions.
The
government further proposes that the statutory disclosure
requirements be enforced by the Securities and Futures
Commission (SFC). The SFC would promulgate guidelines
on what constitutes PSI and when the safe harbours would
be applicable to facilitate compliance by listed corporations.
The SFC is in parallel consulting the public on its draft
guidelines.
Subject
to public comments, the government plans to introduce
a bill to the Legislative Council to codify such disclosure
requirements in the Securities and Futures Ordinance in
the 2010/11 legislative session. The public were invited
to give their views before the end of the consultation
on June 28, 2010.
In
October 2010, the SFC announced that a package of measures
to strengthen the regulation of the sale of investment
products has been well-received, with industry participants
embracing them positively.
Speaking
at the fourth annual conference of the Hong Kong Investment
Funds Association on October 4, Martin Wheatley, the Chief
Executive Officer of the SFC reiterated that in shaping
new regulations, the SFC will continue to adopt a balanced
approach and engage various stakeholders through consultation
and active communication.
“Good
regulation needs to balance investor protection and market
development, and implementing these regulations requires
efforts from both market participants and regulators,”
he said.
The
latest regulatory initiatives, which result from a three-month
public consultation, are directed at enhancing investor
protection and addressing issues highlighted in the report
submitted by the SFC to the Financial Secretary in December
2008.
The
measures - outlined in a set of consultation conclusions
- include a consolidated product handbook with revised
product codes for unit trusts and mutual funds and for
investment-linked assurance schemes as well as a new product
code for unlisted structured investment products. There
are also requirements for product key facts statements
to summarise the key features and risks of investment
products, issuers to provide a post-sale “cooling-off”
or “unwind” right for certain unlisted structured
investment products to give investors a window to exit
these investments, and conduct requirements for intermediaries
to enhance selling practices relating to the sale of investment
products.
The
majority of the proposals in the consultation paper published
in September 2009 will be adopted, with some modifications
and amendments to take into account responses received
during the consultation process.
“The
measures will strengthen investor protection and ensure
that Hong Kong remains a well-regulated, vibrant financial
market. We thank our stakeholders for their constructive
feedback, which has enabled us to achieve a healthy balance
between the need for market innovation and investor protection,”
Wheatley said.
Some
of the measures will take effect immediately after publication
of the revised codes in the Government Gazette, while
transitional arrangements will be implemented in respect
of some requirements to enable the industry to make the
necessary adjustments.
Hong
Kong's Securities and Futures Commission (SFC) announced
in February 2011 that it was proceeding
with proposals to refine the requirements for evidencing
whether a person qualifies as a high-net-worth professional
investor.
The purpose of the proposals is to create more flexibility
by adopting a principles-based approach whereby firms
may use methods that are appropriate in the circumstances
to satisfy themselves that an investor meets the relevant
assets or portfolio threshold to qualify as a professional
investor under the Securities and Futures (Professional
Investor) Rules.
A
new regulatory regime governing credit rating agencies
(CRAs) operating in Hong Kong became effective on June
1, 2011.
Under
the new regime, CRAs and their rating analysts who provide
credit rating services in Hong Kong, are required to be
licensed and are subject to supervision by the Securities
and Futures Commission (SFC). In addition, the licensees
are required to comply with the provisions of the Code
of Conduct for Persons Providing Credit Rating Services
and with other legal and regulatory requirements that
are generally applicable to all SFC licensees.
On
April 21, 2011, the SFC released a circular in which it
invited CRAs and their rating analysts to submit their
licence applications ahead of the new regulatory regime
coming into force. On June 1, the SFC issued licences
to five CRAs and 156 of their rating analysts providing
credit rating services in Hong Kong.
In
May 2011, Hong Kong’s Securities and Futures Commission
(SFC) launched a consultation inviting the public to comment
on the draft legislation that will give effect to the
proposed short position reporting regime.
Under
the proposed regime, a short position that hits the threshold
of 0.02% of the issued share capital of a listed company,
or a market value of HKD30m (USD3.9m), whichever is lower,
has to be reported to the SFC on a weekly basis. In general,
the party who beneficially owns the short position will
be responsible for the reporting.
In
the case of funds, the reporting requirement applies to
each fund. The fund manager may report the position on
behalf of each of the funds it manages but will not be
required to aggregate the short positions of different
funds or be permitted to net positions between different
funds.
In
the case of a group structure that has multiple legal
entities (for example, global financial institutions),
the reporting obligation will be on individual legal entities
within the group structure. They are not required to aggregate
the short positions within the group.
The
reporting requirement will only apply to the constituent
stocks of the Hang Seng Index, the Hang Seng China Enterprises
Index and other financial stocks specified by the SFC.
The reporting requirement may be tightened to further
enhance transparency and monitoring in contingency situations.
Short positions created via over the counter trading,
and economic short positions created by use of derivatives,
will be excluded for reporting purpose.
Jersey
Letter of Intent
In
September, 2005, the Jersey Financial Services Commission
and Hong Kong’s securities and futures market regulator,
the Securities and Futures Commission, signed a Letter of
Intent which provides a framework for enhanced cooperation
between the two regulatory authorities.
The
Letter of Intent provides a formal basis for both regulators
to work towards several goals, including:
- equivalence
of regulatory frameworks in place in each jurisdiction
in the areas of regulation, supervision and marketing
of investment products;
- the
mutual recognition of investment products; and
- further
strengthening of regulatory cooperation and assistance
in matters pertaining to cross-border supervision of
fund management activities.
The authorities agreed to establish a bilateral working
group to work towards the achievement of objectives set
out in the Letter of Intent.
Both
the Commission and the SFC are members of the International
Organisation of Securities Commissions (IOSCO) and signatories
of the IOSCO Multilateral Memorandum of Understanding. The
Letter of Intent is signed in the spirit of mutual cooperation
between securities regulators fostered by IOSCO.
David
Carse, then Director General of the Commission noted that:
“I am delighted to sign this Letter of Intent with the Hong
Kong SFC. The Commission considers that co-operation under
the Letter will facilitate access to Hong Kong’s markets
for Jersey investment products, and also help to develop
the range of products that are available for distribution
in Jersey. It will also provide a more formal basis for
exchanging views with an important Asian supervisor on matters
of common interest.”
Andrew
Sheng, Chairman of the SFC added that: “The SFC is committed
to facilitating the development of deeper and broader investment
markets globally. We are delighted to sign this Letter of
Intent with the Jersey Financial Services Commission, our
second non-Asian partner in this endeavour. Jersey is strategically
located and plays an important role in the European investment
products market, and therefore ideally placed to explore
with the SFC the means of achieving cross-border distribution
of investment products between our respective markets to
our mutual benefit.”
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Hong
Kong Banking Law
The
Banking Ordinance is the basis of the legal framework governing
the banking sector. The Bank Advisory Committee, which is
composed of members of public-sector and private financial
institutions, advises government authorities on issues concerning
the Banking Ordinance.
The
Banking Ordinance was amended in 1986 to authorize the Commissioner
of Banking to regulate the banking sector, set minimum capital
standards, and limit loans to customers and bank employees.
Amendments to the Ordinance in 1995 gave the HKMA broader
powers, including responsibility for all matters pertaining
to the authorization of banks. The HKMA can suspend or revoke
the license of a bank found to be in violation of regulations
designed to protect the safety and soundness of the financial
system. It is also authorized, after consultation with the
Financial Secretary of Hong Kong, to take over a financial
institution that is unable to make payments or if it is
deemed in the public interest to take control of the firm.
There
is a three-tier banking system of "authorized institutions"
in Hong Kong: licensed banks, restricted-license banks,
or deposit-taking companies. Only licensed banks are permitted
to accept deposits of any size and maturity and to offer
checking and savings accounts. They effectively function
as commercial banks. Restricted-license banks are limited
to accepting deposits of more than HKD500,000 and thus offer
investment banking services. Deposit-taking companies are
only authorized to accept deposits over HKD100,000 that
have an initial maturity of at least three months. Hong
Kong adheres to the Basle principles for bank supervision.
The
approach is one of ongoing supervision and includes on-site
reviews of operations and financial records and off-site
reviews of financial statements and reports. Banks are required
to be incorporated and publish detailed audit reports as
well as monthly returns showing assets and liabilities.
In addition to information on their balance sheet and quality
of assets, banks are required to disclose inner reserves,
realized profits, and net assets. Authorities meet annually
with internal and external auditors to review each institution’s
audit and determine if the institution is in compliance
with prudential standards and the Banking Ordinance. The
Banking Ordinance, in turn, provides a legal basis for enforcing
the Basle standards. Violation of the Banking Ordinance
is punishable by fines, imprisonment, or both.
The
Banking Ordinance restricts the use of the word "bank"
to those institutions that are either licensed or restricted-license
banks. In the latter case, the word "bank" must
be accompanied by either "merchant" or "investment."
Only a "fit and proper person" can be issued a
banking license, and there exist controls regarding the
ownership and management of an authorized financial institution.
An authorized institution is required to inform the HKMA
if it makes changes to any documents that outline the institution’s
procedures. Approval is also required before there can be
any changes in a bank’s ownership.
The
Banking Ordinance also sets forth minimum capital requirements
for authorized institutions. Locally incorporated banks
must have paid-in capital equal to USD388 million and net
assets of USD518 million dollars for authorization to operate
a licensed bank. Applicants for a restricted-license bank
must have paid-in capital equal to USD12.8 million.
Authorized
institutions are not permitted to lend more than 25% of
their capital base to a single customer or group of related
customers, nor are they allowed to hold more than 25% of
shares in other companies. No more than 10% of an authorized
institution’s capital base may be used for unsecured
loans.
The
HKMA adopted BIS capital-adequacy guidelines in 1989. The
minimum standard according to BIS recommendations is a capital-adequacy
ratio of 8 percent. The national requirement in Hong Kong
is also 8%, although some banks are required to maintain
12% and some nonbanks at least 16%. The actual risk-based
capital-adequacy ratio at the end of 1995 was 17.5%. In
December 1996, the HKMA implemented reporting requirements
that direct banks to address market risk in calculating
their capital-adequacy ratio.
New
Banking (Capital) Rules came into effect in January, 2007,
and are the implementing Rules for Basel II, the new international
standard for banks' capital adequacy.
They
set out in detail the different approaches that can be adopted
for calculating the capital charge for credit, market and
operational risks.
They
were issued under a new rule-making power provided under
the Banking (Amendment) Ordinance 2005, and replaced the
previous regulatory capital regime set out in the third
schedule to the Banking Ordinance. This was to be followed
by a consultation on the Banking (Disclosure) Rules.
In
September 2010, HKMA deputy chief executive Arthur Yuen
Kwok-hang suggested that Hong Kong's banks will have few
problems complying with the latest changes to international
capital adequacy rules under Basel III. He said that local
banks' capital ratios are already well above existing standards,
with capital adequacy ratios standing at 15.7% in June 2010.
Under
Basel III banks will have to maintain capital adequacy ratios
at 8%, but tier 1 capital requirement, which includes common
equity and other qualifying financial instruments based
on stricter criteria, will increase from 4% to 6% from January
1, 2013 to January 1, 2015. Banks will be required to hold
a capital conservation buffer of 2.5% to withstand future
periods of stress bringing the total common equity requirements
to 7%. The buffer requirement will be phased in from January
1, 2016 to January 1, 2019.
Foreign-owned
commercial banks can enter the Hong Kong banking industry
by establishing a branch or by acquiring ownership of a
local bank. Foreign-owned firms must apply for a license
to enter the financial services market. License approval
is subject to four criteria: foreign-owned firms must (1)
satisfy the minimum net asset requirement, (2) be incorporated
in a country that applies the Basle principles for bank
supervision, (3) have approval from their home country to
operate a branch in Hong Kong, and (4) come from a country
that offers reciprocal access to Hong Kong banks. Of the
224 authorised institutions in Hong Kong in 2004, 197 were
beneficially owned by interests from over 30 countries.
In addition, there were 89 local representative offices
of overseas banks in Hong Kong.
At
the end of June, 2010, there were 146 licensed banks, 24
restricted licence banks and 27 deposit-taking companies
in business. These 200 authorised institutions operate a
comprehensive network of 1,600 local branches. In addition,
there are 70 local representative offices of overseas banks
in Hong Kong.
Hong
Kong does maintain restrictions on the number of branches
that foreign banks are permitted to operate. In 1994, authorities
relaxed the one-branch limit for foreign banks, allowing
them to open one additional office in a separate building
from the location of their main branch; however, the additional
office is to be used only for "back office" functions
such as processing and settling transactions conducted in
the main branch office. Fully licensed banks (commercial
banks) are allowed to establish operations in Hong Kong
only as a bank branch. Restricted-license banks (investment
banks) are permitted to open branches or subsidiaries. Licenses
for deposit-taking companies are extended only to locally
incorporated subsidiaries.
In
the light of China's accession to the WTO, in December 2001
the
Hong Kong Monetary Authority reduced
the USD16 billion minimum asset requirement for foreign
banks, bringing the amount needed down to HKD5 billion,
in line with the requirements for local institutions. As
well as encouraging foreign financial institutions to put
down roots in the SAR, the authorities hope that this move
will encourage the mainland to reduce its minimum asset
requirements - previously set at USD16 billion - which would
make it easier for Hong Kong banks to establish there.
'These
proposals would further open up Hong Kong's banking sector
to allow a broader range of domestic and international institutions
to participate in the Hong Kong markets as full licence
banks,' explained the Deputy Chief Executive of the HKMA,
David Carse, adding: 'We believe these incentives will help
to rationalise the authorisation and market entry system
in Hong Kong and will also enhance the status of Hong Kong
as an international financial centre.'
Two
accounting standards came into force in Hong Kong in January
2005 . Hong Kong Accounting Standards 32 and 39 are detailed
and prescriptive in nature, requiring banks to estimate
loan provisions based on future cash flows rather than the
current guidelines issued by the Hong Kong Monetary Authority,
and review the basis for general provisioning.
Most
banks hold a general provision of around 1% of total advances,
as required by the Hong Kong Monetary Authority. The new
standard requires this to be based on an analysis of historical
loss experience and may lead to a significant write back
of general provisions.
The
standards are the Hong Kong Society of Accountants' final
step in achieving full convergence with International
Financial Reporting Standards. In achieving full compliance
Hong Kong banks will be more comparable with their international
peers, facilitating easier access to cross border capital
markets.
Banking
Code of Practice
On
December 31, 2008, the Hong Kong Association of Banks
and the Deposit-Taking Companies Association (DTCA)
jointly announced the launch of a revised Code of Banking
Practice (the Code) which will took effect from January
2, 2009. The revised Code has been produced following
a comprehensive review of the existing Code by the Code
of Banking Practice Committee (CBPC), which has representatives
from HKAB, the DTCA and the Hong Kong Monetary Authority.
The
main objective of the review was to clarify and enhance
the provisions of the Code in the light of recent developments
in the banking sector. Among the major improvements
are:
-
the
introduction of a new section to require Authorized
Institutions (AIs), which include licensed banks,
restricted licence banks and deposit-taking companies
to give reasonable notice, normally not less than
2 months, to customers before closing a branch. The
notice should be prominently displayed on the branch
premises and should contain details of how the AI
may continue to provide services to customers and
provide contact information in case of enquiries by
customers;
- the
rewriting of the provisions relating to guarantees and
third party securities to make them more reader friendly.
These provisions were introduced in 2003 to enhance
the protection of guarantors. One of the requirements
is that AIs should offer a choice between a limited
or unlimited guarantee to any person proposing to give
a guarantee or third party security. In the case of
an unlimited guarantee, AIs are required to notify the
guarantor as soon as reasonably practicable when further
facilities are extended to the borrower;
-
the updating of the chapter on “stored value cards”
to offer more protection to stored value cardholders
through various measures, including the provision of
channels to check previous transactions and the requirement
to reimburse the cardholder as soon as reasonably practicable
where a transaction cannot be completed successfully
but value has been deducted from the stored value card;
- the
enhancement of the provisions relating to security advice
for cards and e-banking services to provide more guidance
to facilitate compliance by AIs as well as to make it
easier for customers to understand what they should,
and should not, do in order not to compromise the security
of their card and e-banking transactions;
- the
expansion of the provision in relation to advertising
and promotional materials of AIs to make it clear that
where benefits offered are subject to conditions, such
conditions should be clearly displayed in the advertisement
wherever practicable, or the advertisement should include
reference to the means by which further information
may be obtained; and
- the
expansion of the provision regarding notice on dormant
account charges to require AIs to also advise customers
of what can be done to avoid such charges or where they
can obtain such information.
AIs
were expected to take steps to comply with the revised
provisions within 6 months from the effective date at
the latest. Another 6 months is allowed for compliance
with those revised provisions which require system changes.
Electronic
Banking
As
a bank regulator, the primary objective of the Hong Kong
Monetary Authority (HKMA) in respect of the developments
of electronic banking (e-banking) is to ensure that the
regulatory framework for e-banking keeps up with the industry
and technological developments without stifling innovation.
Since
1997, the HKMA has been issuing a series of circulars to
set out its regulatory approach on e-banking services and
to provide authorised institutions with recommendations
on the risk management for these activities. While institutions
do not need to seek formal approval from the HKMA to offer
their e-banking services, they should discuss their plans
and risk management measures with the HKMA in advance.
Among
the issues discussed, the arrangements adopted by institutions
to ensure adequate information security for their services
are one of the key focuses of the HKMA. While absolute information
security does not exist, institutions are expected to implement
information security arrangements that are "fit for
purpose", i.e. commensurate with the risks associated
with the types and amounts of transactions allowed, the
electronic delivery channels adopted and the risk management
systems of individual institutions.
Furthermore,
the HKMA expects senior management of institutions to commission
periodic independent assessments of the information security
aspects of their e-banking services. The HKMA expects such
independent assessments to be carried out by trusted independent
experts before launch of the services, and thereafter at
least once a year, or whenever there are substantial changes
to the risk assessment of the services or major security
breaches. To provide further recommendations to the senior
management of institutions on information security, the
HKMA issued in July 2000 a Guidance Note on Management of
Security Risks in Electronic Banking Services.
Internet
Advertisements for Deposits
Under
the Banking Ordinance, overseas-incorporated institutions
(including virtual banks) intending to solicit deposits
from members of the public in Hong Kong would not be required
to be authorised, provided that the deposits are placed
overseas. However, section 92 of the Banking Ordinance makes
it an offence for any person, other than an authorised institution,
to issue an advertisement or invitation to members of the
public in Hong Kong to make a deposit, even if it is made
outside Hong Kong, unless the disclosure requirements in
the Fifth Schedule to the Banking Ordinance are complied
with. They should include a warning in their advertisements
that they are not authorised under the Banking Ordinance
and hence are not subject to the supervision of the HKMA.
The advertisements must also contain certain specified information
about the overseas institutions and the deposit scheme being
advertised. The objective is to ensure that material facts
are available to enable prospective depositors to make their
own judgement on whether to place a deposit with the institutions
concerned.
The
HKMA say that advertisements placed through the internet
should be governed by the same principles.
Authorisation
of Virtual Banks
A
virtual bank is a company which delivers banking services
primarily, if not entirely, through the internet or other
electronic channels. The term does not refer to existing
licensed banks which make use of the internet or other electronic
means as an alternative channel to deliver their products
or services to customers.
In
May 2000, the HKMA issued a Guideline on the Authorisation
of Virtual Banks under section 16(10) of the Banking Ordinance.
The Guideline sets out the principles that the HKMA will
take into account in deciding whether to authorise virtual
banks. The main principle is that the HKMA will not object
to the establishment of virtual banks in Hong Kong provided
that they can satisfy the same prudential criteria that
apply to conventional banks. In summary, virtual bank applicants
must satisfy the following requirements:
-
maintenance
of a physical presence in Hong Kong;
-
maintenance
of a level of security appropriate to their proposed
business;
-
establishment
of appropriate policies and procedures to deal with
the risks associated with virtual banking;
-
development
of a business plan which strikes an appropriate balance
between the desire to build market share and the need
to earn a reasonable return on assets and equity;
-
clearly
setting out in the terms and conditions for their services
the rights and obligations of customers; and
-
compliance
with the HKMA's guidelines on outsourcing of computer
operation.
In line with
existing authorisation policies for conventional banks,
a locally incorporated virtual bank cannot be newly established
other than through the conversion of an existing locally
incorporated authorised institution. Furthermore, local
virtual banks should be at least 50% owned by a well-established
bank or other supervised financial institutions. For applicants
incorporated overseas, they must come from countries with
an established regulatory framework for electronic banking.
In addition, they must have total assets of more than
USD16 billion and will be subject to the "three-building"
condition in respect of its physical offices, but not
in respect of its cyber network.
Hong
Kong Investment Management Law
The Intermediaries and Investment Products Division of the
Securities and Futures Commission is responsible for regulating
the marketing to the public of unit trusts, mutual funds
and other collective investment schemes.
The Investment Products Department has regulatory responsibility
for unit trusts, mutual funds, investment-linked assurance
schemes, pooled retirement funds and immigration-linked
investment schemes as well as other forms of investment
arrangements. These products require authorisation by the
SFC before they can be marketed to the public in Hong Kong.
The Department vets applications for such authorisation
and monitors ongoing compliance with regulatory requirements.
The SFC has issued numerous sets of Rules and Codes of Practice
for the guidance of the investment management sector, including:
Fund
Manager Code of Conduct
http://www.sfc.hk/sfcRegulatoryHandbook/EN/displayFileServlet?docno=H207
Code
on Real Estate Investment Trusts
http://www.sfc.hk/sfcRegulatoryHandbook/EN/displayFileServlet?docno=H586
Code
on Unit Trusts and Mutual Funds, Investment-Linked Assurance
Schemes and Unlisted Structured Investment Products
http://www.sfc.hk/sfcRegulatoryHandbook/EN/displayFileServlet?docno=H584
Code
on Pooled Retirement Funds
http://www.sfc.hk/sfcRegulatoryHandbook/EN/displayFileServlet?docno=H583
Code
on MPF Products
http://www.sfc.hk/sfcRegulatoryHandbook/EN/displayFileServlet?docno=H582
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