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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


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.


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.


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.”


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

Code on Real Estate Investment Trusts

Code on Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products

Code on Pooled Retirement Funds

Code on MPF Products




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