Consultation Paper on Proposed Enhancements to the Banking Ordinance (Cap.155)

This document is a consultation paper issued by the Hong Kong Monetary Authority (HKMA) on December 5, 2024, proposing enhancements to the Banking Ordinance (Cap. 155) (BO). It also includes proposed amendments to the Financial Institutions (Resolution) Ordinance (Cap. 628) (FIRO) and the Hong Kong Association of Banks Ordinance (Cap. 364) (HKABO). The purpose of these proposed changes is to update Hong Kong's banking regulatory framework to reflect evolving industry practices, address supervisory experience, and align with international standards and best practices from major financial centers. The consultation period concludes on January 28, 2025.

This consultation paper outlines proposed legislative amendments to the Banking Ordinance (BO), the Financial Institutions (Resolution) Ordinance (FIRO), and the Hong Kong Association of Banks Ordinance (HKABO). The HKMA has conducted a review of the BO to ensure its continued effectiveness in promoting the stability and sound functioning of Hong Kong's banking system amidst rapid industry developments and evolving regulatory landscapes. The proposed changes aim to enhance the Monetary Authority's (MA) supervisory capabilities, streamline regulatory processes, and align Hong Kong's regulatory framework with international best practices. Public feedback is invited on these proposals.

The proposed enhancements are categorized into four main areas:

This section proposes to introduce a statutory regime that would empower the MA with direct regulatory and supervisory powers over designated locally incorporated holding companies (IHCs) of locally incorporated Authorized Institutions (AIs).

• Key Powers to be Conferred:
• Power to require a locally incorporated AI to be held by a locally incorporated IHC. This includes the ability to mandate the controller of an AI to establish a new IHC, even if solely for the purpose of holding the AI.
• Power to designate one or more locally incorporated holding companies of a locally incorporated AI for direct MA supervision.
• Power to impose prudential standards and other supervisory requirements on designated IHCs to ensure they act as a source of support and not weakness to the AI and its group.

• Justifications:
• Alignment with International Standards: The proposal aligns with Basel Committee on Banking Supervision (BCBS) Core Principle 12 (CP #12) on consolidated supervision, which mandates supervisors to oversee banking groups on a consolidated basis.
• Addressing Current Limitations: Currently, the MA lacks direct supervisory powers over holding companies, relying on "fitness and propriety" requirements via shareholder controller conditions under section 70 of the BO. This is seen as less transparent and lacking adequate enforcement tools.
• Enhancing Transparency and Best Practices: A statutory regime will provide a clearer framework for direct regulation and supervision, enhancing transparency and aligning with practices in major overseas financial centers.

• Factors for MA Consideration: When deciding whether to exercise these powers, the MA will consider:
• Whether any holding company is already supervised by the MA or other financial regulators, and the scope of that supervision.
• The degree of influence or control the holding company has over the AI's policy and management.
• The materiality of the AI's banking business relative to its group and the Hong Kong banking sector.
• The size and nature of the AI's group's non-banking businesses and their potential risk to the AI.
• Other relevant criteria from international standard-setting bodies like the BCBS.

• Proposed Requirements for Designated IHCs: These requirements will mirror existing conditions under section 70 of the BO but will be statutorily empowered and may include:
• Prudential and supervisory requirements (e.g., capital adequacy, liquidity, large exposures, connected party exposures, asset charges).
• Requirement for an effective capital and liquidity support plan.
• Restrictions on activities detrimental to the AI, or requiring prior MA consent for certain activities.
• Assessment of fitness and propriety of key executives and directors, and effective corporate governance.
• Inspection, disciplinary, and intervention powers for the MA.
• Requirements for reports from auditors or skilled persons.
• Submission/publication of financial and other relevant information.

This section proposes to grant the MA the flexibility to engage skilled persons on a case-by-case basis to assist in performing his functions under the BO.

• Key Provisions:
• The MA can appoint one or more skilled persons to assist in performing his functions.
• The MA can appoint, or require an AI to appoint, skilled persons to prepare and submit reports on matters related to the AI that the MA reasonably requires.
• Amendments to section 59(2) of the BO to allow the MA to directly appoint auditors (in addition to requiring an AI to appoint them) to prepare and submit reports.
• Skilled persons and auditors appointed by the MA will be subject to official secrecy provisions (section 120 of the BO) and granted statutory immunity (section 127 of the BO).

• Justifications:
• Addressing Complexity and Expertise Gaps: Increased complexity in AI operations due to digitalization and Fintech necessitates specialized expertise that the MA may not always have in-house, given resource constraints.
• Enhancing Supervisory Effectiveness: Equips the MA with necessary tools for more effective supervision and aligns with international practices and BCBS Core Principles.
• Clarification of Role: Emphasizes that the MA's supervisory functions are not outsourced; skilled persons are purely for assistance.

• Requirements for Skilled Persons: While not necessarily auditors or bound by professional bodies, appointed skilled persons must possess the necessary skills, qualifications, experience, competency, and resources, and be suitable to act independently and objectively. If appointed by an AI at the MA's requirement, they must be nominated or approved by the MA.

This broad category covers various technical amendments to streamline operations, reduce compliance burdens, align with international standards, and clarify policy intent. These are divided into three sub-categories:

I. Addressing Operational Issues Identified from Supervisory Experience:

• AIs Incorporated Outside Hong Kong: Flexibility for these AIs to choose between submitting documents as currently specified or complying with the Companies Ordinance (Cap. 622) for account audits.
• Non-Hong Kong Supervisory Authorities: Expansion of section 68 to allow these authorities, with MA approval, to conduct examinations on relevant AIs.
• Prospective Relevant Individuals (ReIs): Conferring MA powers under section 72A to require prospective ReIs (individuals awaiting registration in the AI's register) to submit information.
• Prohibition Period for Employees: Revising section 73 to impose a time limit (proposed 7 years) on prohibitions from acting as AI employees, making it applicable in resolution cases (not just revocation and winding-up).
• Temporary Exemption for Chief Executive Appointment: Allowing the MA to temporarily exempt an AI from section 74(1) (appointment of a chief executive) if it's not detrimental to depositors' interests, providing flexibility during unforeseen circumstances.

II. Aligning Regulation with Major Financial Centres:

• Definition of "Indirect Controller": Expanding the definition to include individuals whose "wishes" directors are accustomed to acting upon, or those with significant influence over management, even if not a director or employee.
• Publication of Guidelines: Amending sections to allow the MA to publish guidelines via Gazette notice or other MA-determined publications for greater flexibility.
• Auditor Qualifications and Reporting: Requiring AIs to ensure appointed auditors have necessary qualifications, skills, experience, and resources for independent duties. AIs must also ensure auditors provide information on their credentials and independence to the MA upon request.
• MA's Power to Withdraw Approval of Auditors: Empowering the MA to withdraw prior approval of external auditor appointments or require termination if deemed inappropriate.
• Notification of Cessation and Adverse Developments: Requiring AIs to notify the MA in advance of ceasing business and of any material adverse developments.
• Exemption from Controller Application: Allowing the MA to exempt certain entities (e.g., HKSCC Nominees Limited for clearing, custodians/nominees without voting discretion) from becoming controllers if they hold shares without discretionary voting power, aligning with the intent of the shareholder controller regime.

III. Textual Amendments to Reflect Policy Intent:

• Definitions: Repealing the definition of "money at call" and amending "working day" and "business day" to exclude Saturdays and black rainstorm warning days for clarity.
• Money Broker Definition: Specifying that money brokers negotiate agreements related to "wholesale treasury markets."
• Exemption from Pre-Commencement Returns: Allowing the MA to exempt AIs from submitting returns before commencing business.
• Amalgamation of AIs: Explicitly requiring locally incorporated AIs to seek MA approval before amalgamation and notify the MA afterwards.
• Conforming Language: Replacing "appropriate recognized banking supervisory authority" with "relevant banking supervisory authority" for textual alignment.
• Electronic Signatures: Expressly allowing the MA to accept electronic signatures (following the Electronic Transactions Ordinance) where not specifically prohibited by the BO.
• Electronic Service of Notice: Including electronic mail as a valid method for serving notices on AIs.
• Association Name Correction: Replacing "Hong Kong Foreign Exchange & Deposit Brokers’ Association" with "Hong Kong Inter-Dealer Brokers Association" for accuracy.

This section proposes an amendment to the Financial Institutions (Resolution) Ordinance (FIRO) to include an express reference to the "public interest" in the conditions for initiating resolution of a "within scope financial institution" (WSFI).

• Proposed Amendment: Modifying condition 3 in section 25(4) of the FIRO. Currently, resolution can only be initiated if a WSFI has ceased or is likely to cease to be viable, private sector action is unlikely to restore viability, and the WSFI's non-viability poses risks to the financial system's stability and effective working, and resolution will avoid or mitigate these risks. The amendment proposes to add "public interest" as an alternative trigger for resolution, alongside the existing conditions.

• Justifications:
• Enhanced Flexibility: The current Condition 3 is considered more restrictive than in other major financial jurisdictions. Including "public interest" will provide resolution authorities with greater flexibility in managing diverse crisis scenarios.
• International Alignment: This aligns Hong Kong's resolution regime with equivalent conditions in jurisdictions like the EU, UK, and Singapore, promoting international harmonization and more efficient cross-border resolutions.

The consultation paper proposes several significant changes:

• Establishment of a Statutory Regime for Bank Holding Company Supervision: This is a major shift, granting the MA direct supervisory powers over designated locally incorporated holding companies of AIs, enhancing consolidated supervision.
• Empowerment of MA to Engage Skilled Persons: Provides the MA with a formal mechanism to bring in external expertise for complex supervisory tasks and investigations, including direct appointment of auditors.
• Broad Range of Technical Amendments: Numerous changes to the BO, FIRO, and HKABO aimed at operational efficiency, regulatory alignment, and improved clarity of policy intent. This includes adjustments to definitions, notification requirements, and powers related to auditors and controllers.
• Inclusion of "Public Interest" in Resolution Triggers: A crucial amendment to FIRO that broadens the scope for initiating resolution of financial institutions, aligning with international practices and enhancing crisis management flexibility.
• Amendments to HKABO and HKAB By-laws: To streamline the process for varying the composition of the Consultative Council and facilitate virtual meetings for the Hong Kong Association of Banks.

• Consultation Paper Publication Date: December 5, 2024
• Deadline for Public Comments/Submissions: January 28, 2025

• Applicable Parties:
• Locally Incorporated Authorized Institutions (AIs): Those that are part of a group headed by a holding company.
• Locally Incorporated Bank Holding Companies (IHCs): Designated holding companies of locally incorporated AIs will be directly supervised.
• Controllers of AIs: Including indirect controllers, with proposed expanded definitions.
• Auditors of AIs: Facing potential direct appointment by the MA and enhanced reporting requirements.
• Skilled Persons: Those engaged by the MA or AIs for supervisory assistance.
• Within Scope Financial Institutions (WSFIs): Banking, insurance, and securities/futures sector entities, as the proposed amendment to FIRO impacts their resolution triggers.
• The Hong Kong Association of Banks (HKAB): Its processes for Consultative Council composition and meeting conduct will be affected.
• The Monetary Authority (MA): Will gain new powers and tools for supervision and regulation.

• Degree of Impact:
• High Impact: For locally incorporated AIs that are part of groups where their holding companies will be designated for direct supervision. This will introduce new compliance obligations and regulatory oversight.
• Moderate Impact: For AIs whose auditors may be directly appointed by the MA. Also, for entities falling under the expanded definition of "indirect controller."
• Low to Moderate Impact: For AIs generally, due to various technical amendments aiming to streamline processes and reduce compliance burdens. The FIRO amendment is of high strategic importance but may not directly alter daily operations for most entities unless a resolution scenario arises.
• Procedural Impact: For HKAB, concerning its internal governance and meeting arrangements.

• Submission of Comments: Interested parties must submit written comments and/or responses to consultation questions by January 28, 2025, via mail or email to the HKMA.
• Reporting Requirements:
• Designated holding companies will be subject to new prudential and supervisory reporting requirements (e.g., capital, liquidity, large exposures).
• AIs may be required to submit reports prepared by appointed skilled persons or auditors.
• AIs will have new notification obligations, including for cessation of business and material adverse developments.
• Implementation Guidance: The HKMA will likely issue detailed guidance and circulars following the consultation period and any legislative enactment. This may include specific frameworks for capital adequacy, liquidity, and other prudential standards for designated holding companies.
• Internal Review and Adaptation: Affected institutions will need to review their group structures, internal controls, and compliance frameworks to adapt to the proposed changes, particularly regarding holding company structures and auditor engagement.
• Information Disclosure: Designated holding companies may be required to submit and/or publish relevant financial and other information.

• Banking Ordinance (Cap. 155) (BO): The primary legislation being amended.
• Financial Institutions (Resolution) Ordinance (Cap. 628) (FIRO): Key amendment regarding resolution triggers.
• Hong Kong Association of Banks Ordinance (Cap. 364) (HKABO): Amendments related to HKAB governance.
• Monetary Authority (MA): The chief regulator responsible for implementing the BO.
• Authorized Institution (AI): A licensed bank, virtual bank, or digital bank in Hong Kong.
• Holding Company (控權公司): Defined under section 13 of the Companies Ordinance (Cap. 622).
• Immediate Holding Company (IHC): A locally incorporated holding company of a locally incorporated AI.
• Ultimate Holding Company (UHC): The top-tier holding company in a group.
• Intermediate Holding Companies (ITHCs): Holding companies between the AI and the UHC.
• Basel Committee on Banking Supervision (BCBS): International standard-setter whose principles (Core Principles) are referenced.
• Core Principles for Effective Banking Supervision (Core Principles): International benchmarks for sound banking regulation.
• Consolidated Supervision (CP #12): Supervision of a banking group on a consolidated basis.
• Home-Host Relationships (CP #13): Principles governing cooperation between supervisors of a parent institution (home) and its subsidiary (host).
• Section 70 of the BO: Currently used to impose conditions on shareholder controllers.
• Skilled Person: An individual or entity with relevant expertise to assist the MA.
• Section 59(2) of the BO: Currently relates to auditor appointments.
• Section 120 of the BO: Official secrecy provisions.
• Section 127 of the BO: Statutory immunity provisions.
• Digitalisation and Fintech: Factors driving increased complexity in AI operations.
• Relevant Individual (ReI): An individual whose particulars have been submitted for registration in an AI's register but not yet formally registered.
• Companies Ordinance (Cap. 622): Referenced for audit requirements for AIs incorporated outside Hong Kong.
• "Indirect Controller": Definition proposed to be expanded.
• Gazette: The official publication for certain regulatory notices.
• "Wholesale Treasury Markets": Specified market for money broker activities.
• "Within Scope Financial Institution" (WSFI): Defined in section 2(1) of the FIRO, includes banking, insurance, and securities/futures sector entities.
• Section 25(4) of the FIRO: Contains conditions for triggering resolution.
• Personal Data (Privacy) Ordinance (Cap. 486) (PDPO): Governs the collection and use of personal data submitted in consultation responses.

The document contains one primary appendix:

• Annex: Consultation Questions: This annex lists all the questions posed by the HKMA regarding the proposed amendments. There are nine specific questions, grouped by the main proposal sections (A, B, C, and D), and one general question for any other comments. These questions are designed to solicit feedback from the public on the merits, details, and potential implications of each proposed change. They serve as a structured framework for respondents to articulate their views and concerns.

This comprehensive summary provides an executive-level overview of the HKMA's proposed enhancements to the Banking Ordinance and related legislation, facilitating informed decision-making.