Consultation conclusions on enhancements to Banking Ordinance (2026-02-13)

This document presents the Hong Kong Monetary Authority's (HKMA) conclusions following a consultation on proposed amendments to several key pieces of legislation: the Banking Ordinance (Cap. 155) (BO), the Financial Institutions (Resolution) Ordinance (Cap. 628) (FIRO), The Hong Kong Association of Banks Ordinance (Cap. 364) (HKABO), and The Hong Kong Association of Banks By-laws (Cap. 364 A) (HKAB By-laws). The primary aim of these proposed enhancements is to strengthen the regulatory framework for Hong Kong's banking sector, ensuring its continued stability, confidence, and alignment with international best practices.

This consultation conclusions paper summarizes the feedback received from various stakeholders on proposed amendments to the Banking Ordinance and related legislation. It outlines the HKMA's responses to the feedback, clarifies certain aspects of the proposals, and details the next steps for implementing the approved enhancements. The document serves as an essential resource for executives to understand the implications of these regulatory changes and to inform their strategic and operational decision-making.

The consultation covered three main areas of proposed enhancements:

1. Statutory Regime for Bank Holding Companies: The proposal seeks to formalize the existing supervisory framework for locally incorporated bank holding companies within the Banking Ordinance. This aims to bolster long-term stability and confidence in the banking industry by ensuring that these holding companies, which can exert significant influence on Authorized Institutions (AIs), act as a source of support rather than risk.
2. Engagement of Skilled Persons and Auditors: This section proposes to grant the Monetary Authority (MA) greater flexibility to engage skilled persons and directly appoint auditors when necessary to assist in performing its functions under the Banking Ordinance. This is intended to enhance the MA's effectiveness in supervising AIs in an increasingly complex financial environment.
3. Technical Amendments and FIRO Amendment: This encompasses a range of technical adjustments to the Banking Ordinance to improve regulatory clarity, reduce compliance burden, and align with international standards. It also includes an amendment to the Financial Institutions (Resolution) Ordinance to expressly reference "public interest" in resolution initiation conditions.

The consultation process led to several key policy changes and clarifications. The HKMA has considered the feedback and refined its proposals accordingly.

1. Statutory Regime for Bank Holding Companies:

• Codification of Existing Practice: The primary change is to codify the existing non-statutory guidelines in the HKMA's Supervisory Policy Manual (SPM) module CS-1 ("Group-wide Approach to Supervision of Locally Incorporated Authorized Institutions") into the Banking Ordinance.
• Scope of Application Clarified:
• Only locally incorporated holding companies of locally incorporated AIs will be subject to potential designation as Designated Bank Holding Companies (DBHCs).
• Designation will generally apply to holding companies not under the direct or consolidated supervision of the MA or any other financial authority (local or overseas). This targets Type 3 group structures as defined in SPM CS-1.
• The intention is not to designate holding companies already adequately supervised by a local or overseas financial authority, unless specific circumstances warrant it (e.g., home supervisor doesn't exercise consolidated supervision or defers to the MA).
• The focus is on ensuring the unregulated holding company supports the AI, not on whether its subsidiaries are regulated or engaged in non-material activities.
• Prudential and supervisory requirements will be imposed on the DBHC, not directly on its subsidiaries. However, for consolidated requirements, the positions of other group companies will be considered.
• Recovery Plans: For DBHCs not under direct supervision and engaging in other businesses, the MA may require them to have recovery plans to address their own stress situations and provide support to the AI. This will be implemented using existing section 68H of the BO.
• Immediate Holding Companies: The requirement to establish an immediate holding company is primarily for unregulated shareholder controllers where warranted. If an AI already has an immediate holding company for resolution planning, this new requirement will generally not apply.
• Compliance Burden: The HKMA does not expect significant additional compliance burden as the framework codifies existing practices.
• Further Guidance: SPM CS-1 will be updated to reflect the new statutory provisions, and the industry will be consulted on a draft revised SPM CS-1.

2. Engagement of Skilled Persons and Auditors:

• MA's Power to Engage Skilled Persons: The MA will have the power to appoint, or require AIs to appoint, skilled persons to assist in performing functions under the BO.
• MA's Power to Appoint Auditors: The MA will gain the power to directly appoint auditors for AIs, in addition to requiring AIs to appoint them. This will be achieved through amendments to section 59(2) of the BO.
• Scope of Skilled Persons: The definition of skilled persons will be broad, encompassing various qualified professionals and legal/unincorporated entities (e.g., cybersecurity specialists, climate risk experts, companies, industry associations). A pre-approved list is not considered practical due to varying competency needs.
• Cost Bearing:
• If a skilled person is appointed by the MA to assist in regulatory functions, costs will be borne by the MA (similar to deploying HKMA staff).
• If a skilled person is appointed by the MA to report on an AI due to deficiencies, the AI may be required to defray costs. AIs aggrieved by cost decisions can apply to the Review Tribunal.
• If an AI is required to appoint a skilled person, costs will be borne by the AI, similar to existing section 59(2).
• Official Secrecy and Immunity:
• Appointed skilled persons and auditors will be subject to official secrecy provisions under section 120 of the BO.
• Crucially, the statutory immunity under section 127 of the BO will NOT be extended to skilled persons or auditors appointed by the MA. This addresses concerns about potential compromise to AI interests in cases of gross professional negligence.
• Reporting Obligations: Expanding the scope of section 63A for skilled persons to report adverse material impacts is considered impractical as a standard requirement due to varying expertise. However, it can be included in the terms of reference for specific appointments.
• Guidance on Skilled Persons/Auditors: The HKMA plans to revise and expand SPM module IC-3 ("SPM IC-3") to cover the engagement of auditors and skilled persons, with further industry consultation planned.
• Application to Approved Money Brokers (AMBs): The proposed provisions for the engagement of skilled persons will also apply to AMBs. However, the amendment to section 59(2) (regarding direct auditor appointment) will only apply to AIs.

3. Technical Amendments:

• Support for Technical Amendments: Most respondents supported the proposed technical amendments aimed at reducing compliance burden, enhancing clarity, and aligning with international standards.
• Specific Amendments and Clarifications:
• Sections 59(1) and 60(5): AIs incorporated outside Hong Kong can comply with either section 59(1) or 60(5), eliminating the need for an exemption under section 60(6) and reducing administrative burden. Requirements remain the same for each financial year.
• Section 67 (Notification of Material Adverse Developments): Amendments are necessary for alignment with Basel Core Principles. "Material adverse development" includes any development likely to have a material impact on an AI's financial soundness, viability, ability to continue business, or where the AI is likely to be unable to meet obligations or is about to suspend payment. Further guidance will be provided in an SPM module.
• Section 68 (Examination by Non-Hong Kong Authorities): The scope is broadened to allow non-Hong Kong supervisory authorities with functions corresponding to the SFC or IA, and supervisory responsibility for relevant non-banking activities of an AI, to conduct examinations, subject to MA's prior approval.
• Section 73 (Director/Manager Gatekeeping): Instead of a 7-year time limit, sections 73(1)(c), 73(1A)(c), 73(1A)(ii), and 73(1D) will be repealed. This is in conjunction with a separate proposal to modernize MA's enforcement powers, which will provide means to address misconduct cases involving directors, chief executives, or managers.
• Publication Requirements (Sections 7(3), 16(10), 82(1), 92(6), 97M and 118C(7)): Public's right to know and accessibility/traceability of published guidelines will be considered.
• Definition of "Indirect Controller": The definition will be refined considering "employed in the management of the company," with potential exclusions and alignment with the Companies Ordinance. Exclusions for "Manager or Advisor" acting in a professional capacity will remain. Explicit exclusions for the AI's chief executive, directors, and managers are intended.
• Definition of "Working Day": The current definition of "working day" will be retained. However, calculations for average liquidity maintenance ratio and average core funding ratio under the Banking (Liquidity) Rules will be based on *each day* instead of each "working day" to account for liquidity changes on weekends, public holidays, and during extreme weather events.
• Definition of "Money Broker": No amendment to the definition of "deposit" is planned to clarify the "money broker" remit. This is to avoid affecting other BO provisions. The existing money broker regime, established in 1997, is considered to be operating effectively.

4. Amendment to FIRO:

• Inclusion of "Public Interest": An express reference to "public interest" will be included in the conditions for initiating resolution of a "within scope financial institution" under the FIRO. This aims to enhance the flexibility of resolution authorities in crisis scenarios and align with international practices.
• Consideration of Other Conditions: The HKMA will explore if other important conditions, such as the interests of affected persons (depositors, policy owners, investors), should be included to ensure comprehensiveness.
• Existing Objectives: The HKMA clarifies that the current resolution objectives under section 8 of the FIRO already encompass promoting financial system stability, protecting deposits and client assets, containing resolution costs, and protecting public money. These objectives implicitly consider the interests of affected persons.

• Consultation Paper Issued: 5 December 2024
• Consultation Period Ended: 28 January 2025
• Introduction of Amendment Bill into Legislative Council: Expected in 2026

Note: Specific effective dates for the enacted amendments are not provided in this document but will follow the legislative process.

These proposed enhancements will primarily impact:

• Authorized Institutions (AIs): Directly affected by enhanced supervision, potential requirements for recovery plans for holding companies, and new provisions for skilled persons and auditors.
• Locally Incorporated Bank Holding Companies: Will be subject to potential designation as DBHCs and the associated regulatory framework.
• Shareholder Controllers of AIs: Particularly those that are unregulated.
• Approved Money Brokers (AMBs): Will be subject to new provisions regarding the engagement of skilled persons.
• The HKMA: Will gain enhanced powers and flexibility in its supervisory and resolution functions.
• Respondents to the Consultation: Industry associations, statutory bodies, law firms, and members of the public who provided feedback.

The degree of impact will vary:

• Significant Impact: For locally incorporated holding companies that may be designated as DBHCs, requiring adherence to new prudential and supervisory requirements, potentially including recovery plans.
• Moderate Impact: For AIs subject to the MA's increased ability to engage skilled persons and auditors, and for those whose holding companies might be designated.
• Minor Impact: For other AIs and market participants due to technical amendments aimed at streamlining processes and improving clarity.
• No Direct Impact: For entities not directly regulated by the BO or FIRO, but the overall stability of the financial system will indirectly benefit them.

Institutions affected by these changes will need to:

• Review Holding Company Structures: Identify any locally incorporated holding companies of AIs and assess their potential for designation as DBHCs.
• Develop/Update Recovery Plans: If required for a DBHC, develop or update recovery plans to ensure preparedness for stress situations and support for the AI.
• Cooperate with MA's Engagements: Facilitate the MA's engagement of skilled persons and auditors. This may involve providing access to information, premises, and personnel.
• Adhere to New Reporting Standards: For section 67 amendments, ensure timely notification of material adverse developments.
• Update Internal Policies and Procedures: Incorporate changes related to the definition of "working day" in liquidity calculations and any other relevant technical amendments.
• Liaise with the HKMA: Engage with the HKMA for clarification on the application of new provisions, especially regarding the designation of DBHCs and the selection of skilled persons.
• Prepare for SPM Updates: Stay informed about updates to SPM modules CS-1 and IC-3, which will provide further guidance on the practical application of the new regulations.

Reporting Requirements:

• No new broad reporting requirements are explicitly detailed in this conclusions paper, beyond the existing obligations and the specific mention of reporting material adverse developments under section 67.
• However, for designated DBHCs, ongoing reporting related to prudential requirements (e.g., consolidated capital ratios) will be expected.

Implementation Guidance:

• The HKMA will provide updated Supervisory Policy Manual (SPM) modules, including revised CS-1 and IC-3, which will contain detailed implementation guidance and illustrative examples.
• The industry will be consulted on draft revised SPM modules before their finalization.

• Legislation Affected: Banking Ordinance (Cap. 155), Financial Institutions (Resolution) Ordinance (Cap. 628), The Hong Kong Association of Banks Ordinance (Cap. 364), The Hong Kong Association of Banks By-laws (Cap. 364 A).
• Key Terms and Definitions:
• Authorized Institution (AI): A licensed bank, restricted licence bank, or deposit-taking company authorized by the MA.
• Designated Bank Holding Company (DBHC): A locally incorporated holding company of a locally incorporated AI that the MA designates for specific regulatory oversight.
• Type 3 Group Structure: As described in SPM CS-1, referring to a group where the ultimate parent is not regulated by the MA or another financial authority.
• Skilled Person: A qualified professional or entity engaged by the MA to assist in its functions.
• Material Adverse Development: Any development with a likely material impact on an AI's financial soundness, viability, or ability to continue operations, or that signals an inability to meet obligations or a suspension of payments.
• Working Day: The current definition in the BO will be retained, but liquidity ratio calculations will shift to *daily* basis.
• Key Sections of the Banking Ordinance Mentioned:
• Section 7(3): Publication of guidelines.
• Section 16(10): Publication requirements.
• Section 59(2): MA's power to appoint auditors.
• Section 60(5) & 60(6): Requirements for overseas incorporated AIs and exemptions.
• Section 63A: Reporting by skilled persons.
• Section 67: Notification of material adverse developments.
• Section 68: Examination by non-Hong Kong authorities.
• Section 68H: MA's power to require recovery plans.
• Section 70: Conditions for controllers.
• Section 73(1)(c), 73(1A)(c), 73(1A)(ii), 73(1D): Provisions related to gatekeeping of individuals with past misconduct (to be repealed).
• Section 82(1): Publication requirements.
• Section 92(6): Publication requirements.
• Section 97M: Publication requirements.
• Section 101B: Review Tribunal.
• Section 118A: Restriction on arranging deposits.
• Section 118C(7): Publication requirements.
• Section 120: Official secrecy.
• Section 127: Statutory immunity.
• Key Sections of the FIRO Mentioned:
• Section 8: Resolution authority's objectives.
• Supervisory Policy Manual (SPM) Modules:
• SPM CS-1: "Group-wide Approach to Supervision of Locally Incorporated Authorized Institutions" (will be updated and become statutory).
• SPM IC-3: Will be revised and expanded to cover engagement of auditors and skilled persons.
• Metrics/Ratios:
• Average Liquidity Maintenance Ratio (will be calculated daily).
• Average Core Funding Ratio (will be calculated daily).
• International Standards: Basel Core Principles (specifically Essential Criteria 10 of Core Principle 9 mentioned for section 67).
• Other Legislation Mentioned: Companies Ordinance (for definition of "significant controller").

This summary provides a detailed overview of the HKMA's consultation conclusions, enabling executives to understand the scope, implications, and next steps for these significant regulatory enhancements.