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Main Features
Hong Kong maintains a three-tier system of deposit-taking institutions,
namely, licensed banks, restricted licence banks and deposit-taking companies.
They are collectively known as authorised institutions (AIs) under the
Banking Ordinance. The Hong Kong Monetary Authority (HKMA) is the licensing
authority for all three types of AIs.
Only licensed banks may conduct full banking services,
including in particular the provision of current and savings accounts
and acceptance of deposits of any size and maturity. Restricted licence
banks may take deposits of any maturity of $500,000 or above. Many deposit-taking
companies are owned by, or otherwise associated with, licensed banks.
Deposit-taking companies may take deposits of $100,000 or above with an
original maturity of at least three months.
Hong Kong has one of the highest concentrations of
banking institutions in the world. As at December 2003, there were 134
licensed banks, 42 restricted licence banks and 39 deposit-taking companies,
which included operations of banks from 32 countries around the world.
These 215 AIs maintained an extensive network of 1 308 local branches.
In addition, there were 87 representative offices of overseas banks in
Hong Kong. A local representative office is not allowed to engage in any
banking business. Its role is confined to liaison work between the bank
and its customers in Hong Kong.
The total deposit liabilities of all AIs to customers
and the total loans and advances extended by these institutions at year-end
were $3,566 billion and $2,035 billion, respectively. The total assets
of all AIs amounted to $6,506 billion.
Hong Kong has a robust interbank payment system, which
operates through the Real Time Gross Settlement (RTGS) system. The Hong
Kong Dollar RTGS system has a single-tier settlement structure with all
banks maintaining settlement accounts with the HKMA. All RTGS payment
transactions are settled in real time across the books of the HKMA. Intraday
liquidity can be obtained by the banks through the use of their Exchange
Fund Bills and Notes for intraday repurchase (repo) agreements with the
HKMA.
Leveraging on the experience with the Hong Kong Dollar
RTGS system, the HKMA introduced the US Dollar RTGS system in August 2000.
The system allows participants to settle US dollar transactions real-time
in the Asian time zone and thereby to reduce or eliminate foreign exchange
settlement risk caused by any time gap. Since its full implementation,
the system has been operating smoothly and has attracted an increasing
number of participants. As at December 2003, there were 67 direct participants
and 160 indirect participants. Among the indirect participants, 113 were
from overseas. Turnover of the system grew to 4 000 transactions per day
with a total value of over US$4.9 billion.
With a view to further enhancing the financial infrastructure
in Hong Kong, the HKMA launched a Euro RTGS system in April 2003. Similar
to the technology used for the Hong Kong dollar and US dollar RTGS systems,
the Euro RTGS system is built on the same infrastructure and offers a
range of advanced and sophisticated clearing functions. The key functions
include the real-time gross settlement for Euro payments and for payment
versus payment (PvP) between Euro and US dollar or Euro and Hong Kong
dollar foreign exchange transactions. The system also maintains a seamless
interface with the Central Moneymarkets Unit (CMU) to cater for the delivery
versus payment (DvP) of Euro denominated debt securities and repo facilities.
The CMU Service, established in 1990, is operated
by the HKMA to provide a clearing and custodian system for Exchange Fund
Bills and Notes, as well as private sector debt issues. There are 172
CMU members, most of which are financial institutions in Hong Kong. At
year-end, there were 1 255 issues with a total value of $217.7 billion
equivalent lodged with the CMU. The CMU system accepts both Hong Kong
dollar and foreign currency denominated debt instruments. It has been
fully integrated with the interbank payment systems, and is linked up
with the international central securities depositories like Euroclear
and Clearstream to enable overseas investors to trade CMU securities.
It also has established links with the regional central securities depositories
in Australia, New Zealand and the Republic of Korea.
Through a seamless interface with the US Dollar and
Euro RTGS systems, the CMU enables members to settle US dollar and Euro
securities on a DvP basis, thereby enhancing settlement efficiency and
eliminating settlement risk. The interface also enables automatic intraday
repo to provide intraday liquidity to participants of the US Dollar and
Euro RTGS systems.
Hong Kong Monetary Authority
The HKMA was established in April 1993. The Exchange Fund (Amendment)
Ordinance 1992 provides for its establishment.
The HKMA's policy objectives are to maintain currency
stability, within the framework of the Linked Exchange Rate System, through
sound management of the Exchange Fund, monetary policy operations and
other means deemed necessary; to ensure safety and stability of the banking
system through the regulation of banking business and the business of
taking deposits, and the supervision of AIs; and to promote efficiency,
integrity and development of the financial system, particularly payment
and settlement arrangements.
The HKMA is an integral part of the Government, but
can employ staff on terms different from those of the Civil Service to
attract personnel of the appropriate experience and expertise. Its staff
and operating costs are charged directly to the Exchange Fund instead
of the general revenue. The HKMA is accountable to the Financial Secretary,
who is advised by the Exchange Fund Advisory Committee on matters relating
to the control of the Exchange Fund.
The HKMA seeks advice on policy matters routinely
from the Banking Advisory Committee and the Deposit-Taking Companies Advisory
Committee. Both committees are established under the Banking Ordinance.
They are chaired by the Financial Secretary and comprise members from
the banking industry and other relevant professions. Members of the committees
are appointed by the Financial Secretary under the authority delegated
by the Chief Executive.
The Banking Ordinance provides the legal framework
for banking supervision in Hong Kong. Under the ordinance, the HKMA is
the licensing authority responsible for the authorisation and revocation
of all AIs, as well as the approval and revocation of money broker licences.
The HKMA seeks to maintain a regulatory framework that is fully in line
with international standards. The objective is to devise a prudential
supervisory system to help preserve the general stability and effective
working of the banking system while at the same time providing sufficient
flexibility for AIs to make commercial decisions. Hong Kong's framework
of banking supervision is in line with the Core Principles for Effective
Banking Supervision promulgated by the Basel Committee.
The HKMA's supervisory approach is based on a policy
of 'continuous supervision' through a combination of on-site examinations,
off-site reviews, prudential meetings, cooperation with external auditors
and meetings with boards of directors. Since 2000, the HKMA has been using
a risk-based supervisory framework for all AIs. This approach puts emphasis
on evaluation of the quality of risk management practices and internal
controls in respect of various types of risks faced by AIs. On-site examinations
are typically focused on areas of higher risk at AIs.
On the international front, the HKMA continues to
promote cooperation among central banks in the region, principally through
the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP), whose
activities cover supervisory liaison and cooperation, development of financial
markets and infrastructure, and various areas of central bank operations.
The HKMA currently chairs the EMEAP Working Group on Financial Markets,
and has just completed a two-year term (from 2002 to 2003) as chairman
of the South-East Asia, New Zealand and Australia (SEANZA) Group of Central
Bank Governors, as well as the SEANZA Forum of Banking Supervisors. To
facilitate supervisory training in the region, the HKMA is active in organising
seminars for regional banking supervisors in collaboration with the BIS
Financial Stability Institute. In addition, Hong Kong is an active member
of both the Financial Action Task Force (FATF), and the Asia/Pacific Group
on anti-money laundering, which are inter-governmental bodies charged
with the objective of developing and promoting legal, law enforcement
and financial regulation policies to combat money laundering.
Recent Developments
In line with its policy of adhering closely to international regulatory
standards, the HKMA is committed to adopting the New Capital Accord in
Hong Kong. In view of the complexity of the New Accord, the HKMA will
work closely with the industry with a view to agreeing on an implementation
approach that is both practicable and appropriate for Hong Kong. The HKMA
issued for industry consultation in July 2003 its preliminary implementation
proposals, and will carefully consider the industry's feedback and other
supervisory priorities before finalising the implementation plans. Recognising
the importance of cross-border supervisory cooperation to implementation
of the New Accord, the HKMA will continue to take an active part in liaison
with other regional supervisors and monitor closely developments in relation
to the New Accord and the manner in which it is being implemented in different
jurisdictions. Besides, the FSAP exercise concluded in June 2003 noted
that Hong Kong had a very high degree of compliance with international
best practices in banking regulation and supervision, including the Basel
Core Principles for Effective Banking Supervision.
With the commencement of the Banking (Amendment) Ordinance
2002 and the Securities and Futures Ordinance on April 1, 2003, banks
are subject to a new securities regulatory framework which, among other
things, upholds a level playing field between banks and non-bank intermediaries
in the securities market. The HKMA has been reinforcing its role as front-line
supervisor of banks through day-to-day co-operation with the SFC to ensure
a consistent supervisory approach in accordance with the new Memorandum
of Understanding between the two regulators. An electronic register containing
the names and relevant particulars of banks' securities staff is made
available for public inspection at the HKMA website.
The HKMA continued to implement the policy initiatives
contained in the reform programme announced in 1999. A bill to implement
the proposed Deposit Protection Scheme was introduced into the Legislative
Council in April 2003, and the council has formed a Bills Committee to
consider it. Good progress has also been made in the establishment of
a Commercial Credit Reference Agency (CCRA) in Hong Kong. The banking
industry has identified a service provider to operate the CCRA and is
working with the service provider to finalise the implementation details.
It is expected that the proposed CCRA would be up and running in 2004.
Meanwhile, the Code of Practice on Consumer Credit Data was revised in
June 2003 to allow a wider range of positive consumer credit data to be
shared among AIs and other credit providers. This has helped strengthen
the credit management systems of AIs and thus is conducive to the maintenance
of the stability of the banking system.
The HKMA continued to enhance its electronic banking
(e-banking) and technology risk management supervisory framework. In this
connection, the HKMA rolled out an automated control self-assessment process
to 40 AIs, and also completed over 20 on-site examinations on e-banking,
technology risk management and business continuity planning in 2003. In
addition, the HKMA issued a guideline note on general principles for technology
risk management and a series of circulars to AIs to help strengthen their
information technology control environment.
In 2003, the HKMA noted a spate of fake bank websites
and e-mail cases in Hong Kong and overseas. To ensure that members of
the public in Hong Kong are adequately protected from these frauds, the
HKMA issued a circular in May 2003 to recommend AIs to take certain preventive
and detective measures, and also a number of press statements to alert
people to these cases. The HKMA, the Hong Kong Police Force and the Hong
Kong Association of Banks have also been cooperating since February 2003
to launch a multi-channel consumer education programme (for example, issuance
of an educational leaflet, production of various episodes played on television
and radio) to promote awareness of e-banking security precautions among
the general public.
The HKMA received a number of reports on suspected
Automatic Teller Machine (ATM) fraud cases during the second half of 2003.
The HKMA has been taking the matter seriously and issued a circular in
October 2003 to AIs to set out its expectation on the related precautionary
measures that should be undertaken and the way in which customer complaints
in this relation should be handled. AIs have been actively enhancing their
precautionary measures for their ATMs. The HKMA will continue to assess
the adequacy of individual AIs' measures, and also to ensure that customers'
complaints are being dealt with fairly and fully in a satisfactory manner.
One of the functions of the HKMA is to promote and
encourage high standards of conduct and sound and prudent business practices
among AIs, primarily by way of the Code of Banking Practice. The code
is issued by the industry associations and endorsed by the HKMA. It sets
out the minimum standards to be followed by AIs in their dealings with
personal customers. In 2002, the industry established the Code of Banking
Practice Committee, in which the HKMA is represented, to provide guidance
on the interpretation of the code and to undertake future review from
time to time. Following an in-depth review, the committee recommended
new provisions be added to the code in 2003 to address the problem of
guarantors and third party security providers being held liable for the
borrower's additional debts without their consent or knowledge.
On developing financial infrastructure, following
implementation of the outbound link from CMU to Euroclear in November
2002 to provide a two-way link, an outbound link from CMU to Clearstream
was similarly implemented in January 2003 to provide a two-way link between
CMU and Clearstream. These real-time links enable Asian investors to hold
and settle Euroclear and Clearstream eligible securities directly via
their CMU accounts, thus significantly improving settlement efficiency.
At year-end, the Government introduced the Clearing
and Settlement Systems Bill into the Legislative Council. The objectives
of the proposed legislation are to provide express statutory backing for
the oversight role of the Monetary Authority in relation to important
clearing and settlement systems in Hong Kong, in line with concerns expressed
by the International Monetary Fund; and for the finality of settlements
effected through such systems, so as to facilitate the inclusion of the
Hong Kong dollar in the Continuous Linked Settlement System which is a
global clearing and settlement system for cross-border foreign exchange
transactions. Many major international currencies have been admitted to
the Continuous Linked Settlement System and it is hoped that the Hong
Kong dollar can be admitted in 2004.
Main Features
The securities and futures markets in Hong Kong are operated by the
SEHK and the HKFE, respectively. Both the SEHK and the HKFE are wholly-owned
subsidiaries of the HKEx. At year-end, there were 499 corporate and individual
exchange participants on the SEHK and 129 exchange participants on the
HKFE.
At year-end, there were 852 companies listed on the
Main Board of SEHK with a total market capitalisation of $5,477.7 billion,
raising an aggregate of $209.0 billion within the year.
New products continued to be launched in 2003. To
meet market demand created by the growth of the H-shares market and to
offer an effective trading and hedging instrument for investors in H-shares,
the HKEx launched the H-shares Index Futures in December 2003. At about
the same time, the H-share Exchange Traded Fund was also listed on the
SEHK.
The Hong Kong Securities Clearing Company (HKSCC),
a wholly-owned subsidiary of the HKEx, operates the Central Clearing and
Settlement System (CCASS) for the clearing and settlement of securities
transactions at the SEHK. The CCASS is an automated book-entry system.
In addition to brokers and custodians, CCASS services are also available
to retail investors.
Securities transactions on the HKEx's securities market
are executed by the Third Generation Automatic Order Matching and Execution
System (AMS/3) which provides facilities and investor access channels
that make securities trading more accessible. The system has maintained
100 per cent uptime record for three consecutive years since its launch
in October 2000. The AMS/3 provides an electronic platform for trading
of equities, debt securities, exchange traded funds, unit trusts/mutual
funds, derivative warrants and equity linked instruments.
The HKEx rolled out the final phase of the CCASS/3
in May 2003 by introducing the Participant Gateway, which provides a direct
electronic interface between the CCASS/3 and the CCASS Participants' back
office systems. The CCASS/3 network connection provides integrated access
to FinNet, which was built to connect financial institutions in Hong Kong
to effect straight-through processing of financial transactions.
The HKEx upgraded the software of its electronic
trading system for futures and options in October 2003. The upgrade raised
the performance and stability capabilities of the Hong Kong Futures Automated
Trading System (HKATS) and paved the way for the introduction in 2004
of an integrated clearing and settlement system for the HKEx's derivatives
market to increase efficiency.
Securities and Futures Commission
The SFC was established in May 1989 following enactment of the Securities
and Futures Commission Ordinance (SFCO). This represented the first important
phase in the overhaul of the regulation of securities and futures markets
in Hong Kong, and the implementation of one of the most important recommendations
made by the Securities Review Committee in May 1988.
The regulatory objectives of the SFC, as set out in
the SFO that came into effect on April 1, 2003, include: —
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to maintain and promote the fairness, efficiency, competitiveness,
transparency and orderliness of the securities and futures industry;
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to promote the understanding by the public of the operation and functioning
of the securities and futures industry;
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to provide protection for members of the public investing in or holding
financial products;
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to minimise crime and misconduct in the securities and futures industry;
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to reduce systemic risks in the securities and futures industry;
and
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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.
Established as an autonomous statutory body outside
the Civil Service, the SFC is responsible for regulating the securities
and futures markets in Hong Kong. The SFC at present has a governing body
of 13 directors (six of them executive) appointed by the Chief Executive.
The Government is not involved in the day-to-day regulation of the securities
and futures industry.
The SFC is funded by the market. No government funding
has been sought since 1993. The revised estimate of its operating expenditure
budget for 2003-04 was $408 million.
The SFC seeks advice on policy matters from its Advisory
Committee, which comprises three executive directors of the SFC and 11
independent members. The independent members are appointed by the Chief
Executive and are broadly based and representative of market users.
Exercise of powers by the SFC is subject to a range
of checks and balances. For instance, decisions relating to matters concerning
the licensing of persons and intervention in their business are subject
to appeal to the independent full-time Securities and Futures Appeals
Tribunal (SFAT), which has replaced the previous part-time Securities
and Futures Appeals Panel. A much wider range of the SFC's decisions are
now subject to appeal to the tribunal. In November 2000, a Process Review
Panel (PRP) was established to undertake an ongoing review of the fairness
and consistency of the SFC's internal operational procedures. Members
of the PRP are appointed by the Chief Executive. The Government published
the PRP's second Annual Report in May 2003. The PRP could not identify
any serious deficiency in the SFC's operational process. Yet, there were
certain areas where the PRP has made recommendations for improvement.
The SFC has been positive in adopting the recommendations of the PRP.
Broadly speaking, the SFC's work involves licensing,
supervision and monitoring of intermediaries; regulation of the public
marketing of unit trusts, mutual funds and other collective investment
products; regulation of takeovers, mergers and other corporate activities;
listing regulation under the dual filing system for IPO applicants and
issuers; supervision of markets including the exchanges and clearing houses;
enforcement of securities laws and rules; and investor education.
As at year-end, there were 20 103 licensed persons,
including securities brokerage firms, futures dealers, and securities
margin financiers, as well as their representatives, and 98 registered
institutions, such as banks, engaging in regulated activities like dealing
and advising on securities and futures.
The SFC considers investor education the first important
step to investor protection. It maintains an Electronic Investor Resources
Centre (eIRC), which is a web-based collection of investor education materials
and links. It aims to assist investors in making informed investment decisions.
During the year, the SFC continued its active campaign
to educate investors on various investment related subjects. Easy-to-understand
leaflets and feature articles were published online and in hard copies
on investing basics, bonds, portfolio planning, pooling risk in margin
trading, hedge funds, exotic warrants, commodity futures and index tracking
exchange traded funds.
As in previous years, the SFC also organised a series
of investor education workshops for secondary school teachers of Economics,
Commerce and related subjects to facilitate their teaching work. It also
partnered with the Open University and the HKEx to organise investor education
lectures for the public free of charge.
In the meantime, the SFC remained active in external
relations and international activities. In June 2003, it signed a Declaration
on Co-operation and Supervision of Cross-Border Investment Management
Activity with the Australian Securities and Investments Commission (ASIC).
The MoU enables the SFC and the ASIC to exchange information and offer
assistance to each other concerning the activities of fund managers licensed
in their respective jurisdictions.
The SFC continued to participate in different aspects
of the work of the International Organisation of Securities Commissions
(IOSCO), including the work on the regulation of securities analysts and
rating agencies. Hong Kong was selected by the IOSCO Executive Committee
to host the 31st Annual Conference of IOSCO in 2006. This will be the
first time that Hong Kong has hosted the IOSCO Annual Conference.
Insider Dealing Tribunal and the Market Misconduct Tribunal
The Insider Dealing Tribunal has been an important feature of the regulatory
framework for the securities market in Hong Kong. Established under the
Securities (Insider Dealing) Ordinance, the tribunal looks into cases
involving suspected insider dealing referred to it by the Financial Secretary.
Since the commencement of its operation in 1994, the tribunal has concluded
14 cases.
With the commencement of the SFO on April 1, 2003,
the Insider Dealing Tribunal has been replaced by a Market Misconduct
Tribunal (MMT), which covers five other types of market misconduct (namely
false trading; price rigging; disclosure of information about prohibited
transactions; disclosure of false or misleading information inducing transactions;
and stock market manipulation) in addition to insider dealing. The MMT
decides cases on the civil standard of proof and can impose a range of
civil sanctions, such as ordering the disgorgement of profits, banning
a person from trading in SFC regulated financial products and disqualifying
a person from directorship or management of a company.
The MMT inquires into market misconduct which occurs
on or after April 1, 2003. The Insider Dealing Tribunal continues in existence
to inquire into cases of insider dealing that occurred before April 1,
2003.
As an alternative to civil proceedings, market misconduct
is subject to criminal prosecution, which, if successful, may result in
more severe penalties on conviction, including up to 10 years' imprisonment
or a fine of up to $10 million.
Recent Developments
The Government, together with the SFC, strives to continue to provide
a favourable environment for introducing new financial products, and for
its intermediaries.
The SFC published in July 2003 a Code on Real Estate
Investment Trusts (REITs) following market consultation. Market respondents
welcomed the code which facilitates new product development. The SFC also
concluded the review of Chapter 20 of the Listing Rules of HKEx for streamlining
the listing of SFC-authorised collective investment schemes. The HKEx
announced the amendments in August and the new Chapter 20 became effective
on September 1, 2003.
The SFC consultation on the draft guidelines for regulating
Exchange Traded Index Tracking Funds (ETFs) ended in May 2003. The new
guidelines, which provide for streamlined requirements on investment restrictions
and risk disclosure requirements, suitable disclosure of trading information
and streamlined recognition of overseas ETFs, were gazetted and became
effective in October 2003.
With the liberalisation of commission rates in April
2003, brokerage commissions are now freely negotiable between brokers
and their clients. The Government convened a Working Group on the Business
Environment of the Stockbroking Industry in a bid to enhance the competitiveness
of small and medium sized brokerage firms. The Working Group engaged the
industry actively and completed its deliberations in April 2003. It put
forward a number of recommendations, including enhancing transparency
of brokerage commissions and other service fees; promoting image building
of brokers and market awareness among investors; and enhancing training
opportunities for brokers. The SFC, the HKMA, the HKEx and various industry
associations have been following up on these recommendations.
The SFC Working Group on Review of Financial Regulatory
Framework for Licensed Corporations, which was established in May 2002
to review the arrangements for securities margin finance providers (SMF
providers) to pool and re-pledge clients' securities as well as the need
to tailor regulatory capital requirements, has made good progress in examining
the various risks arising from the operation of securities firms. The
SFC plans to conduct public consultation in relation to these measures
in 2004.
The SFO has also given the SFC greater flexibility
and powers to pursue and combat market crimes and misconduct. In implementing
the new SFO, the SFC has refocused its enforcement resources in the last
year to address three areas of high risk in the financial markets in Hong
Kong: corporate misconduct, serious misconduct by intermediaries, and
market misconduct. These areas will continue to be the SFC's enforcement
priorities in the coming year. The SFC is also taking a tougher stance
towards such misconduct.
Main Features
Hong Kong is one of the most open insurance centres in the world. At
year-end, there were 188 authorised insurers, 94 of which were incorporated
in Hong Kong and the remaining 94 were incorporated in 22 overseas countries
or the Mainland, with the United States taking the lead followed by the
United Kingdom.
Notwithstanding the economic slowdown, the total gross
premiums of the insurance industry reached $89.0 billion in 2002, representing
a 16.6 per cent growth over 2001. Gross premiums of the general insurance
sector increased by 20.6 per cent to $23.4 billion in 2002. General Liability,
Property Damage, Motor Vehicle and Accident and Health business have attained
significant premium growth. Underwriting performance improved from a loss
of $473 million in 2001 to a profit of $1,243 million in 2002.
The long term insurance business continued to attain
a double-digit annual growth from 1991 to 2002, with office premiums increasing
by 15.2 per cent to $65.5 billion in 2002. The office premiums in force
of Individual Life business amounted to $49.6 billion, accounting for
75.7 per cent of the total office premiums. The number of Individual Life
policies in force grew by 5.9 per cent to 5.2 million in 2002.
At year-end, there were 32 099 insurance intermediaries,
including 31 635 agents (of whom 1 973 are agency firms) and 464 brokers.
Insurance Authority
The Commissioner of Insurance, appointed by the Chief Executive as the
Insurance Authority (IA), has the principal function (under the Insurance
Companies Ordinance (ICO)) to regulate and supervise the insurance industry
for the promotion of the general stability of the insurance industry and
for the protection of existing and potential policy holders.
The ICO, which prescribes a comprehensive regulatory
framework for all classes of insurance business, has the two main objectives
of ensuring the financial stability of all insurers authorised in Hong
Kong and the fitness and propriety of their management. These objectives
are achieved through the prescription of, inter alia, the minimum share
capital and the solvency margin requirements, and the requirement for
directors and controllers of insurers to be fit and proper persons.
A general business insurer is also required to maintain
assets in Hong Kong to meet the claims of Hong Kong policy holders. For
life insurance business, a fully-fledged appointed actuary system has
been implemented to ensure that the insurer would be able to meet its
obligations.
Prudential supervision of insurers is carried out
mainly through examination of the financial statements, reports of actuaries
and other returns submitted by insurers and regular on-site visits. The
IA may take appropriate action against an insurer, under the ICO, to safeguard
the interests of policy holders. These measures include the limitation
of premium income, placing of assets in the IA's custody, assumption of
control by a manager appointed by the IA or petitioning for the winding-up
of the insurer.
Insurance intermediaries have been brought under the
regulation of the ICO since 1995. An insurance agent must be properly
appointed by an insurer and an insurer is required to comply with the
Code of Practice for the Administration of Insurance Agents in appointing
and controlling its agents. An insurance broker must meet certain minimum
requirements before he can be authorised.
Self-regulatory measures are in place to strengthen
the market discipline in the insurance industry. These measures, formulated
by the insurance industry in consultation with the IA, include the adoption
of a Code of Conduct for Insurers governing the writing of insurance contracts
and insurance benefit illustration standards for life insurance policies.
As a member of the International Association of Insurance
Supervisors (IAIS), Hong Kong endeavours to ensure that its supervisory
standards are in line with the principles and standards developed by the
association. It has also established an Insurance Advisory Committee with
representatives from the industry as members. The committee was set up
pursuant to section 54 of the ICO for advising the Government on matters
relating to the administration of the ICO and the carrying on of insurance
business in Hong Kong.
Recent Developments
The IA reviews from time to time the regulatory regime of the insurance
sector, in the light of operational experience, market development and
the international trends to ensure its effectiveness. In the process,
it maintains close liaison with industry bodies and overseas regulators.
In 2003, the IA issued a number of guidelines for further enhancement
of the different aspects of the regulatory regime. For instance, the IA
issued in February a Guidance Note on Classification of Class C-Linked
Long Term Business (GN11) and in June a Guidance Note on Reinsurance with
Related Companies (GN12). GN11 was issued to clarify the classification
of long term business between Class A (Life and Annuity) and Class C (Linked
Long Term). GN12, on the other hand, was issued to specify the criteria
for adequate reinsurance arrangements with related reinsurers and how
to address the supervisory concern arising from inadequate reinsurance
arrangements.
Having regard to the latest international regulatory
developments, the IA also issued in June 2003 a Supplement to the Guidance
Note on Prevention of Money Laundering and a Guideline on the Combat of
Terrorist Financing.
The existing self-regulatory system for insurance
intermediaries has been in operation since 1995. In recent years, there
have been rapid developments in the industry such as the growing numbers
of insurance intermediaries and the increasing sophistication of insurance
products. There is also a rising public expectation for better protection
for the insured. The IA considers that there is a need to enhance the
existing system. The relevant self-regulatory organisations (SROs) were
consulted on possible improvements to the existing regulatory regime.
On the basis of the industry's comments, the IA is in the process of liaising
with the SROs to implement a number of proposals. Some items of the proposed
improvements have been implemented, such as the disclosure of registration
number to facilitate identification of insurance intermediaries, and reinforcement
of the requirements relating to policy replacement. The IA will continue
to liaise with the industry and parties concerned to enhance the regulatory
system for insurance intermediaries and further protect the interests
of the insuring public.
In January 2003, legislation has been made to introduce
a definition of 'Hong Kong Long Term Insurance Business' and a requirement
to submit annual returns of such business. Besides promoting market transparency,
and the integrity and comprehensiveness of the relevant statistics, this
would also enable the IA to monitor the operation of long term insurers
more effectively.
In the light of international regulatory trends and
developments of the insurance industry, the Government is reviewing the
institutional set-up of the IA. The review entails a study on turning
the IA into a regulatory agency independent of the Government. Relevant
stakeholders are being consulted.
The IA had commissioned a consultancy study on the
need and feasibility of establishing Policyholders' Protection Funds (PPFs)
in Hong Kong. Stage 1 of the study which comprises a review of the existing
regulatory regime and a feasibility study on establishing PPFs was largely
completed. The IA issued in December 2003 a consultation paper inviting
public comments by the end of March 2004. The Government is keeping an
open mind on the PPF concept.
To examine the need for enhancing the supervisory
framework of the assets of long term business insurers, the IA commissioned
another consultancy study in September 2003. The study focuses on the
appropriate framework for asset valuation and the need for a mechanism
that better safeguards the interest of Hong Kong policy holders in the
event of failures of long term insurers. The first stage of the study
would be completed by early 2005. It would include a review of the existing
regulatory framework as well as the international practice. Stakeholders
will be consulted in the process.
Main Features
On December 1, 2000, the Mandatory Provident Fund (MPF) System was implemented
to help encourage the workforce to save and invest for their retirement
protection. The system, which was formulated after extensive consultation,
is a privately managed, employment-related mandatory system of provident
fund schemes. Unless exempted, employees and self-employed persons aged
between 18 and 65 are required to participate in MPF schemes.
The MPF system provides for joint contributions by
the employer and employee, each contributing 5 per cent of the employee's
relevant income to a registered MPF trust scheme, subject to the maximum
and minimum levels of income for contribution purposes. The accrued benefits
are fully vested in the scheme members and can be transferred from scheme
to scheme when employees change employment or cease to be employed. A
self-employed person has to contribute 5 per cent of his or her relevant
income. In normal circumstances, benefits must be preserved until the
scheme member attains the retirement age of 65.
By year-end, about 95 per cent of employers (i.e.
about 218 000), 96 per cent of relevant employees (1 733 000) and 82 per
cent of self-employed persons (299 000) had enrolled in MPF schemes. The
total MPF assets amounted to about $89.4 billion, with monthly MPF contributions
amounting to around $2 billion.
Unlike the compulsory MPF schemes, occupational retirement
schemes (ORSO schemes) registered under the Occupational Retirement Schemes
Ordinance (ORSO) are voluntary schemes established by employers. The objective
of the ORSO is to regulate such schemes through a registration system
to ensure that they are properly administered and funded. All registered
schemes must meet certain requirements, including asset separation, independent
trusteeship, restricted investments, funding, independent audit, actuarial
reviews, information disclosure and the submission of audited financial
statements to the Registrar of Occupational Retirement Schemes.
To tie in with the implementation of the MPF System,
ORSO schemes that fulfilled certain conditions were exempted from MPF
requirements. Members of such schemes may choose to remain in the existing
scheme or join a MPF scheme. At year-end, there were 5 554 MPF-exempted
ORSO schemes covering over 500 000 employees.
Mandatory Provident Fund Schemes Authority
The Mandatory Provident Fund Schemes Authority (MPFA) was set up in September
1998 under the Mandatory Provident Fund Schemes Ordinance (MPFSO). It
is tasked with the responsibility of regulating and supervising the MPF
System and ensuring compliance with the MPFSO. Two statutory committees,
the MPF Schemes Advisory Committee and the MPF Industry Schemes Committee,
have been established to advise the MPFA on the overall operation of the
MPFSO and the Industry Schemes respectively. The MPF Schemes Appeal Board
has also been set up under the MPFSO to hear appeals against the relevant
decisions of the MPFA.
To ensure that the interests of MPF scheme members
are protected, the MPFA closely monitors the operation of MPF trustees
and other service providers, investigates complaints about non-compliance
and takes enforcement actions accordingly. Proactive inspections are carried
out at business premises to ensure compliance of employers in enrolling
their employees in MPF schemes and making contributions. The MPFA also
educates the public on the need for retirement protection and on the MPF
System, with an emphasis on investor education. Some of the educational
activities were held in conjunction with other bodies (for example, the
Hong Kong Investment Funds Association and labour unions).
The MPFA also acts as the Registrar of Occupational
Retirement Schemes.
Recent Developments
In order to further enhance the effectiveness and efficiency of the MPF
System, the MPFA continued to review the MPF legislation in the light
of operational experience. The MPF Schemes Operation Review Committee
(SORC), comprising representatives of employer and employee bodies, service
providers, professional organisations, the Government and the MPFA, was
set up in 2001 for this purpose. The SORC has so far completed three phases
of its work. Following the coming into force of the provisions relating
mainly to raising the minimum relevant income level for making MPF contributions
and other scheme administration measures in February 2003, all the provisions
arising from the first phase of review have become operational. The proposals
resulting from the second and third phases of its review cover issues
relating to investment regulation, scheme administration and enforcement.
The Government is aiming to put these proposals through the legislative
process.
The MPFA has also initiated a project since late 2002
to review and improve the disclosure of information about fees, charges
and fund performance of MPF products, with a view to enabling scheme members
to make informed investment decisions. Key proposals have been developed
in consultation with industry bodies and other regulators, and the details
are being worked out progressively. The proposals will be implemented
in phases from 2004 to 2006. Public education programmes will be developed
to tie in with the different stages of implementation. |
