HONG KONG DEPOSIT PROTECTION BOARD

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Berenice Ross
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4 Annex I HONG KONG DEPOSIT PROTECTION BOARD Amendments to the Guideline on Information Required for Determining and Paying Compensation and Compliance Review Program for the Guideline This paper summarizes the major amendments to the Guideline on Information Required for Determining and Paying Compensation (the IS Guideline) issued by the Hong Kong Deposit Protection Board (the Board) under section 8(1) of the Deposit Protection Scheme Ordinance, and the changes to the compliance review program (the Program) to be adopted by the Board for reviewing Scheme members compliance with the IS Guideline starting New measures have been introduced under the Program to strengthen self-monitoring of Scheme members to improve their readiness to facilitate the Board in making prompt payouts as this is conducive to promoting financial stability. AMENDMENTS TO THE IS GUIDELINE Standardising Information Provision 2. All Scheme members are required to provide information in the specified formats regardless of their size so that the information may be readily transferred to the Board to ensure payout efficiency. However, in view of the popularity of Windows technology employed by small Scheme members, Scheme members with not more than 1,000 deposit accounts may submit the required information in CSV 1 format. Shortening Information Submission Timeline 3. As timely information submission by Scheme members is critical to speedy payout, the new submission deadline of the required information is as follows: (i) Scheme members with less than 500,000 deposit accounts will be required to submit all required information within 12 hours from (1) estimated completion of necessary processing 2 to arrive at 1 A comma-separated values (CSV) file consists of any number of records, separated by line break; each record consists of fields, separated by some other character or string, most commonly a literal comma. 2 Scheme member should complete processing the day s deposit and other transactions to arrive at end-of-day ledger balances. It is envisaged that Scheme members will not be required to run all the regular day end

section 8(1) of the Deposit Protection Scheme Ordinance, and the changes to the compliance review program (the Program) to be adopted by the Board for reviewing Scheme members compliance with the IS

5 - 2 - end-of-day ledger balances; or (2) 6:00 a.m. 3 the trigger date, whichever is earlier; on the day following (ii) Scheme members with deposit accounts in the range of 500,001 to 2,000,000 will be required to submit all required information except liabilities and off-balance sheet transactions (liability information) within 12 hours, and submit the liability information within 36 hours from (1) estimated completion of necessary processing 2 to arrive at end-of-day ledger balances; or (2) 6:00 a.m. 3 on the day following the trigger date, whichever is earlier; and (iii) Scheme members with more than 2,000,000 deposit accounts will be required to submit all required information except the liability information within 48 hours, and submit the liability information within 72 hours from (1) estimated completion of necessary processing 2 to arrive at end-of-day ledger balances; or (2) 6:00 a.m. 3 on the day following the trigger date, whichever is earlier. Improving Payout Efficiency 4. A depositor who does not owe the failed bank any liability and has not given guarantee for any debt to the failed bank (pure depositor) is not subject to netting and, in principle, can be paid compensation straight away at minimal overpayment risk. Scheme members will therefore be required to provide additional information so that the pure depositors can be identified quickly. In addition, room for improvement has been observed in reporting of guaranteed debts and guarantor information, and comprehensive guidance has been supplemented in the Explanatory Note. 5. To prepare for paying compensation by methods other than mailing cheques, Scheme members will be required to report whether depositors use services such as ATMs, internet banking, and to provide the depositors address and mobile phone numbers. computer processes to bring the deposits, customer liabilities and off-balance sheet transactions current as of the close of business for that day. 3 It is estimated that the necessary processing of a bank to arrive at end-of-day ledger balance should normally be completed by about 6:00 a.m.

except liabilities and off-balance sheet transactions (liability information) within 12 hours, and submit the liability information within 36 hours from (1) estimated completion of necessary

6 Other amendments are related to streamlining the payout process, and improving clarity of the requirements to minimise data errors when loading the bank records in the payout system of the Board. These include: reporting the protection status of deposit products; providing extra information to enable easy identification of depositors/deposits to be withheld from straight-through payment pending further investigation or follow-up actions, such as deceased depositors, depositors not contactable, deposits subject to encumbrance, deposits held under trust, overdue principal balance, loan classification; and clarifying the common issues observed in compliance reviews in relation to providing interest information precisely as prescribed in the IS Guideline. 7. The amended IS Guideline and its Explanatory Note can be found at Enclosure 1(a) and 1(b), respectively. REVISION TO COMPLIANCE REVIEW PROGRAM Enhancing scope of compliance review conducted by the Board 8. To ensure that Scheme members maintain adequate records and procedures to permit complete, timely and accurate information submission in accordance with the IS Guideline, the Board will continue to conduct around six compliance reviews every year. Major changes to the program include requesting information for review on a random position date instead of a month-end date; strengthening the verification steps to ascertain Scheme members compliance in providing the required information in a timely manner; and requiring Scheme members to perform reconciliation to substantiate the completeness of the information extracted from their systems. The Scheme members selected for review will be notified at the beginning of the year, followed by a reminder provided about 1 to 2 months prior to the review but the exact date of the commencement of the review will not be notified. A subsequent information request will be issued giving the Scheme member 10 business days to prepare the information required for the Board s review. This is designed to test the readiness of Scheme members to meet the submission timeframe requirements of the IS Guideline. Please refer to Enclosure 2 for the revised Program.

These include: reporting the protection status of deposit products; providing extra information to enable easy identification of depositors/deposits to be withheld from straight-through payment

7 - 4 - Self-declaration and independent assessment program 9. In order to facilitate the Board to monitor whether the requirements set out in the IS Guideline have been complied with and to provide the Board with a reasonable assurance that Scheme members maintain systems and processes for continuous compliance, a self-monitoring mechanism will be introduced. In this connection, Scheme members will be required to: submit annually a declaration signed by the Chief Executive by the end of March every year to confirm whether or not requirements set out in the IS Guideline are met; and to complete an annual questionnaire; and conduct an independent assessment by independent assessors, such as qualified internal or external auditors, and submit an auditors report on status of compliance with the IS Guideline once every 3 years. 10. A program guide has been developed for assessors engaged in the independent assessment. The assessment scope should cover overall control environment, operational controls and IT controls to ensure compliance with the IS Guideline. Scheme member should submit to the Board an independent assessment report covering the assessment results, material findings and remediation action plan following the assessment. Please refer to Annex A and Annex B to Enclosure 2 for the Program Guide and Self-declaration template respectively. 11. To facilitate the Board s planning of compliance reviews and to maintain payout readiness, Scheme members are required to complete a questionnaire, in relation to depositor profile, banking products and system information. The questionnaire should be returned at the same time with the annual declaration for that year. Please refer to Annex C to Enclosure 2 for the Questionnaire template. TIMELINE FOR IMPLEMENTATION Amendment to the IS Guideline 12. Scheme members should have their systems and records ready to achieve compliance with all requirements except Part (C) and Part (E) of the Guideline before the end of June 2014, and with the requirements of Part (C) and Part (E) of the Guideline before the end of September In view of large Scheme

maintain systems and processes for continuous compliance, a self-monitoring mechanism will be introduced.

8 - 5 - members may need to expend greater amount of effort to comply with the amended requirements, large Scheme members having more than 500,000 deposit accounts or a Scheme member belonging to the same group of companies of such Scheme members should achieve compliance with the Guideline not later than the end of December For the avoidance of doubt, Scheme members should continue to comply with the requirements set out in the 2009 Guideline before it is amended until they can meet the new requirements in the amended Guideline. Compliance Review Program 13. The Board will adopt the revised compliance review program commencing 2014, and expect return of the first annual declaration and questionnaire by Scheme members in March For the avoidance of doubt, Scheme members receiving a notification from the Board in 2013 to be subject to a compliance review will be reviewed according to the requirements set out in the 2007 Compliance Review Program even though the review may only be completed in Hong Kong Deposit Protection Board September 2013

For the avoidance of doubt, Scheme members should continue to comply with the requirements set out in the 2009 Guideline before it is amended until they can meet the new requirements in the amended

HONG KONG DEPOSIT PROTECTION BOARD. Revised September 2013

HONG KONG DEPOSIT PROTECTION BOARD. Revised September 2013 HONG KONG DEPOSIT POTECTION BOAD GUIDELINE ON INFOMATION EQUIED FO DETEMINING AND PAYING COMPENSATION ISSUED UNDE SECTION 8(1) OF THE DEPOSIT POTECTION SCHEME ODINANCE evised September 2013 Introduction