Bank Finance and Regulation Survey. HONG KONG Deacons

Transcription

1 Bank Finance and Regulation Survey HONG KONG Deacons CONTACT INFORMATION Simon Deane Deacons 5 th Floor, Alexandra House Central, HONG KONG simon.deane@deacons.com.hk I. BANKS AND FINANCIAL INSTITUTIONS SUPERVISION 1. Applicable laws and regulations. Provide a list of the main laws and regulations that refer to the supervision and control of banks and financial institutions. Give a brief summary of the substance of each of them. The following are a list of the main laws and regulations that refer to the supervision and control of banks and financial institutions: Banking Ordinance (Cap. 155) ( BO ). The BO makes provision for the regulation of the taking of money deposits from the public in Hong Kong. The BO sets up a scheme for the licensing of three types of deposit taking financial institutions: banks, restricted license banks ( RLB ) and deposit-taking companies ( DTC ) (collectively, authorized institutions ). The BO is supported by subsidiary legislation enacted under it. The Hong Kong Monetary Authority ( HKMA ) (see below, Question 2) also publishes detailed guidelines governing the business practices of authorized institutions. While these guidelines do not have the force of law, they are indicative of the HKMA s interpretation of the BO, and the manner in which its provisions are likely to be enforced.

2 1.2. Securities and Futures Ordinance (Cap. 571) ( SFO ). The SFO provides the legal framework for the regulation of financial products, the securities and futures markets and the securities and futures industry in general. The SFO provides for a licensing regime for market participants, administered by the Securities and Futures Commission ( SFC ) (see below, Question 2), and also regulates the operators of securities and futures markets and the offer of investment products to the public, and establishes an investor compensation scheme. There are also provisions to combat market misconduct. The SFO is supported by a variety of subsidiary legislation. The SFC also issues codes, guidelines and circulars on a range of relevant matters, which are consolidated in the SFC s Regulatory Handbook Insurance Companies Ordinance (Cap. 41) ( ICO ). The ICO regulates the carrying on of insurance business in Hong Kong. It provides for the appointment of the Office of the Commissioner of Insurance ( OCI ). The Commissioner is conferred with powers to authorise, and intervene in respect of, insurers and insurance intermediaries. There is subsidiary legislation enacted under the ICO. The Insurance Authority also publishes guidelines and circulars indicating the manner in which he will administer the provisions of the ICO Mandatory Provident Fund Schemes Ordinance (Cap. 485) ( MPFSO ). The MPFSO establishes the framework for the establishment of private mandatory provident fund schemes for the purpose of financial protection on retirement. It provides for the appointment of the Mandatory Provident Fund Schemes Authority ( MPFS Authority ) who oversees the regulatory regime under the MPFSO. There is subsidiary legislation enacted under the MPFSO, and the MPFS Authority issues codes, guidelines and circulars governing mandatory provident fund schemes Occupational Retirement Schemes Ordinance (Cap. 426) ( ORSO ). The ORSO establishes a registration system for operators of voluntary occupational retirement schemes ( ORS ). The MPFS Authority also assumes the role of the Registrar of Occupational Retirement Schemes in administering the provisions of the ORSO. There is subsidiary legislation enacted under the ORSO, and the MPFS Authority currently issues circulars regarding the operation of the registration system Exchange Fund Ordinance (Cap. 66) ( EFO ). The EFO makes provision for the establishment and management of the Exchange Fund and the employment of its assets in Hong Kong. The HKMA (see below, Question 2) is appointed under the EFO to manage the Exchange Fund under powers delegated by the Financial Secretary Money Lenders Ordinance (Cap. 163) ( MLO ). The MLO provides for the control and regulation of money lenders and money-lending transactions in Hong Kong. It establishes a system of licensing of money lenders, and the appointment of the Registrar of Money Lenders, whose functions are currently carried out by the Registrar of Companies. The MLO also provides protection and relief against excessive interest rates.

3 1.8. Organised and Serious Crimes Ordinance (Cap. 455) ( OSCO ), Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405) ( DTRPO ) and United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) ( UNATMO ). The OSCO, DTRPO and UNATMO are the primary laws addressing money laundering in Hong Kong. The DTRPO provides for the tracing, confiscation and recovery of the proceeds of drug trafficking and creates an offence for money laundering in relation to such proceeds. The OSCO extends the offence of money laundering to cover the proceeds of indictable offences. Additionally, the UNATMO implements the United Nations Security Council resolution 1373 and certain of the Special Recommendations on Terrorist Financing of the Financial Action Task Force. The HKMA has also issued a detailed guidance to authorized institutions on the prevention of money laundering. Although the guideline does not have binding legal force, all authorized institutions are expected to have in place systems which enable them to comply. Further, an Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance is currently under consideration by the Hong Kong Government although it may not be passed into law for a while yet Deposit Protection Scheme Ordinance (Cap. 581). (See below, Question 9) Personal Data (Privacy) Ordinance (Cap. 486). (See below, Questions 12-14) 2. Entities/Authorities in charge of control and supervision. Purposes, powers and functions of each of them/their organization and structure (i.e. public or private, independency or body of the Government to which they belong, size, etc.) 2.1. Hong Kong Monetary Authority The HKMA is a government authority appointed under the EFO by the Financial Secretary, and plays the roles of central bank, manager of the Exchange Fund and regulator of the banking industry. The HKMA was established on 1 April 1993 by merging the Office of the Exchange Fund and the Office of the Commissioner of Banking. The stated policy objectives of the HKMA are: 1) to maintain currency stability within the framework of the Linked Exchange Rate system; 2) to promote the stability and integrity of the financial system, including the banking system; 3) to help maintain Hong Kong s status as an international financial centre, including the maintenance and development of Hong Kong s financial infrastructure; and 4) to manage the Exchange Fund.

4 The HKMA s central banking functions and powers derive from the EFO. The EFO establishes the Exchange Fund under the control of the Financial Secretary, and requires the HKMA to assist the Financial Secretary in the performance of his functions under the EFO, and to perform functions delegated by the Financial Secretary or imposed on him by any other Ordinance. The Exchange Fund s primary purpose is to protect the currency of Hong Kong under the direction of the Financial Secretary. This includes the protection of the Hong Kong Dollar s link to the US Dollar at the rate of US$1 = HK$7.80 under the Linked Exchange Rate System. Under the current division of functions and responsibilities, overall control of the financial system is retained by the Financial Secretary, who determines the monetary policy objective and sets policies for the maintenance of the stability and integrity of the financial system and the maintenance of Hong Kong s status as an international finance centre. Implementation of these policies is generally delegated to the HKMA, who operates with a high degree of autonomy and independence, despite being accountable to the Financial Secretary. The use and operation of the Exchange Fund is also delegated to the HKMA under the control of the Financial Secretary. The HKMA s functions and powers as regulator of Hong Kong s banking industry derive from the BO. The principal function of the HKMA is to promote the general stability and effective working of the banking system. The HKMA is responsible for the authorization of persons carrying on banking or deposit-taking business and has the power to revoke or suspend any such authorization granted. The HKMA also has regulatory powers to protect the interests of depositors and creditors. In certain circumstances, including where an authorized institution is unable to meet its obligations or becomes insolvent, the HKMA may intervene and require certain acts to be done, direct that advice be sought or direct that a Manager be appointed, in relation to the management of the authorized institution s affairs, business or property. The Chief Executive of the HKMA reports directly to the Financial Secretary. The Chief Executive is supported by three Deputy Chief Executives who are in charge of the following departments: a) banking supervision and related matters, b) monetary management and investment of Exchange Fund assets, and c) HKMA internal administration matters Hong Kong Association of Banks ( HKAB ) and Hong Kong Association of RLBs and DTCs ( DTCA ) The HKAB is an organization established under the Hong Kong Association of Banks Ordinance (Cap. 364) ( HKABO ) as a body corporate. Its members consist of all fully licensed banks in Hong Kong. The objects of the HKAB include: 1) furthering the interests of licensed banks and making rules for the conduct of the business of banking;

5 2) being a focal point for consultation on law reform, new legislation and regulatory matters affecting the business of banking; 3) providing information to members and third parties; 4) representing its members before any public body, committee, inquiry, court or tribunal; 5) acting as an advisory body on all matters concerning the business of banking; 6) providing a channel of communication between its members and third parties; 7) providing facilities for the clearing of cheques and other instruments for the processing of banking transactions presented by members; and 8) promoting best practices to its members. The DTCA is an organization whose members include authorized institutions other than licensed banks (i.e. RLBs and DTCs). Although participation is not mandatory, almost all RLBs and DTCs are members of the DTCA. The objectives of the DTCA include furthering the interests of RLBs and DTCs and serving as an intermediary between the Government and its members. The BO contains provisions which require the DTCA to be consulted when the relevant authorities are considering prospective legal and regulatory changes to the banking and finance industry in Hong Kong. The HKAB and DTCA have jointly published the Code of Banking Practice which is a non-statutory voluntary code, with which its members are expected to comply Securities and Futures Commission The SFC is an independent non-government statutory body, the constitution, powers and functions of which are defined by the SFO. As the regulator of the securities and futures industry in Hong Kong, its statutory regulatory objectives are to: 1) maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry; 2) promote understanding by the public of the operation and functioning of the securities and futures industry; 3) provide protection for members of the public investing in or holding financial products; 4) minimise crime and misconduct in the securities and futures industry; 5) reduce systemic risks in the securities and futures industry; and

6 6) 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 a number of operational divisions. The Corporate Finance Division is tasked with administering the securities legislation and the Codes on Takeovers and Mergers and Share Repurchases, overseeing the listing-related functions of The Stock Exchange of Hong Kong Ltd, and reviewing prospectuses for listed and unlisted companies as part of the dual filing regime for listing applicants under the SFO. The Licensing and Intermediaries Supervision Departments are responsible for the licensing of corporations and individuals carrying out activities regulated under the SFO (see Question 3, below), and the subsequent supervision and monitoring of licensed intermediaries. The Policy, China & Investment Products Division regulates the offer of investment products to the public, and the Enforcement Division monitors market activities, conducts investigations into irregularities involving potential misconduct, and enforces the securities and futures laws including taking disciplinary action where necessary. The members of the SFC consist of the Chairman, Chief Executive Officer ( CEO ) and Executive and Non-Executive Directors who are appointed by the Chief Executive of Hong Kong. The Chairman is primarily responsible for making decisions regarding the general direction, policies and strategies of the SFC, while the executive arm, headed by the CEO, is responsible for the running of the SFC on a day-to-day basis Hong Kong Exchanges and Clearing Limited ( HKEx ) The HKEx is a recognised exchange controller under the SFO and is the holding company of The Stock Exchange of Hong Kong Limited ( SEHK ), the Hong Kong Futures Exchange Limited ( HKFE ) and the Hong Kong Securities Clearing Company Limited ( HKSCC ). The SEHK and HKFE are recognised exchange companies under the SFO and they each operate and maintain the stock market and futures market respectively. The HKSCC provides clearing and settlement services for transactions on the SEHK. Additionally, each of the SEHK and HKFE operates their own clearing houses (the SEHK Options Clearing House Limited and the HKFE Clearing Corporation Limited, also subsidiaries of HKEx) to settle and clear stock options transactions on their respective Exchanges. The HKEx performs a self-regulatory role with respect to the operations of the SEHK and HKFE. It regulates listed companies by issuing and administering listing, trading and clearing rules (which are subject to the approval of the SFC), and provides trading, clearing and settlement, depository and nominee, and information services to Exchange participants. Additionally, persons wishing to carry on businesses dealing in securities and futures contracts in Hong Kong must not only comply with the licensing requirements under the SFO, but also with rules promulgated by the SEHK and HKFE on trading rights.

7 The HKEx is a company listed on its own stock market and is subject to the regulation of the SFC. While its subsidiaries are separate legal entities, decision-making is centralised with the HKEx board of directors. HKEx operations are divided into separate organizational units including the Listing Division, Trading Division, Clearing Division and Risk Management Division The Office of the Commissioner of Insurance The OCI is a statutory body established under the 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 OCI is responsible for the authorization of insurance companies and insurance intermediaries and is vested with regulatory powers. In respect of insurers, the OCI may impose restrictions on investments, require the transfer of custody of assets to an approved trustee, or even assume control of the insurer where there is cause for concern. It may also require the production of information for the examination of the affairs of insurance intermediaries. Where the OCI considers it to be in the public interest, it may even petition for an insurance intermediary to be wound up or declared bankrupt. The ICO does not empower the OCI to intervene in disputes between policy-holders and insurers or insurance intermediaries. However, disputes may be referred to the Insurance Claims Complaints Bureau, a body established by the insurance industry as a self-regulatory system of dispute resolution. The OCI is headed by the Commissioner of Insurance. There are three Assistant Commissioners of Insurance who are responsible for, a) general insurance business, b) long term insurance business, and c) policy and development. Additionally, the OCI is an ex officio member of the Insurance Advisory Committee which advises the Chief Executive of Hong Kong on matters relating to the insurance business in Hong Kong Mandatory Provident Fund Schemes Authority The MPFS Authority is established as a company under the MPFSO to oversee the administration and management of privately managed provident fund. Its responsibilities include ensuring compliance with the provisions of the MPFSO, registration of provident fund schemes, and approving and regulating persons as trustees of registered schemes. The MPFS Authority is also the Registrar of Occupational Retirement Schemes which administers the provisions of the ORSO. The MPFS Authority consists of a Managing Board, from which one of the executive directors is appointed by the Chief Executive of Hong Kong to be the Managing Director. The Managing Director is the administrative head of the MPFS Authority, and is responsible its daily operations. The Chief Executive of Hong Kong also appoints one of the non-executive directors to be the chairperson of the MPFS Authority, and the Managing Director also takes the role of deputy chairperson. The Managing Director is supported by a number of organizational units which oversee,

8 manage and implement the work of the MPFS Authority in the areas of supervision, member protection, regulation and policy and risk management. 3. Describe briefly the activities under supervision and give a list of the different types of licenses available Banking and Deposit-taking supervision The carrying on of banking business or deposit-taking business in Hong Kong is regulated under the BO. No banking business may be carried on except by a licensed bank, and no deposit-taking business may be carried on except by an authorized institution. The BO defines banking business as either or both of the following: 1) receiving from the general public money on current, deposit, savings or other similar account repayable on demand, or within less than 3 months, or with a period of call or notice of less than 3 months; 2) paying or collecting cheques drawn by or paid in by customers. Accordingly, the scope of regulation under the BO is quite limited, and does not extend to the regulation of lending and other provision of credit except for certain restrictions upon risk concentration (e.g. limits on exposure to certain entities and individuals) and capital and liquidity requirements. Lending and credit is regulated under the common law and by a range of other specific legislation, such as, in the case of lenders who are not authorized institutions, the Money Lenders Ordinance (Cap. 163) this ordinance requires persons carrying on money lending businesses to be licensed. The range of licenses available under the BO are banking licenses, restricted banking licenses, deposit-taking company registrations (see below, Question 6) and money broking licenses Securities supervision Generally, no person may carry on, or hold himself out as carrying on, a business in a regulated activity under the SFO, except for, a) corporations or authorized institutions licensed by the SFC ( licensed corporations and registered institutions respectively; and collectively, intermediaries ), or b) persons authorised to provide automated trading services for any regulated activities. The regulated activities are: 1) Type 1: dealing in securities; 2) Type 2: dealing in futures contracts; 3) Type 3: leveraged foreign exchange trading;

9 4) Type 4: advising on securities; 5) Type 5: advising on futures contracts; 6) Type 6: advising on corporate finance; 7) Type 7: providing automated trading services; 8) Type 8: securities margin financing; 9) Type 9: asset management 10) Type 10: providing credit rating services. The licensing regime under the SFO provides for the issuance of a single license which specifies each intermediary s permitted scope of business. In addition, individuals acting on behalf of intermediaries will be licensed as representatives of that intermediary, to which they will be accredited. More senior representatives of an intermediary must be approved by the SFC as responsible officers before the intermediary may carry on any regulated activity for which it is licensed. Licensed corporations are required to have at least 2 responsible officers approved, at least one of whom must be an executive director Insurance supervision Insurance products generally are governed by the common law. Entry into the insurance industry is regulated under the ICO. With a few exceptions (such as authorized institutions under the BO), Companies carrying on insurance business must be authorised and regulated by the OCI. In addition, insurance agents and insurance brokers are also subject to authorization by the OCI MPFS and ORS supervision Providers of MPFS and ORS services need to be licensed by the MPFS Authority to operate in Hong Kong. These products are subject to very detailed and comprehensive regulatory provisions. 4. Describe briefly non-regulated financial and banking activities. Financial and banking activities are regulated in Hong Kong.

10 5. Describe briefly non-permitted financial and banking activities and/or government monopolies. The Government in Hong Kong, through the HKMA, has authorised three commercial banks, namely Bank of China (Hong Kong) Limited, Standard Chartered Bank (Hong Kong) Limited and The Hongkong and Shanghai Banking Corporation Limited, to issue legal tender notes. This arrangement is set out in the Legal Tender Notes Issue Ordinance (Cap. 65). The issue of bank notes by any other bank is not permitted. II. BANKING ACTIVITIES 6. Different types of banking licenses. Activities permitted under each of them. Activities prohibited. As mentioned, Hong Kong has a three-tier banking system regulated by the HKMA, consisting of licensed banks, restricted license banks and deposit-taking companies, collectively known as authorized institutions under the BO. Each type of authorized institution is characterised by the range of deposit taking business it may conduct, as summarised below: 6.1. Licensed banks In Hong Kong, only licensed banks may conduct banking business, which is defined under the BO as (1) receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than 3 months or with a period of call or notice of less than 3 months; and/or (2) paying or collecting cheques drawn by or paid in by customers. Fully licensed banks can therefore engage in any usual banking business, such as accepting deposits, granting loans and advances, without any special restriction Restricted license banks RLBs are institutions which are not entitled to carry on the full range of banking business, and are excluded from the definition of bank under the BO. RLBs are typically merchant banks and investment banks, and may only take large deposits of over HK$500,000 or an equivalent amount in any other currency. This is the minimum deposit amount for each depositor, such that each customer holding a deposit with the RLB must maintain the aggregate amount of his deposits at HK$500,000 at all times. Further, they may not receive money on savings account, current account or chequing account, but may take short-term deposits, which are deposits with an original term to maturity of less than 3 months or with a period of call or notice of less than 3 months Deposit-taking company DTCs are restricted to taking only deposits over HK$100,000 or an equivalent amount in any other currency, with an original term of maturity of at least 3 months. As with

11 RLBs, each customer holding deposits with a DTC must maintain the aggregate of his deposits at this amount at all times. A DTC may not repay any deposit within a period of less than 3 months without the written permission of the HKMA. A DTC also may not receive money on savings account, current account or chequing account, and is not allowed to take short-term deposits. DTCs are usually finance companies engaged in the business of taking deposits, granting term loans, factoring, hire purchase and leasing Local representative offices In addition to the above three categories of authorized institutions, foreign banks may establish and maintain a local representative office ( LRO ) in Hong Kong with the approval of the HKMA. LROs must only operate from one business location, and are not permitted to carry on banking business. An LRO s activities are confined to representing the foreign bank of which it is an office, and it may perform intelligence gathering, marketing and liaison with the foreign bank s customers in Hong Kong. A foreign bank wishing to carry on banking or deposit-taking business must apply to the HKMA to be authorised as an authorized institution in Hong Kong. 7. Procedures to be followed and requirements to be met to obtain each of the different licenses. Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc. A company wishing to carry on business as a bank, RLB or DTC must apply for authorisation from the HKMA - the authority responsible for the authorisation, suspension and revocation of authorized institutions. The HKMA has a general discretion whether or not to grant authorisation to any applicant, provided that he must refuse authorisation of an applicant if any of the minimum requirements specified in the Seventh Schedule to the BO is not satisfied. Any company that obtains authorisation is expected to continue to comply with those requirements, and failure to do so will be grounds for revocation of authorisation. The general minimum requirements for all license applicants are summarised below: 1) Home supervision (for company incorporated outside Hong Kong). The applicant must be a bank that the HKMA is satisfied is adequately supervised by the relevant banking supervisory body. 2) Controllers. The HKMA must be satisfied that he knows the identity of each controller of the applicant. 3) Fit and proper. The HKMA must be satisfied that each person who is, or will be, a director, controller, chief executive or executive officer of the applicant is a fit and proper person to hold that particular position.

12 4) System of control for appointment of managers. The HKMA must be satisfied that the applicant has adequate systems of control to ensure that each person who is, or will be, a manager is a fit and proper person to hold that particular position. 5) Financial resources. The HKMA must be satisfied that the applicant has adequate financial resources (whether actual or contingent) for the nature and scale of its operations. Companies incorporated in Hong Kong must also maintain adequate capital to support their business. 6) Liquidity. The HKMA must be satisfied that the applicant maintains adequate liquidity to meet its obligations as and when they fall due, and a liquidity ratio of not less than 25% on average in each calendar month. 7) Adequate control of large exposures. The HKMA must be satisfied that the applicant will comply with the provisions of the BO relating to limitations on loans by and interests of authorized institutions. 8) Provisions. The HKMA must be satisfied that the applicant maintains adequate provision for depreciation or diminution in the value of its assets (including provision for doubtful debts), for liabilities and losses. 9) Systems. The HKMA must be satisfied that the applicant has adequate accounting systems and adequate systems of control. 10) Disclosure of information. For companies incorporated in Hong Kong, the HKMA must be satisfied that they disclose adequate information in relation to the state of their business, including capital and financial statements. 11) Integrity. The HKMA must be satisfied that the applicant s business is carried on with integrity, prudence and the appropriate degree of professional competence, and in a manner which is not detrimental to the interests of its depositors. 12) Share capital and asset base requirements. There are minimum requirements as to the paid up share capital and asset base of each type of authorized institution. Banks must also maintain a minimum level of customer deposits. 8. Legal structure admitted/requested for each of the different licenses. a) Different types of legal structures that may be used, i.e. corporations, limited liability partnership, branches, subsidiaries, etc. Only a body corporate may apply to the HKMA for authorization to carry on business as any category of authorized institution. It follows that other business structures such as partnerships and unincorporated entities may not be authorized institutions.

13 A company incorporated in Hong Kong seeking a banking license will only be granted such a license if it has been an RLB or DTC for at least three continuous years. The HKMA s policy in respect of overseas-incorporated companies seeking a banking license is that such companies may only enter in the form of a branch. However, there is provision under the BO allowing an overseas-incorporated bank to convert its branch operations into a subsidiary, provided that the HKMA is satisfied that a) it is a subsidiary of a foreign bank that has held a banking license for at least three continuous years, and b) the subsidiary can meet the relevant capital and customer deposit requirements (see below, Question 8(e)). For companies seeking to be licensed as an RLB, the HKMA s policy is that such presence may take the form of either a branch or a subsidiary. The HKMA will generally only grant DTC registrations to Hong Kong incorporated subsidiaries. b) Capital requirements and own fund rules. Please see Question 7, above. c) Transfer of control and ownership regime. Is it regulated? The ownership and management of authorized institutions is regulated under the BO. Authorized institutions may not enter into any arrangement or agreement for the sale of its banking business (in the case of banks) or deposit-taking business (in the case of RLBs and DTCs) without the HKMA s prior written consent. Additionally, written notice must be made to the HKMA where any authorized institution enters into an arrangement or agreement for the sale of any part of its business, or reconstructs any of its capital. These rules only apply to authorized institutions incorporated in Hong Kong. The HKMA also has the power under the BO to regulate persons who are, or are becoming controllers of authorized institutions. Generally speaking, any person wishing to become a controller of an authorized institution must serve notice on the HKMA and obtain his consent before he may assume control. d) Personal requirement and restrictions that may apply in each case for officers, directors, shareholders, etc. The HKMA has the power to regulate the management of authorized institutions. All authorized institutions are required to appoint a chief executive and at least one alternative chief executive ordinarily resident in Hong Kong. Any person becoming a chief executive of any authorized institution, or a director of an authorized institution incorporated in Hong Kong, must obtain the HKMA s prior consent. Consent will not be given unless the HKMA is satisfied that the person is fit and proper to become such a chief executive or director.

14 Additionally, authorized institutions which have been registered by the SFC for carrying on securities and futures related business under the SFO are required to appoint at least 2 executive officers to supervise those activities. Persons becoming executive officers are required to obtain the HKMA s prior written consent. Less senior employees of authorized institutions are not subject to the same scrutiny by the HKMA as above. However, the HKMA must be notified of appointments of managers within any authorized institution within 14 days of such appointment. e) Special requirements/restrictions for foreigners either individual or legal entities (including short description of WTO/GATS commitments and exemptions). Generally, it is not possible for a foreign bank to incorporate a Hong Kong company and apply immediately for a banking license through this company since one of the requirements for a local applicant is that it must have been an RLB or DTC for at least 3 continuous years (see above, Question 8(a)). Accordingly, the options available to a foreign applicant for a banking license are: 1) the foreign applicant applying itself for authorization to carry on banking business; 2) the foreign applicant or local subsidiary applying for authorization to carry on deposit-taking business as a RLB; 3) a local subsidiary applying for authorization to carry on deposit-taking business as a DTC (although the HKMA has indicated informally that it is winding down the DTC tier of authorized institutions); 4) if a bank, the foreign applicant setting up a LRO; or 5) the foreign applicant taking over a local authorized institution. It is the general policy of the HKMA that a foreign bank should maintain a prior presence in Hong Kong before it may obtain a full banking license. However, the HKMA may, in certain limited circumstances, allow a well-established and financially sound foreign bank to obtain a full banking license for its branch operations in Hong Kong immediately. 9. Is there Deposit Insurance? Is it mandatory or based on self-regulation? Provide a brief explanation of how it operates. The Deposit Protection Scheme (the DPS ) has been established under the Deposit Protection Scheme Ordinance (Cap. 581) to provide compensation to eligible depositors in respect of deposits maintained with banks that are members of the DPS. The DPS is administered by an independent statutory body called the Hong Kong Deposit Protection Board (the DPS Board ). Every licensed bank in Hong Kong is a member of the DPS and is required to make contributions to the DPS Fund. However, overseas-incorporated banks may be exempted from membership if the deposits taken by their Hong Kong offices are already covered by a similar deposit protection

15 scheme in the country of their incorporation. RLBs and DTCs may not be members of the DPS, and as such, deposits held with such institutions are not protected. The target size of the DPS Fund is 0.25% of the aggregate of the protected deposits held by all DPS member banks. Accordingly, the DPS Board assesses each DPS member s contribution by reference to the amount of protected deposits it holds, as well as the supervisory rating assigned to it by the HKMA. Deposits in any currency held with a DPS member bank are protected up to HK$500,000 for each depositor per bank. Generally, any type of deposit may be protected except for certain special types of deposit including the following (which are expressly excluded): term deposits maturing in more than 5 years, structured deposits (such as foreign-currency linked and equity-linked deposits), secured deposits (such as deposits used as collateral to secure a loan and other credit facilities), bearer instruments (such as bearer certificates of deposit) and offshore deposits. 10. Interest rate. Is it regulated? Should the answer be affirmative, explain briefly its regulatory framework. The interest rate in Hong Kong has been deregulated since July Banks now set their own deposit interest rates by reference to the market rate. 11. Sanctions (civil, administrative, or criminal) for violations of the legal and regulatory dispositions. The BO creates numerous offences for the contravention of its provisions by authorized institutions and persons who make up the senior management of such authorized institutions. The penalties under these offences include fines and sentences of imprisonment. Additionally, the HKMA is empowered to impose a number of sanctions on authorized institutions which fail to comply with their obligations. It may: 1) revoke or suspend licenses; 2) appoint a Manager to look after certain business and affairs of an authorized institution; 3) make investigations and perform examinations into the business and affairs of an authorized institution 4) take disciplinary action on individuals who are guilty of misconduct or who the HKMA is of the opinion that are no longer fit and proper in their capacity as a relevant individual in relation to an authorized institution The HKAB may also take disciplinary action against its members.

16 III. BANK SECRECY LAWS Copyright Lex Mundi Ltd Is clients information protected? Are there any restrictions for its use? Under the common law, banks generally have a duty to maintain secrecy in relation to all customers information, and this is an implied term in the banker-customer contract. Additionally, individual customers personal data (not companies) are protected under the Personal Data (Privacy) Ordinance (Cap. 486) ( PDPO ). The PDPO imposes restrictions on the use of personal data (see Question 13, below). 13. Should answer to number 12) be affirmative, please describe the legal framework, i.e. scope, limitation, exceptions Scope The PDPO protects personal data, which is defined to include any data relating directly or indirectly to a living individual (the data subject ), from which it is practicable to ascertain the identity of the individual. Any person (the data user ) (including banks and other financial institutions) who controls the collection, holding, processing or use of personal data is subject to the provisions of the PDPO. Data users must comply with six Data Protection Principles contained in Schedule 1 of the PDPO, summarised below: 1) Principle 1-purpose and matter of collection of personal data. Personal data must be collected for only lawful purposes directly related to a function or activity of the data user, and only if necessary for those purposes. The means of data collection must also be lawful and fair in the circumstances. A data user must inform data subjects of certain matters on or before collection including the purpose for which the data are to be used, to whom data may be transferred and data subjects right to request access to and correction of the data. 2) Principle 2-accuracy and duration of retention of personal data. Data users should ensure that personal data are accurate regarding the purpose for which it is to be used and not keep data longer than is necessary for the fulfillment of that purpose. 3) Principle 3-use of personal data. Personal data must be used only for the purposes for which they were collected or a directly related purpose, unless the express consent of the data subject is given voluntarily. 4) Principle 4-security of personal data. Personal data must be protected against unauthorised or accidental access, processing, erasure or other use.

17 5) Principle 5-information to be generally available. Data users must ensure that their policies and practices, information about the kind of personal data held, and the main purposes for which they are to be used are available to the public. 6) Principle 6-access to personal data. Data subjects are entitled to ascertain whether a data user holds their personal data, and if so, to have access to and to correct those data. The PDPO also governs the use of personal data in direct marketing Exceptions There are a number of exemptions available which exclude the application of particular Data Protection Principles under the PDPO. However, they are not blanket exemptions, so that even if an exemption applies, other relevant provisions of the PDPO not covered by specific exemption categories are still applicable. Categories of use which may be exempted include the use of personal data for domestic purposes, preventing crime and other improper conduct, news activities and statistics and research purposes. 14. Sanctions (civil, administrative, or criminal) for violations. The PDPO establishes the office of the Privacy Commissioner for Personal Data (the Commissioner ). Any contravention of the PDPO, including breaches of the Data Protection Principles, may be investigated by the Commissioner, but a breach of the Data Protection Principles alone does not constitute a criminal offence. If there is a contravention, the Commissioner may attempt to resolve the matter by mediation, or if he is reasonably satisfied that the contravention is continuing or likely to be repeated, an enforcement notice may be issued requiring the data user to take steps remedying the contravention. Non-compliance with an enforcement notice is a criminal offence. Contraventions which constitute a criminal offence under the PDPO are referred by the Commissioner to the Secretary for Justice for prosecution. A data subject may also institute civil proceedings for compensation where damage has been suffered as a result of a contravention of the PDPO. Further, a breach of any provision of the PDPO other than the Data Protection Principles is an offence, and penalties range from fines of up to HK$10,000 to fines of HK$50,000 and imprisonment for 2 years.