Panel on Financial Affairs (Minutes) 11 Sept 97

Provisional Legislative Council

PLC Paper No. CB(1) 319
(These minutes have been
seen by the Administration.)

Ref : CB1/PL/FA/1

Panel on Financial Affairs

Minutes of Meeting held on Tuesday, 11 September 1997, at 4:30 p.m. in Conference Room B of the Legislative Council Building

Members present :

Hon Paul CHENG Ming-fun, JP (Chairman)
Hon NGAN Kam-chuen (Deputy Chairman)
Hon NG Leung-sing
Hon Eric LI Ka-cheung, JP
Dr Hon David LI Kwok-po, JP
Hon Henry WU
Hon CHAN Choi-hi
Hon CHIM Pui-chung
Dr Hon LAW Cheung-kwok

Members absent :

Hon Ronald ARCULLI, JP
Dr Hon Philip WONG Yu-hong

Public officers attending :

Item IV

Mrs Rebecca LAI, JP: Secretary for Financial Services (Acting)
Mrs Pamela TAN, JP: Director, Mandatory Provident Fund Office
Mr Frederick W H HO, JP: Commissioner for Census and Statistics
Mr G W E Jones, JP: Registrar of Companies
Mr Norman CHAN, JP: Deputy Chief Executive; Hong Kong Monetary Authority
Mr H Y CHEUNG: Acting Government Economist
Mr Alan C K WONG, JP: Commissioner of Insurance
Mr J S Bush: Acting Official Receiver

Item V

Mrs Rebecca LAI, JP: Secretary for Financial Services (Acting)
Mr Michael WU, JP: Chairman; Securities and Futures Commission (Acting)
Mr Alex TSUI: Chief Executive, Stock Exchange of Hong Kong

Item VI

Mr K C KWONG, JP: Secretary for the Treasury
Mr Patrick CHIM: Principal Assistant Secretary for the Treasury (E)
Mr Alan SIU: Principal Assistant Secretary for the Treasury (R)

Clerk in attendance :

Ms Estella CHAN,: Chief Assistant Secretary (1)4

Staff in attendance :

Mr Andy LAU,: Senior Assistant Secretary (1)6

I.Confirmation of minutes
(PLC Paper No. CB(1) 201)

The minutes of the meeting held on 22 July 1997 were confirmed.

II.Information papers issued since last meeting
(PLC Paper No. CB (1) 74 - Regional Monitor - Issue No. 3, June 1997
PLC Paper No. CB(1) 163 - Regional Monitor - Issue No. 4, July 1997)

2.Members noted that two information papers had been issued by the Stock Exchange of Hong Kong through the Secretariat.

III.Items for discussion for the next meeting scheduled for 6 October 1997

3.Members proposed the following items for discussion at the forthcoming meeting on 6 October 1997:

Financial positions and future monitoring of banks in Hong Kong after the recent currency crisis in Asia;
Red Chip Index Futures trading prospect and safeguards for investors;
Briefing on background and objective of the Code of Conduct for fund managers prepared by the Securities and Futures Commission; and
Review of Financial Secretary's authority in using the Exchange Fund.

4.The Chairman advised that in order to allow sufficient time for discussion, the items would need to be prioritized and the Administration would be consulted in this regard.

(Post meeting note: With the concurrence of the Chairman, members were advised after the meeting that items

(a) to (c) would be included in the agenda for the meeting on 6 October 1997. Item (d) had been included in the list of outstanding items for discussion by the Panel).

5.The Chairman informed that after the Chief Executive's Policy Address on 8 October 1997, the Panel would need to hold a special meeting to receive briefings by the Secretary for Financial Services and the Secretary for the Treasury. Members would be informed of the details for the meeting once available.

6.The Panel expressed interest in the staging of the 1997 World Bank Group/International Monetary Fund annual meetings in Hong Kong and requested the Clerk to approach relevant parties to obtain the necessary information for participation.

(Post meeting note: The registration forms, programmes of seminars and meeting schedules for the event were forwarded to members on 16 September 1997).

IV.Briefing by Secretary for Financial Services

(PLC Paper No. CB(1) 220(01))

7.At the invitation of the Chairman, the Secretary for Financial Services (Acting) (SFS (Atg)) briefed members on the main policy objectives of the Financial Services Bureau (FSB) as set out in the information paper.

Securities and futures

8.SFS (Atg) advised that the regulatory regime for securities and futures comprised three tiers. The first tier consisted of front-line regulators such as the Stock Exchange of Hong Kong (SEHK) which fulfilled its regulatory functions through promulgation and enforcement of rules. At the second tier, supervision of the operation of the stock and futures exchanges, clearing companies and registered market intermediaries, and the exercise of regulatory powers vested by the relevant legislations, rested with the Securities and Futures Commission (SFC). The Financial Services Bureau, being the third tier, dealt with policy and legislative matters relating to securities. The regulation of the securities and futures market was governed by 11 Ordinances, which aimed to provide a favourable environment in the industry and a level playing field for market participants. In this regard, the Bureau would regularly review the Ordinances in the light of changing circumstances and introduce suitable amendments to cope with the changes in market.

9.As to whether SFC was subject to the supervision of the Administration, SFS (Atg) advised that the statutory power of SFC was bounded by the related Ordinances enacted by the legislature. A number of monitoring mechanisms were in place to control the activities of SFC. These included the appointment of executive directors and non-executive directors by the Chief Executive; the presentation of annual reports to the Financial Secretary; and the approval of the annual budget by the Administration.

10.On the progress of the proposed composite Securities and Futures Bill, SFS (Atg) advised that SFC had issued a consultation paper in April 1996. Comments were received and being considered by the SFC and the Administration. As the Bill touched on some fundamental principles which would have significant policy implications, the Administration needed to examine it carefully in collaboration with the relevant parties. The Administration would put forward proposals for consideration by the Council in due course.

11.Regarding the inclusion of the SEHK in the schedule of Public Bodies under the Prevention of Bribery Ordinance, SFS(Atg) advised that the Independent Commission Against Corruption was examining the subject matter in consultation with parties concerned.

Retirement scheme

12.On the possibility of reconsidering the Central Provident Fund scheme, SFS (Atg) advised that in discussing the selection of a retirement scheme for the workforce in Hong Kong, the Administration had already examined the feasibility of the various options including the Central Provident Fund scheme. Having examined all the relevant factors including views expressed by the general public and the legislature, the Mandatory Provident Fund (MPF) scheme was finally adopted upon the enactment of the MPF Schemes Ordinance in August 1995. The Director, MPF Office added that the development of the MPF System had been completed after wide consultation with the legislature, the industries, professional and other interested bodies; and drafts of the required MPF subsidiary legislation would be submitted for the formal legislative enactment process shortly.

Supervision of banking and monetary matters

13.Mr NG Leung-sing declared interest as a practitioner in the banking sector.

14.Regarding the demarcation of duties and responsibilities between FSB and HKMA over the supervision of banking and monetary matters, SFS (Atg) advised that in respect of banking supervision, HKMA was the front-line regulator with its authority derived from the Banking Ordinance whereas FSB was responsible for the related policy and legislative matters. In this regard, FSB would be constantly reviewing the regulatory framework to cater for new developments in Hong Kong and overseas. As for monetary management, the Deputy Chief Executive, Hong Kong Monetary Authority (DCE/HKMA) advised that HKMA was responsible for achieving the primary policy objective of maintaining the stability of the Hong Kong dollar under the linked exchange rate system. To facilitate members' understanding, SFS (Atg) undertook to provide an organization chart depicting the responsibilities of HKMA and FSB.(Post meeting note: The information was forwarded to members vide PLC Paper No. CB(1) 316.)

SFS (Atg)

15.Regarding the demarcation of duties and responsibilities between the Commissioner for Narcotics and Secretary for Financial Services on matters relating to money laundering, SFS (Atg) advised that since money laundering was closely related to the activities of drug trafficking, the Commissioner for Narcotics, being entrusted with the responsibilities for the suppression of drug abuse, drug trafficking and drug money laundering, would be directly responsible for the related policy and legislation matters. FSB, on the other hand, would contribute to the work of anti-drug trafficking in an indirect manner. For example, FSB would seek to prevent authorized financial institutions from involving in money laundering by issuing appropriate codes of conduct or by means of legislation. To facilitate members' understanding, SFS (Atg) would provide further information in this regard.(Post meeting note: The information was forwarded to members vide PLC Paper No. CB(1) 316.)

SFS (Atg)

16.Regarding the high fees and charges by banks for handling applications for property loans, DCE/HKMA advised that there was very keen competition in the banking sector as reflected in the recent curtailment of interest rates in respect of property loans. In selecting financial institutions for property loans, customers would not solely look at the handling fees but also the mortgage interests. Given the keen competition, there was no sign of the property loans market being monopolised in the banking sector. A member opined that it would be beneficial for banks to formulate their individual company policies in respect of fees and charges for property loans in the light of market changes.

17.On the monitoring of banks' engagement of debt collecting agencies for recovery of loans and advances, SFS (Atg) advised that HKMA had recently issued the Code of Banking Practice to the banking sector and other authorized institutions which covered, inter alia, guidelines for recovery of loans and advances by the industry. The Security Bureau and the Police were monitoring the situation. The Administration would assess the effectiveness of the Code with time and consider if any further measures were necessary.

18.On extending the deregulation of retail deposit interest rates to cover all time deposits below seven days, DCE/HKMA advised that the subject matter would require very careful examination, failing which would adversely affect the stability of the banking sector. HKMA would keep monitoring the situation.

Fire insurance for mortgaged properties

19.Regarding the policy governing the purchase of fire insurance for a mortgaged property, DCE/HKMA advised that all major banks required mortgagors to take out fire insurance policies on mortgaged properties as a collateral. This was to protect banks against the credit risks associated with these loans. At present, the loan value was commonly taken as the sum insured. HKMA supported the requirement for fire insurance on mortgaged properties as one of the prudent lending criteria for property loans. Regarding the amount and the nature of risks to be insured, the Commissioner of Insurance advised that these should be a matter of mutual agreement between institutions and their customers.

V.Suspension of stock trading and its consequences
(PLC Paper No. CB(1) 222(02))

20.At the invitation of the Chairman, the Chief Executive, Stock Exchange of Hong Kong (CE/SEHK) and the Chairman, Securities and Futures Commission (Acting) (C/SFC (Atg)) briefed members on the circumstances leading to the suspension of listed companies and related matters as set out in the paper. They said that the objective of the suspensions was to ensure a fair, orderly and fully informed market in order to preserve the integrity of the market and to protect the investing public. In carrying out their duties, both SEHK and SFC were keenly aware of the need for and the desirability of maintaining a continuous market. Every effort was therefore made to strike a balance between the opposing requirements and to keep trading suspensions to the minimum required. In brief, there were three major reasons for suspension. Firstly, suspensions might be warranted when listed companies were involved in material corporate activities whereby price-sensitive information could not be disclosed in a timely fashion. Secondly, suspensions might be necessary when ther were fundamental concerns about the company's suitability for continued listing and/or trading. Lastly, suspension might be necessary if unexplained unusual movements in the price or trading volume of the company's listed securities were identified.

21.Whilst supporting the move to take regulatory actions to tackle insider trading or market manipulation, a member had reservations about prolonged suspension of listed companies which would adversely affect the interests of the investing public, brokers companies and the listed companies themselves. He opined that stock trading of a suspended company should be resumed if adequate information in respect of the status of the company and the progress of inquiries made by the regulatory bodies could be provided to the market.

22.In reply, C/SFC (Atg) advised that the prime concern of SFC was to protect the interest of investing public. Where SFC was not satisfied that the market in the stock was fair and orderly, it would be in breach of the statutory responsibility of SFC if such a stock was permitted to resume trading under such circumstances. To disclose information on listed companies without establishing all the necessary facts before the completion of inquiries would also jeopardize the reputation of the companies, bearing in mind unusual price/volume movements might not always be attributable to the companies themselves.

23.Regarding the question of overlapping responsibilities of SEHK and SFC, C/SFC (Atg) advised that SEHK and SFC had respective statutory responsibilities for the market and coordinated closely on questions of suspensions. There were clear demarcations of duties and responsibilities for the two organizations as set out in the memorandum signed between them. In essence, SEHK was the front-line regulators whereas SFC was responsible for supervising and monitoring the activities of SEHK. Where necessary, the delegated authority granted to SEHK could be revoked.

24.Regarding the availability of control mechanisms to avoid abuse of power, C/SFC (Atg) advised that SFC was under proper control through separation of powers. Being an enforcement agent, SFC could only act within the statutory power granted by the legislature. The decisions to suspend listed companies were also subject to judicial review and hearings by the Listing Committee. CE/SEHK added that similar appeal mechanisms were also available in SEHK.

25.On the internal control mechanism governing the suspension of listed companies, C/SFC (Atg) advised that a working team, comprising an Executive Director, a Senior Director and two Directors, was deployed to examine the day-to-day unusual movements in the price or trading volume of listed companies. They would take follow-up investigation and compile bi-weekly reports covering all necessary details on the inquiries and the status of companies under suspension during the reporting period. Such reports would be passed on to other Executive Directors and heads of divisions for review. In this regard, regular meetings would be conducted on a bi-weekly basis. For those companies under prolonged suspension as a result of fundamental concerns raised by SFC, monthly reports would also be required to increase transparency.

26.On the way to improve dissemination of information on suspension of stocks to the public to increase transparency, CE/SEHK advised that presently, the general public could receive updated information through the Teletext system of SEHK or telephone hotline of the company. SEHK would continue to explore other means to improve the dissemination of information. However in order to preserve the reputation of companies under suspension, it would not be appropriate to provide information on the classification of suspended cases according to the reasons for suspension until conclusions could be drawn from investigations. Regarding suspensions due to material corporate activities of companies, it was not necessary to make separate reports to the public as the companies would make the announcements themselves before stock trading was resumed.

27.On the need for brokers to provide information on their clients upon requests, C/SFC (Atg) advised that a range of measures had already been introduced to facilitate prompt retrieval of information and to minimize disturbance caused to brokers. These included computer analysis of trading patterns to target brokers for their clients' information and requests for data in electronic form wherever possible. He confirmed that brokers would be exempted from the provisions of the Personal Data (Privacy) Ordinance. As such, they could disclose information on their clients to the regulatory bodies as required. However, brokers companies could advise their clients of such an arrangement at the outset when accounts were opened. He confirmed that such information would be used purely for investigation and would not be disclosed for other purpose as SFC was subject to the secrecy provisions of the SFC Ordinance.

28.Regarding the penalty for the offence of insider trading, a member opined that the present statutory penalty was not severe enough to deter such offence. In reply, SFS(Atg) advised that they would review the penalty in due course.

VI.Briefing by Secretary for the Treasury
(PLC Paper No. CB(1) 202 (01))

29.The Secretary for the Treasury (S for Tsy) briefed members on the policy objectives of Finance Bureau and explained some of its major areas of work in the year ahead.

Trading Funds
30.Regarding the programme to set up additional trading funds, S for Tsy advised that for the time being, there was no immediate plan to set up additional trading funds but consideration would be given to converting business-oriented Government activities into trading funds where appropriate.

Land Fund

31.On the disposal of the Land Fund, S for Tsy advised that assets of the Land Fund had been transferred to Hong Kong Special Administrative Region Government's General Revenue Account in accordance with the provisions of the Public Finance Ordinance. As such, the Land Fund had become part of the fiscal reserves. As to when and how the reserves would be utilized, S for Tsy advised that such would depend on the particular circumstances of the time but the Administration would welcome members' views in this regard.

32.As to whether it was feasible to set up a new Fund by injecting monies from the Land Fund to finance public expenditure, S for Tsy advised that unless there was a concrete proposal for the usage of the new Fund, it would be difficult for the Administration to assess the feasibility of such a proposal. However as a matter of principle, it would not be acceptable if such a proposal was intended to by-pass the normal financial control over expenditure. He drew Members' attention to Article 107 of the Basic Law which stipulated that the budget, over time, should not grow faster than the economy as a whole.

Stamp duty on securities

33.On possible reduction of stamp duty on securities to increase the competitiveness of the market, S for Tsy advised that each year the Administration would review the levies of all taxable items. In considering any changes, the Administration would take into account the financial implications of such proposals and also their impacts on the overall economy.

Financing of statutory bodies

34.As to whether there was any conflict for statutory bodies in achieving both the social and business objectives simultaneously, S for Tsy advised that this would vary, depending on the actual circumstances. In the case of Housing Authority, as its primary objective was to provide subsidised public housing to the community, it might not be appropriate to adhere strictly to commercial principles under such circumstances. As to the provision of non-residential facilities, the authority could adopt commercial principles where appropriate. On the financing of the Housing Authority, he advised that the government provided land on concessionary terms and finance, where necessary, to enable the authority to meet the government's public housing targets.

35.Regarding the targets of the Mass Transit Railway Corporation, S for Tsy advised that the company was established for the principal purpose of constructing and operating a mass transit railway system on prudent commercial principles, having regard to the reasonable requirements of the public transport system of Hong Kong. As such, a target return rate alone would not be the sole consideration of the company. In determining the fares for the network, the MTRC Managing Board would consider a number of factors such as passengers' affordability and the need to secure sufficient funds to upkeep the railway system, having regard to the views of the Administration.

36.On the financial arrangements for statutory bodies, S for Tsy advised that the financial packages for these bodies were subject to the legislature's approval.

VII.Any other business

37.There being no other business, the meeting ended at 6:40 pm.

Provisional Legislative Council Secretariat
28 October 1997