LC Paper No. LS187/98-99

Objects of the Bill

To amend the Banking Ordinance (Cap. 155) (the Ordinance) so as to -

1. bring Hong Kong's banking supervision framework in closer conformity with the Core Principles for Effective Banking Supervision published by the Basle Committee on Banking Supervision in September 1997 (Core Principles);
   
   
2. revise the provisions governing the publication and submission of annual audited accounts of authorised institutions (AI); and
   
   
3. improve the operation of the Ordinance in the light of market developments.

LegCo Brief Reference

2. G4/16/19C dated 14 May 1999 issued by the Financial Services Bureau.

Date of First Reading

3. 26 May 1999.

Comments

(a) Provisions Bringing Hong Kong's Banking Supervision Framework in Closer Conformity with the Core Principles

(i) Major acquisitions or investments by AIs (Clause 4)

4. It is one of the Core Principles that banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments made by an AI and ensuring that corporate affiliations or structures do not expose the AI to undue risks or hinder effective supervision. In compliance with this principle, the proposed section 51B now requires an AI incorporated in Hong Kong not to acquire share capital of any company of a value equal to or more than 5% of the capital base of the acquiring institution without the prior approval of the Monetary Authority (MA). Approval would be deemed to have been granted if such share capital is held by the AI before the commencement date of the section or if such acquisition is made within three months after the commencement date pursuant to acts or circumstances substantially occurred before the commencement date. Share capital of a company acquired by an AI would not include share capital acquired in satisfaction of debts due to it or under an underwriting or subunderwriting contract within 7 working days of the date on which such obligation arises. MA may approve extension of the 7 working day period and subject to such conditions as he may think proper. MA may attach to any approval granted or deemed to have been granted such conditions as he may think proper and may amend or cancel the conditions. Any approval granted may be revoked. Contravention of the provisions of this section would be a criminal offence for every director and manager of such AI who would, on conviction upon indictment, be liable to a fine at tier 7 ($400,000) or on summary conviction, to a fine at tier 5 ($100,000). Continuing offences would subject to a further fine at tier 2 ($10,000) each day during which the offence continues. For the purposes of this section, the capital base of an AI would be determined in accordance with the Third Schedule of the Ordinance (i.e. provisions for determining capital adequacy ratio) but excluding the requirements under section 79A(1) or 98(2).

5. The proposed section would not cover the acquisition of share capital of any company by a subsidiary of an AI. If after the commencement date, a reduction of the capital base of an AI results in the share capital of a company acquired by it equalling or exceeding 5% of its capital base, the proposed section 51B would not apply and no approval of MA is required.

(ii) Disclosure of information about individual customers (Clause 12)

6. One of the Core Principles stipulates that host banking supervisors of the local operations of foreign banks must have powers to share information required by the home country supervisors of those banks for the purpose of carrying out consolidated supervision. The existing section 121(3) prohibits the disclosure by MA of any information relating to the affairs of any individual customer of an AI or a local representative office. It is now proposed that section 121(3) be repealed and replaced by a new provision. The proposed section 121 (3) would give MA the power to attach to any disclosure of information under section 121, and would impose on MA an obligation to attach, a condition that the direct recipient and subsequent recipients of information so disclosed would not disclose such information to any other person without the consent of MA.

7. The effectiveness of such condition depends on the co-operation of the recipient in a foreign jurisdiction.

(iii) Winding-up petitions of AIs (Clause 13)

8. The Core Principles also require that banking supervisors have at their disposal adequate supervisory measures to effect timely corrective actions in the event that depositors' interests are threatened. MA has a range of powers to take measures with the ultimate aim of protecting the interests of depositors and maintaining the stability of the banking sector. All these measures could be defeated if any unsatisfied creditor presents a petition to wind-up an AI or takes legal proceedings against its assets. MA has no power to prevent such legal proceedings being taken. It is now proposed to add a subsection (7) to section 122 giving MA the right to be heard and to call, examine and cross-examine any witness and to support or oppose the making of a winding-up order as he may think fit.

9. The proposal is only an interim measure. It is understood that MA intends to make a more thorough proposal of change in due course.

(b) Publication and submission of annual audited accounts (Clauses 6 & 7)

10. The existing section 60(1) requires every AI incorporated in Hong Kong to publish its audited annual accounts and the auditor's report in one English language newspaper and one Chinese language newspaper within 4 months after the close of each financial year. Section 60(2) requires a copy of such newspaper notice to be lodged with MA 7 days before publication. Due to the change in supervisory guidelines and disclosure requirements, the amount and quality of information required to be disclosed by AIs in their annual accounts have significantly increased. Consequently, the costs of publication have also increased considerably. The banking industry has requested a review of this requirement.

11. It is now proposed to repeal section 60(1) and (2). Section 60(3) would be amended so that the full name of the directors and managers of an AI and the names of all its subsidiaries need not be exhibited. A new subsection (5A) would be added to allow AIs incorporated outside Hong Kong to submit to MA instead of the documents required under section 60(5) those documents of its holding company on a consolidated basis.

12. A new section 60A is proposed to be added. It gives MA the power to require by notice in Gazette every AI or a class of AIs to publish or disclose information relating to such affairs or profit and loss of the AI and in such manner and at such time or times as are specified in the notice. Such notice in Gazette would be subsidiary legislation. Any contravention of the section would be a criminal offence for every director and manager who would be liable on conviction upon indictment to a fine at tier 7 ($400,000) or on summary conviction to a fine at tier 5 ($100,000) and in the case of a continuing offence, to a further fine at tier 2 ($10,000) each day during which the offence continues. MA also has the power to publish guidelines in the Gazette to give AIs guidance in their compliance with the requirements of the section.

13. The specifics of the new arrangement contemplated by the proposed section 60A are yet to be finalised by MA.

(c) To Improve the Operation of the Banking Ordinance

(i) Definition of "relevant banking supervisory authority outside Hong Kong" (Clause 2)

14. In section 2(9) of the Ordinance, the word "primary" is deleted to enable MA to recognise a wider range of banking supervisory authorities outside Hong Kong.

(ii) Impose condition on existing controllers (Clause 8)

15. It is proposed to add a new subsection (6A) to section 70 of the Ordinance to give MA the power to serve conditional notice of consent on a minority shareholder controller of an AI and revoke a prior notice of consent served on that person. Consequential amendment is also made to subsection(9).

(iii) Consent to become an employee of an AI (Clause 9)

16. A new subsection (1D) is added to section 73 of the Ordinance so that a person, who has been a director of an AI which has been wound up or has its licence being revoked, and has obtained MA's consent to be employed by another AI, need not seek such consent every subsequent time when he changes his employment to another AI.

(iv) Limitation on advances to employees (Clause 11)

17. The recent fluctuation in the property prices has caused some staff property mortgage loans of AIs to become partially unsecured due to the substantial reduction in the value of the mortgaged properties and thus result in technical breaches of the limit imposed under section 85 of the Ordinance. The proposed amendment to section 85(1) would empower MA to grant general or specific consent to AIs to exceed the limit.

(v) Financial exposures and section 81 (Clause 10)

18. To cater for the changing market developments and the introduction of new products, a new subsection (2A) is added to empower MA to declare by notice in Gazette financial exposures that would be subject to the limit of 25% of the capital base of an AI as stipulated in section 81(1). Section 81(1) is consequentially amended by adding the proposed paragraph (ba) to provide for the category of financial exposures to be declared by MA under subsection (2A).

19. Subsection (6)(kc) is proposed to be added to section 81 to exempt exposures under the Mortgage Insurance Programme of the Hong Kong Mortgage Corporation Limited (HKMC) as they are guaranteed by HKMC.

(vi) Definition of "residential mortgage" in the Third Schedule (Clause 17(b))

20. The percentage specified in the definition of "residential mortgage" in paragraph 1 of the Third Schedule of the Ordinance is in relation to the purchase price or market value of the property but the time, at which such market value is to be determined, is not specified. The recent movements in property prices result in many loans secured by residential mortgages to exceed the 90% loan-to-value ratio at current market prices. This throws in doubt whether such loans are still to be regarded as secured by residential mortgage as defined in the Third Schedule and whether the risk weighting of 50% still applies to such loans for the purposes of calculating the capital adequacy ratio. Since the policy intention of MA has all along been that the market value of the property referred to in the definition of "residential mortgage" means the market value at the time when the mortgage loan was approved, it is now made explicit by the proposed amendment.

(d) Other Amendments (Clauses 3, 5, 14, 15, 16, 17(a) & 18)

21. The other amendments are mainly technical amendments or consequential amendments arising from the foregoing amendments.

Public Consultation

22. According to the LegCo Brief, the Banking Advisory Committee, the Deposit-taking Companies Advisory Committee, the Hong Kong Association of Banks and the Deposit-taking Companies Association have been consulted and they support the legislative proposals. The Hong Kong Society of Accountants has in a written memorandum copied to the Clerk to the House Committee raised two matters: one is the request that MA undertakes to consult the Society before exercising its discretionary power under the proposed section 60A(1) (see paragraph 12 above); the other is an request for further information in support of the 5% threshold stipulated in the proposed section 51B (see paragraph 4 above). The Legal Service Division has written to the Administration asking for its response and is waiting for its reply.

Consultation with LegCo Panel

23. Members of the Panel on Financial Affairs have been briefed on the main proposals of the Bill on 3 May 1999.

Recommendation

24. The legislative proposals do not seem to involve major policy issues and are largely relating to technical operational matters. The Legal Service Division is seeking clarification on certain drafting and technical aspects of the Bill from the Administration. Members may wish to wait for the further report on this Bill before deciding whether a Bills Committee should be set up.


Prepared by


KAU Kin-wah
Assistant Legal Adviser
Legislative Council Secretariat
26 May 1999