Ref : CB1/PL/FA/1

Members present :

Hon Ambrose LAU Hon-chuen, JP (Chairman)
Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon Albert HO Chun-yan
Hon NG Leung-sing
Hon Margaret NG
Hon Ronald ARCULLI, JP
Hon CHEUNG Man-kwong
Hon Ambrose CHEUNG Wing-sum, JP
Hon Bernard CHAN
Hon SIN Chung-kai
Hon Jasper TSANG Yok-sing, JP
Hon Timothy FOK Tsun-ting, JP
Hon FUNG Chi-kin

Member attending :

Hon CHAN Kam-lam

Members absent :

Hon David CHU Yu-lin
Hon Cyd HO Sau-lan
Hon Martin LEE Chu-ming, SC, JP
Dr Hon David LI Kwok-po, JP
Hon James TO Kun-sun
Hon HUI Cheung-ching
Dr Hon Philip WONG Yu-hong

Public officers attending :

Agenda items IV, V and VI

Mrs Rebecca LAI, JP
Deputy Secretary for Financial Services

Agenda item IV

Miss Vivian LAU
Principal Assistant Secretary for Financial Services

Mr Raymond L C LI, JP
Executive Director of Banking Policy Department
Hong Kong Monetary Authority

Agenda items IV and VI

Mr H Y MOK
Assistant Commissioner of Insurance

Agenda item VI

Mr Alan WONG
Commissioner of Insurance

Attendance by invitation :

Agenda item IV

Mr Keith LUI
Director, Supervision of Markets
Securities & Futures Commission

Mr Alfred WONG
Director (Information Technology)
Markets and Operations Systems
The Stock Exchange of Hong Kong

Mr Mark HO
Head of Compliance Department
Hong Kong Futures Exchange

Mr Henry CHAN
Executive Director/Information Technology Division
Hong Kong Securities Clearing Company

Agenda item V

Mr Alan WONG
Managing Director
Mandatory Provident Fund Authority

Mr Raymond TAM
Executive Director (1)
Mandatory Provident Fund Authority

Ms Maisie CHENG
Executive Director (2)
Mandatory Provident Fund Authority

Clerk in attendance :

Ms Estella CHAN
Chief Assistant Secretary (1)4

Staff in attendance :

Ms Connie SZETO
Senior Assistant Secretary (1)1

I Confirmation of minutes and matters arising
(LC Paper Nos. CB(1)1074 and 1102/98-99)

The minutes of the meeting held on 9 October 1998 and 2 November 1998 were confirmed.

I Confirmation of minutes and matters arising
(LC Paper Nos. CB(1)1074 and 1102/98-99)

The minutes of the meeting held on 9 October 1998 and 2 November 1998 were confirmed.

II Information papers issued since last meeting
(LC Paper No. CB(1)993/98-99 - "Regional Monitor, Issue Nos. 19 and 20" provided by the Stock Exchange of Hong Kong
LC Paper No. CB(1)1007/98-99 - "Members Transaction Survey 1998" provided by the Stock Exchange of Hong Kong
LC Paper No. CB(1)1096/98-99 - "Regional Monitor, Issue No 21" provided by the Stock Exchange of Hong Kong)

2. Members noted the above information papers issued since last meeting.

III Items for discussion at the next meeting
(LC Paper No. CB(1)1094/98-99(01))

3. Members agreed to discuss the following items at the next regular meeting scheduled for Monday, 3 May 1999, at 10:45 am -

1. Year 2000 compliance in Government, Government-funded and Government-regulated organizations under the purview of the Finance Bureau; and

2. Briefing on Banking (Amendment) Bill 1999.

4. Members also agreed that pending consultation with the Administration on the appropriate timing for discussion, either one of the following items should be included in the agenda -

1. Privatization of Government services; or

2. Securities and futures market reform.

(Post-meeting note: The Administration had advised that it would be prepared to discuss both items in June 1999. Two new items, i.e. Hong Kong Monetary Authority's Annual Report 1998 and Migration of Hang Seng Index Futures and Options Contracts to the Automated Trading System were added to the agenda as proposed by the Administration and Mr Bernard CHAN respectively.)

IV Progress report on year 2000 readiness of the financial services sector in Hong Kong
(LC Paper Nos. CB(1)1094/98-99(02) and 1115/98-99)

5. At the Chairman's invitation, the Deputy Secretary for Financial Services (DS/FS) updated members on the progress which the financial services sector in Hong Kong had made to tackle the Year 2000 (Y2K) problem since the subject was last discussed at the Panel meeting on 7 December 1998. She remarked that the progress made by the financial services sector was satisfactory and the overall Y2K readiness of financial institutions and clearing and settlement organizations had recently been rated positively by the international financial community and rating agencies including the Global 2000 Co-ordinating Group and Moody's. On the progress of Y2K compliance programmes in departments under the purview of Finance Services Bureau (FSB), DS/FS said that except the Census and Statistics Department, which was expected to achieve full compliance by end of June 1999, all other departments were Y2K compliant by March 1999. The internal operations of FSB did not involve mission critical systems.

6. Responding to the enquiry on enforcement actions against financial institutions which failed to meet specified compliance deadlines set by their respective regulators, the Executive Director of Banking Policy Department, Hong Kong Monentary Authority (ED/HKMA) said that HKMA had issued 17 warning letters to authorized institutions (AIs) which failed to meet the deadline of 31 December 1998. The measure was effective. The AIs concerned had taken appropriate actions to rectify their problems and almost all of them had become Y2K compliant. As regards the situation in the insurance industry, the Assistant Commissioner of Insurance (AC of I) said that the 28 institutions which failed to achieve compliance by end December 1998 had been requested to submit monthly instead of quarterly returns on their Y2K readiness. Among these 28 institutions, 12 had already achieved compliance. Progress for the rest of the 16 institutions was generally satisfactory. The Office of the Commissioner of Insurance would monitor closely the progress of these institutions and consider taking more stringent supervisory measures if they failed to meet the deadline of 30 June 1999.

7. Mr CHEUNG Man-kwong remained concerned about the slow progress of the securities and futures industry in tackling the Y2K problem, in particular, the low compliance rate of non-Exchange firms. He queried the Securities and Futures Commission (SFC) for setting the late compliance deadline of 30 June 1999 for these firms and suggested stricter supervisory measures to be taken against those institutions with less satisfactory progress.

8. In response, the Director of Supervision of Markets, SFC (DSM/SFC) said that there had been remarkable improvement in the compliance position of registered intermediaries since the end of 1998 as illustrated in Table 2 of the information paper. Two rounds of Y2K street-wide testing for shared financial systems had been successfully conducted in January and March 1999. Results for both rounds of testing were generally satisfactory with no major problems identified in the shared systems of the Exchanges and clearing houses, and the interfaces with members and other parties concerned. More than 90% of the institutions participated in the first round of testing had already declared no major exceptions in their test results. Pending availability of the full testing results of the second round of testing in early May 1999, SFC envisaged that the position would further improve.

9. As regards supervisory measures on non-Exchange registered intermediaries, DSM/SFC said that while the Exchanges expected their members to achieve full compliance before end of March 1999, non-Exchange firms under the direct supervision of SFC were subject to the compliance deadline of 30 June 1999. He explained that as the majority of non-Exchange firms were of small and medium sizes and engaging in much more diverse lines of business than those of Exchanges members, they needed more time to rectify their systems and tackle related problems. He assured members that most of the non-Exchange firms which showed slower progress were investment advisers not holding any assets for their clients. Hence clients' assets were not exposed to immediate risks. Nonetheless, SFC was following up closely with those firms which demonstrated less satisfactory progress. Apart from providing such assistance to these firms as information packages, guidance notes, on-site visits and examinations, supervisory measures such as appointment of external consultants, had already been taken. SFC had also advised registered intermediaries that failure to take appropriate actions to address the Y2K issue would reflect adversely on their fitness and properness to remain registered with SFC. SFC was prepared to take stringent enforcement actions including restriction of business and suspension or revocation of licence against registrants who failed to meet the compliance deadline by end of June 1999.

10. Mr SIN Chung-kai remarked that notwithstanding the slow progress in the securities and futures industry in addressing the Y2K problem vis-¡K-vis the banking and insurance industries, institutions had stepped up efforts and made apparent improvements. On contingency planning for unforeseen problems, he sought the Administration's views on the banking industry's suggestion to designate 31 December 1999 as a bank holiday in order to provide more time for the industry to tackle the Y2K problem and the suggestion to close the local financial markets on 3 January 2000 (i.e. the first trading day in 2000) so as to minimise possible disruption to the markets.

11. DS/FS said that the Steering Committee on Y2K Compliance in the Financial Services Sector (the Steering Committee) had been keeping in view the above suggestions in the context of Y2K contingency planning. Given the generally satisfactory progress of financial regulators and individual institutions in addressing the Y2K problem, as well as positive results of street-wide tests of shared financial systems in respective industries, the Steering Committee was confident that the financial services sector would achieve Y2K compliance in time and hence considered it unnecessary to close the local financial markets on 3 January 2000. In view of the banking industry's concern over the lead time required to complete year-end transactions and back-up operations before the turn of the millennium, and the benefit of enhancing public confidence on Y2K readiness of the industry if institutions were provided with more time to prepare for the millennium transition, the Administration was considering the suggestion to designate 31 December 1999 as a bank holiday or even a general holiday. She stressed that since the suggestion had far-reaching implications on the economy, the Administration had to consider it carefully and prudently.

12. As regards the communication strategy in the run-up to 2000, DS/FS stressed that the Administration recognized the importance of putting in place an effective strategy encouraging information disclosure and sharing which would enable the public to better understand the impact of the Y2K problem and to prepare themselves for a smooth and orderly transition without panic and disruption. On encouraging wider information disclosure by financial institutions in relation to their status and readiness for Y2K compliance, DS/FS advised that the Steering Committee would step up effort in this area to co-ordinate regulatory bodies' Y2K publicity programmes and disclosure requirements with a view to enhancing openness and transparency of their work in tackling the Y2K problem, as well as ensuring timely disclosure of necessary information. She added that the Stock Exchange of Hong Kong had already imposed a disclosure requirement on listed companies to make detailed disclosure of their Y2K readiness in their financial reports. In respect of HKMA's work in this area, ED/HKMA supplemented that HKMA issued a guideline on 8 April 1999 to require all AIs to develop effective customer awareness programmes by end of June 1999 as part of their Y2K contingency plan. Institutions were required to take a proactive approach and to accord the matter with top priority. Indeed, some institutions had already formulated their own publicity programmes and reached out to their customers before issuance of the said guideline.

13. On whether sanctions, such as disclosing the names of those intermediaries which failed to resolve the Y2K problem and to disclose information on progress of their Y2K compliance work, would be imposed, DS/FS re-iterated that while the Administration and the regulators would continue with every endeavor to assist intermediaries to achieve Y2K compliance and draw up contingency plans accordingly, in the event that institutions remained non-compliant, necessary supervisory measures would be taken to prevent them from posing systemic risk to the market. The customer awareness programmes aimed to inform the customers of the situation to enable them to take appropriate actions to protect their own interest.

14. Noting that the sector-wide contingency plans would not be completed and rehearsed until early September 1999, Mr NG Leung-sing enquired about contingency measures to cope with possible problems associated with other Y2K risk dates, if any, between now and September 1999.

15. DS/FS said that whilst 9 September 1999 was regarded by some quarters as one of the Y2K risk dates, widespread disruptions were unlikely. She added that based on discussions in the international financial community, no Y2K high-risk dates had been identified between now and September 1999. On the progress of Y2K contingency planning, the Principal Assistant Secretary for Financial Services advised that all the financial regulators and operators of major shared financial systems had completed their own high level Y2K contingency plans by end March 1999, which would form important building blocks for the sector-wide Y2K contingency plans. On the other hand, financial institutions were required by their regulators to complete their individual contingency plans before end of June 1999. Review and refinement of plans as well as testing and rehearsal would be undertaken in July and August 1999. Preparation was underway for setting up an emergency co-ordination centre to co-ordinate information exchange within and outside the financial services sector during the millennium transition and other Y2K risk dates. The Administration aimed at completing the detailed sector-wide contingency plans and necessary rehearsals by early September 1999, and starting operation of the emergency centre with effect from 8 September 1999.

V Progress of implementation of the Mandatory Provident Fund system
(LC Paper No. CB(1)1094/98-99(03))

16. DS/FS briefed members on the progress of the preparatory work for the implementation of the Mandatory Provident Fund (MPF) system. She said that MPF Authority (MPFA) had announced an implementation timetable consisting of four stages. Commencement notices, which required negative vetting of the Legislative Council, would be made in batches to bring the MPF system into operation according to the timetable. She also appealed for Members' support in passing the commencement notices.

17. On Mr Bernard CHAN's enquiry about the possibility of deferring implementation of the MPF system, in particular, the stage of collection of MPF contributions which was scheduled to commence on 1 December 2000, DS/FS said that the implementation timetable was realistic, reasonable and should be achievable as it had been drawn up after consultation with the retirement schemes industry, employer groups and MPF Schemes Advisory Committee. The Managing Director, MPFA (MD/MPFA) supplemented that MPFA recognized the importance of launching the MPF system as soon as possible in order to provide early retirement benefits for the entire workforce. Indeed, much preparatory work for setting up the system had been done since passage of various MPF Schemes Regulations and establishment of MPFA in 1998. However, the commencement notices for provisions relating to making contributions would be made at a later stage pending the progress of the preparatory work, in particular the progress of installation of the Information Management System (IMS) which was essential in assisting MPFA to perform its regulatory duties. MPFA would review the situation in the second quarter of 2000 so as to confirm the commencement date of collecting mandatory contributions.

18. As far as the progress of development of the IMS project was concerned, MD/MPFA advised that PricewaterhouseCoopers (PwC) was awarded the consultancy contract on 31 March 1999 and the project would commence on 19 April 1999. PwC was bound contractually to complete installation and necessary test runs for IMS Core System and the entire IMS by April and October 2000 respectively. IMS Committee, which consisted of three co-opted members who were information technology experts, would assist MPFA to monitor closely the development of IMS to ensure that the system was properly in place to tie in with the implementation of the MPF system.

19. In reply to Mr Kenneth TING's enquiry about regulation of MPF service providers, MD/MPFA said that MPFA, SFC, HKMA and Insurance Authority (IA) had agreed in principle that the regulatory framework should build upon the existing regulatory mechanisms for the marketing of securities and insurance products, with MPFA acting as the lead regulator. It was envisaged that existing financial institutions including banks, insurance and fund management companies would apply to be MPF service providers. Examination requirements would also be introduced for intermediaries selling MPF products. Details of the requirements including the scope of the examination were under consultation with the industry and would be finalized in due course. MPFA intended to start the examination process as soon as in July 1999 so that the intermediaries could obtain the necessary qualifications before end of 1999 to tie in with the timetable for marketing and enrollment from early 2000.

20. As regards exemption of existing retirement schemes under the governance of Occupational Retirement Scheme Ordinance (ORSO) (Cap. 426) from MPF requirements, MD/MPFA explained that criteria for exemption included, inter alia, registration under ORSO before 15 October 1995 and conversion from insurance-based schemes into trust-based schemes. He supplemented that among the some 18,000 existing ORSO schemes, around 14,000 were registered before 15 October 1995 about 6,000 of which, in turn, were being run under insurance arrangements. At Members' request, the Administration undertook to provide information on the conversion arrangement for ORSO schemes after the meeting.

(Post-meeting note: The information was provided vide LC Paper No. CB(1)1202/98-99 dated 26 April 1999.)

VI Insurance Companies (Amendment) Bill 1999
(LC Paper No. CB(1)1094/98-99(04))

21. DS/FS briefed Members on the three main objects of the Insurance Companies (Amendment) Bill 1999 (the Bill) namely, to strengthen the regulation of Lloyd's insurance business in Hong Kong, to accelerate the submission of financial information by insurers relating to their Hong Kong general business from six to four months, and to extend the number of development years for the submission of claims statistics by insurers relating to their Hong Kong general business from eight years to 12 years.

22. Mr Kenneth TING expressed support for the Bill which in his views, would enhance protection for policy holders in general. Messrs Eric LI and FUNG Chi-kin expressed concern about the adequacy of the proposed amendments to enhance regulation over Lloyd's in Hong Kong. In this connection, Mr FUNG Chi-kin also enquired about the reason for proposing new sections to regulate Lloyd's instead of repealing Part VII of the Insurance Companies Ordinance (ICO) (Cap 41) which contained special provisions relating to Lloyd's. Mr TSANG Yok-sing further asked about the regulatory frameworks adopted by other countries to govern the operation of Lloyd's.

23. In response, the Commissioner of Insurance (C of I) explained that in recognition of Lloyd's uniqueness, history and international reputation, Hong Kong, like many countries, had made special provisions for the regulation of Lloyd's business. However, in view of financial troubles Lloyd's had experienced in recent years, its admission of corporate members whose liabilities were limited (At present, about 70% of Lloyd's funding was from corporate members.), concerns raised by the local insurance industry on the preferential treatment which Lloyd's currently enjoyed, and moves by other jurisdictions to tighten regulation over Lloyd's, such as the United Kingdom (UK) and USA, the Administration considered it necessary to enhance the regulation over Lloyd's business in Hong Kong.

24. On the concern over the drafting aspect of the Bill, C for I said that the Law Draftsman was responsible for preparing the Bill. He stressed that the purpose of the Bill was to subject Lloyd's to the same regulatory requirements applicable to other authorized insurers and to the interventionary powers of IA. As regards the regulation of Lloyd's in overseas countries, C for I undertook to provide relevant information after the meeting. He also confirmed that the new regulatory regime was in line with the practice in other countries.

(Post-meeting note: The information was provided vide LC Paper No. CB(1)1209/98-99 dated 27 April 1998)

25. Pointing out that financial troubles of Lloyd's had surfaced in early 1990s', Mr FUNG Chi-kin queried the Administration for not taking early action in this respect.

26. C for I said that IA only learnt about financial and management problems of Lloyd's from the press and media in early 1990s' and took initiative to seek official information from UK regulatory authorities in 1995. The successful reconstruction and renewal plan implemented by Lloyd's in 1993 to raise new capital and to revive its business was noted. IA after consulting the Insurance Advisory Committee made a decision in 1996 to review ICO in relation to the special treatment for Lloyd's. It also took about two years to consult the insurance industry and Lloyd's, as well as to conduct research into regulatory practices of other jurisdictions in working out the detailed legislative proposals. The Administration had taken a prudent approach in the matter as it was essential to strike an appropriate balance between enhancing regulation over Lloyd's to safeguard the interest of policy holders and maintaining the viability of Lloyd's business in Hong Kong.

27. Mr NG Leung-sing enquired about the feasibility of further accelerating the submission of financial information relating to the Hong Kong general business of insurers to less than four months and shortening the period of six months within which insurers were required to submit accounts and statements relating to their global business.

28. C of I explained that there were a total of 208 authorized insurers operating in Hong Kong which were incorporated in 29 different countries. Having regard to the constraints imposed by the insurers' accounting practices, in particular, the requirement for endorsement of audited financial information on Hong Kong general business by their head offices, and the capability of the auditing profession to cope with a shorter time limit, the original proposal to accelerate the submission of financial information to three months was changed to four months. On the other hand, the C of I was provided with discretionary power under ICO to grant extension up to two months for late submission of insurers' local business returns. As regards the submission of accounts and statements relating to insurers' global business, the insurance industry was of the view that since financial information relating to the world-wide operations of an insurer normally took a longer time to consolidate and prepare, it would be difficult for insurers, particularly those incorporated overseas and having operations in many different parts of the world, to submit the information in less than six months. On reporting requirements imposed by other jurisdictions, C of I advised that while the international practice for submission of financial information relating to insurers' global business was six months in general, looser requirements were imposed by European countries. The periods imposed by UK and Singapore were six and three months respectively. In this connection, Mr Eric LI remarked that the accounting profession was capable of coping with a shorter time frame if insurers were prepared to submit financial information for auditing purpose within a shorter time.

29. Mr James TIEN questioned the need for extending the claims development period to 12 years since as far as he was aware, claims should normally be made and settled within a few years. He further expressed concern about the possible increase in the level of insurance premium as a consequence of the change.

30. In response, C of I explained that it was not uncommon for insurers to incur claims liabilities which took many years to run their course. For instance, recent experience revealed that outstanding claims liabilities, particularly those relating to third party bodily injuries, normally took 12 years to be fully developed. Hence, it was considered necessary to extend the claims development history in order to provide a more reliable basis for the purpose of assessing the adequacy of the claims reserves maintained by insurers. He added that the proposal was supported by insurers as they would also benefit. Prudent insurers usually maintained a high level of claims reserve. With availability of more claims development statistics insurers were able to keep more accurate claims reserves, hence freeing tied-up capital for other purposes. C of I also remarked that the level of insurance premium reflected the market situation and was influenced by many other factors besides the operating cost of insurers. He did not envisage any adverse effect on the level of premium to be brought about by the proposal.

VII Any other business

31. There being no other business, the meeting ended at 4:00 pm.

Legislative Council Secretariat
31 August 1999