Following is the speech by the Secretary for Financial Services, Mr Stephen Ip, in moving the second reading of the Banking (Amendment) Bill 2001 in the Legislative Council today (April 4):
I move that the Banking (Amendment) Bill 2001 be read the second time.
The Bill seeks to ensure that the Hong Kong Monetary Authority's (HKMA) supervisory regime can keep abreast of the latest developments of the banking industry in respect of places of business, Internet advertisements for deposits and management structure etc. The main amendments introduced by the Bill include provisions that:
(i) enhance the Monetary Authority's (MA) oversight of places of business of authorized institutions (AIs);
(ii) strengthen the provisions relating to advertisements for deposits posted on the Internet or disseminated through other new technological means;
(iii) update the definition of "manager"; and
(iv) introduce requirements for AIs to notify the MA of the appointment of managers and to maintain adequate systems of control to ensure that such managers are fit and proper.
Control over Places of Business
In recent years, some AIs have, in addition to full service branches, established alternative outlets, such as "lending offices" at which loans are made but no deposits are taken, places of business which function predominantly as sales and service outlets, or personal banking centres at which financial advice is provided. The nature of such businesses does not involve deposit taking or impose liabilities on AIs. Therefore, they are not covered by the definition of "local branch" under the Banking Ordinance (the Ordinance). The MA does not have control over the establishment and maintenance of these places of business. However, we consider that these places of business may commit an AI to financial risk, and hence it is necessary to give the MA powers of control over them.
The Bill proposes to extend the definition of "local branch" to cover any place of business in Hong Kong at which an AI carries on any business which involves the incurring of financial exposures as specified under section 81(2) of the Ordinance.
The Bill also introduces the concept of "local office" which covers any place of business from which any business of an AI is promoted or assisted. The AI is required to notify the MA at least seven days before commencing business at an office.
Internet Advertisement for Deposits
Under section 92 of the Ordinance, no person is permitted to issue advertisements that contain an invitation to members of the public to make any deposit in Hong Kong other than with an AI.
Since the section was drafted primarily with physical forms of advertisements in mind, some uncertainties may arise when it is applied to the Internet.
With the advancement of technology, it has become increasingly popular for financial institutions to promote services through the Internet. To ensure effective regulation of advertisements for deposits placed on the Internet and adequate protection of the interests of depositors, we propose to amend section 92 of the Ordinance to cover the situation where advertisements for deposits are provided by new technological means, in particular the Internet.
Definition of and fitness and properness of managers
Given the rapid developments in the banking industry, AIs have adopted various organization structures and management practices to facilitate business development. The existing definition of "manager" based on "reporting line" is outdated. The term may not be able to capture persons who exercise important managerial functions. On the other hand, it can bring in persons whose functions are not central to the safety and soundness of AIs.
The Bill proposes to re-define "manager" as any person, other than a director or the chief executive, who is principally responsible for the conduct of key businesses. Under this definition, only those people who are in charge of the businesses specified in the new Fourteenth Schedule will be regarded as "managers".
As a result of globalization of financial markets, deregulation and technological advancements, the banking environment has become increasingly sophisticated. It is not just directors and the chief executive of an AI, but also its "managers" as discussed above, who can exercise significant influence on the conduct and well being of the AI. Therefore, apart from clarifying the definition of "manager", it is also important to ensure that the person who is a "manager" is fit and proper.
The initial thinking was to introduce an approval requirement for the appointment of 'managers'. This would allow the MA to carry out the necessary vetting process to verify the fitness and properness of the individuals seeking to become a "manager". However, during consultation with the banking industry, some banks queried the need for this new process. They argued that it was the primary responsibility of the directors and the chief executive of AIs to ensure the quality and integrity of their management teams. They were concerned that the proposal might impinge upon AIs' autonomy in the recruitment of staff.
We have considered different options to address these concerns, without compromising the objective of ensuring the fitness and properness of AIs' managers. A viable alternative to the approval requirement, which is the current proposal in the Bill, is to require AIs to maintain adequate systems of control to ensure the fitness and properness of their managers. The Hong Kong Association of Banks has indicated that they had no objection to the new proposal.
The MA will issue a guideline to set out the key elements that AIs' systems of control for recruitment of senior executives should comprise, including details of what constitutes "fit and proper" in the context of manager positions. We also propose to introduce a requirement on AIs to notify the MA when a person becomes or ceases to be a manager of an AI.
Madam President, the purpose of the Banking (Amendment) Bill 2001 keeps the banking regulatory framework abreast of the latest development of the industry, helps to ensure that the interests of depositors are protected and promotes the stability of the banking system. I hope that Members will support the Bill.
Thank you, Madam President.
End/Wednesday, April 4, 2001