Speech by FS at HK Institute of Bankers Annual Banking Conference 2014 (English only)

     Following is the speech by the Financial Secretary, Mr John C Tsang, at the Hong Kong Institute of Bankers Annual Banking Conference 2014 this morning (September 23):

Patrick (Fung), ladies and gentlemen,

     Good morning.

     I am pleased to join you all this morning at the Annual Conference of the Hong Kong Institute of Bankers. Some of you may remember I was here this very month last year speaking at this Conference - and also the year before that. Clearly, there's something about bankers that I can't seem to get enough of. Perhaps, it is the sense of conservatism that I have often been accused of by some members of our community.

     Last year, of course, was particularly noteworthy, being the 50th anniversary of the Hong Kong Institute of Bankers. But this Banking Conference, now in its sixth year, has become a reputable forum for the articulation of policies and practices and the sharing of experiences by practitioners.

     The theme of this year's conference is "Paradigm Shift". It successfully illustrates the extraordinary transformation that the banking industry has been undergoing in the recent past. I want to discuss with you today three main areas of paradigm shift: new regulatory norms, new technological enablers and the new competitive landscape. I shall also look at what the Government is doing to support the banking sector.

New Regulatory Norms

     First, new regulatory norms. If there is one single word most frequently spoken by bankers nowadays, it must be "compliance". I understand quite well that compliance requirements and compliance costs are increasing. But all the new requirements come with good reasons. I urge you to look at compliance efforts, not so much as costly burdens, but as possible edges and sensible investments that will contribute to greater customer confidence and higher credit ratings.

     The global regulatory norms of late have tended to lean towards further tightening of regulations in the banking sector, especially in the areas of anti-money laundering (AML), cross-border tax evasion, and financial stability enhancement. As an international financial centre, Hong Kong will strive to meet the highest international regulatory standards because we believe that Hong Kong's advantage lies in the maintenance of excellence and quality in our supervisory requirements. This, I believe, would ultimately become the source of our competitiveness and attractiveness.

     The banking sector is the primary gatekeeper against illicit fund flows. Our AML laws and the relevant regulatory framework are on par with the requirements of FATF, the Financial Action Task Force, and we are well recognised and well respected by fellow member jurisdictions. No one wants to see hefty fines imposed on an institution at home or abroad as a result of infringement. I am sure our banks will take every possible measure to ensure that all their banking operations, including those covering cross-border transactions, comply with relevant requirements. Your efforts will protect our hard-earned reputation and the integrity of our well-regulated markets.

     In combating cross-border tax evasion, the Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters was released in July. It has been adopted as the new international standard in tax information exchange. Governments are required to obtain detailed account information from their financial institutions. They are also required to exchange that information automatically, instead of on request, with residence jurisdictions of account holders on an annual basis.
     We indicated last week Hong Kong's commitment to this new standard joining some 65 other jurisdictions. We shall go through the due process of engaging local stakeholders and seeking the passage of the required legislation. The first automatic information exchange is expected to begin by the end of 2018.

     With the global economy still struggling in a slow recovery phase from a series of painful financial crises since 2007, the importance of financial stability cannot be over-emphasised. We are fortunate that Hong Kong's financial system has been highly resilient.

     IMF's Financial System Stability Assessment report, released in May, commended our financial system as very well regulated, with the capacity to withstand a diversity of shocks. We must not become complacent as a result of a favourable report. We shall remain vigilant, especially in light of the upcoming cycle of US interest rate increases and various geopolitical conflicts around the world.

     Following last year's first phase implementation of the Basel III capital standards, local banks continue to demonstrate healthy capital adequacy ratios averaging just under 16 per cent, almost doubling the international minimum requirement. We are now working on the next phase, bringing into force from January 2015 liquidity standards, capital buffers and leverage ratio disclosure requirements.

     We are also committed to establishing a regulatory framework for the OTC derivative market in Hong Kong. Since August last year, as interim measures, HKMA has required banks to report specified OTC derivative transactions to its trade repository. Legislative amendments have been enacted to put in place an effective regulatory regime that meets G20 requirements. And, in the coming legislative session, we plan to introduce rules on reporting and record-keeping obligations.

New Technological Enablers

     The second area of paradigm shift is new technological enablers. Technology has long shaped the banking industry, from the advent of the use of telegraph and telephone in the 19th century to the use of the first tabulating machines, the early computers, and in the 1960s, the automated teller machine. The ATM, followed by the introduction of magnetic-stripe plastic cards, marked the beginnings of electronic banking. And we have come a long way since then.

     Internet banking and mobile banking have revolutionised service delivery and redefined customer expectation. Digital-only banks are gaining popularity overseas. More and more, big data will play increasingly important roles in marketing and product design. Some banks are venturing into Facebook and other social media for more business opportunities. Indeed, technology and the information boom in general are rewriting the rules of the game. We are not passers-by. In fact, in some areas, we are forerunners. And we are creating suitable opportunities for our banking practitioners to exploit.

     The proliferation of e-commerce has led to the emergence of innovative retail payment products. With the widespread use of stored-value payment facilities and mobile and Internet payment services, transactions can be done with just a few clicks or taps.

     To ensure the soundness of these settlement systems, we are looking at a regulatory framework that would keep them under HKMA's oversight. Following public consultation last year, we shall be introducing a bill into the legislature early next year for enactment. Last November, the Hong Kong Association of Banks issued a Best Practice note for NFC Mobile Payment to provide a solid foundation for a secure NFC mobile payment system.

     Then there is the e-bill payment scheme, which we introduced last December. The system allows the public to receive, manage and schedule payments for bills via Internet banking. This is a multi-currency platform. E-payments can be made in Hong Kong dollars, Renminbi and US dollars. Cross-border e-billing and e-payment services for billing merchants in the Mainland and overseas countries are also possible.

     Merchants and service providers will join the e-bill scheme in stages, once they have finalised the service arrangements and made the required internal system changes. Major government departments, starting with the Water Supplies Department and Rating and Valuation Department, will also launch the e-bill service as soon as the necessary system changes are completed. In this regard, I am counting on the banking industry to step up its efforts in enhancing public awareness of the new services.

     E-cheques are also in the pipeline. Scheduled for later next year, e-cheques will supplement the established features of conventional cheques with the customer convenience of electronic channels. The innovation will allow bank customers to issue, deliver and present e-cheques through electronic means - anytime, anywhere.

     Where the payees have concerns of the payers' credit, they can ask the payers to issue e-cashier orders, under which the payers' bank accounts will be debited immediately and the paying banks will guarantee to honour such payments to the payees. In this way, the payees can receive payment notifications and be assured of the payments in real-time, while the money will be available the next day.

     E-cheques will greatly reduce bank costs in comparison with the handling of conventional cheques. With lower transaction costs, higher processing speed and other value-added features, e-cheques will have a much wider application than conventional cheques. I am sure some of you are already well prepared to tap into this opportunity.

New Competitive Landscape

    Thirdly, the new competitive landscape. The banking industry is not immune from intensifying competition, not just among banks in Hong Kong, but as we operate in the new global century, also from banks in other cities and non-banking companies. We in Hong Kong welcome competition, and we believe that competition leads to excellence. But as we embrace competition, we also make sure that there is more business for everyone to compete for - bigger pies and more pies.

     Hong Kong's unique geographical location, its role as the gateway to the Mainland markets and its strengths as an international business and financial hub allow us to continue tapping into the opportunities that flourish in today's virtually boundless global economy. In particular, we are strategically positioned as an offshore hub for Renminbi liquidity and financing.

     Since its launch in Hong Kong in 2004, the offshore Renminbi business has flourished. We are hosting the largest pool of Renminbi liquidity outside the Mainland, and we have the most active market for a full range of Renminbi activities, thanks to your innovation and your hard work over the last decade.

     I am particularly pleased with the growth in Renminbi trade settlement handled by banks in Hong Kong, which amounted to RMB3.8 trillion in 2013, a 46 per cent growth over 2012. In the first half of 2014, Renminbi trade settlement already reached RMB2.9 trillion, three-quarters of 2013's full-year figure.

     The Renminbi QFII scheme has broadened the range of Renminbi investment products in Hong Kong. The current investment quota has reached RMB270 billion. I am also pleased with the fast growing "dim sum" bonds. The outstanding amount stood at some RMB400 billion at the end of June, representing a 23 per cent increase from the end of 2013. Big global companies like McDonald's, Caterpillar and Renault have issued Renminbi-denominated bonds in Hong Kong to finance their Mainland operations. The Ministry of Finance in Beijing regularly issues sovereign bonds in Hong Kong, with tenor up to 30 years. It has enabled the development of a benchmark yield curve for Renminbi bonds in Hong Kong, which provides a useful reference for the pricing of other Renminbi products.

     The market has been waiting eagerly for the commencement of the Shanghai-Hong Kong Stock Connect since Premier Li Keqiang's announcement in April. The groundbreaking initiative, to be launched soon, will strengthen strategic co-operation between Hong Kong and Mainland markets. For the first time, Hong Kong and international investors will be able to invest, directly, in shares listed on the Shanghai Stock Exchange. At the same time, Mainland investors will be able to invest directly in shares listed on the Hong Kong Stock Exchange. We expect that the increasing flow between the two markets, as well as the expected growth of Hong Kong's Renminbi liquidity pool, will stimulate the creation of even more products in the capital market.

     We have never sought to monopolise the Renminbi business. The objective is the internationalisation of the Renminbi. That is clear to us and we believe that we can enjoy greater benefit by enlarging the pie. We are strengthening our links with overseas markets, including Britain, Australia, France and Malaysia. This can only reinforce our role as the global hub for offshore Renminbi business, promoting business between banks in Hong Kong and around the world.

     Earlier this month, we issued our inaugural sukuk, following legislative efforts in the past few years to level the tax framework for Islamic bonds and to enable their issuance in the Government Bond Programme. Demand for the inaugural issue was strong, with allocation to a broad range of investors around the world. What is more important is the increasing awareness of the instrument as an alternative financing option and Hong Kong as an upcoming centre of Islamic finance.

     Our asset management business has grown remarkably well over the years. The combined fund now under our management reached a record HK$16.4 trillion (US$2.1 trillion) at the end of 2013, a 30 per cent year-on-year growth. Since 2009, 17 private banks have opened for business in Hong Kong, bringing the total to some 47 institutions offering private banking services.

     We are also further sharpening Hong Kong's competitive edge as an international asset management centre in the following four aspects:

(i) The trust law has been amended to promote Hong Kong as a trust domicile. Settlers are now able to establish perpetual trusts in Hong Kong, giving us a competitive edge over other major common law jurisdictions;

(ii) We are working out the details to give an investment fund the flexibility of adopting an open-ended structure. We hope this can attract more funds to domicile in Hong Kong;

(iii) We are preparing legislative proposals to extend the profits tax exemption to offshore private equity funds and waive stamp duty for ETFs (exchange-traded funds); and

(iv) A joint-departmental task force will develop proposals on how best to attract more multinational and Mainland corporations to establish corporate treasury centres in Hong Kong.


     Ladies and gentlemen, I have outlined for you some examples that we are developing in the three main areas of the paradigm shift which, I believe, is reshaping the banking industry. But ultimately, it is talent that drives the banking industry. In that regard, I am grateful to the Institute, which has been providing high-quality education programmes since its establishment half a century ago.

     These programmes include a wide range of director development and corporate governance offerings. The new enhanced competency framework for private wealth management practitioners, jointly developed by the Institute and other industry organisations - including the newly established Private Wealth Management Association - is a worthy model. As I noted in my budget this year, we are committed to enhancing training for the wealth and asset management sector. And we look forward to the industry's continuing support on related issues.

     Ladies and gentlemen, we live in a new global century where information, technology, capital and talent flow freely. That unprecedented reality comes not only with opportunities, but also with challenges and  responsibility. It demands that we - industry as well as government - rethink the way of doing, and regulating, business. Government is fully cognizant of that responsibility, and I am confident that our banking sector and financial services industry will face up to the challenges, seize these opportunities, and reap the rewards.

     I wish you all a fruitful conference, and have a prosperous year. Thank you.

Ends/Tuesday, September 23, 2014
Issued at HKT 11:45