The banking profession around the world has been feeling the heat during the global financial crisis. As a central banker once said, "Good bankers, like good tea, can only be appreciated when they are in hot water."
We have certainly appreciated the resilience of our banking sector before and during the global financial crisis. With lessons learned from the Asian financial turmoil more than a decade ago, as well as prudent lending practices and transparent regulation, our banks have weathered the storm in relatively good shape.
I will talk about the local financial landscape in the wake of the financial crisis, and Government's vision for Hong Kong's evolving roles in the new financial order as well as our strategic positioning with regard to our country. Let me begin with a snapshot of our banking industry.
Banking in Hong Kong
Hong Kong is the world's 15th and Asia's 3rd largest banking centre. We are also the world's 6th largest foreign exchange trading hub. Our banking industry is characterised by the strong presence of international banks: there are 195 authorised institutions in Hong Kong, from 30 economies.
Of these, 71 of the world's largest 100 banks operate in Hong Kong. The sector contributes to over 10% of our GDP and employs 2.7% of our workforce. These figures speak volumes of the socio-economic significance of our banking industry.
The development of our banking industry has been shaped by a number of underlying trends in the past decade. Increasing financial integration with the Mainland has brought growing presence of Mainland banks in Hong Kong and vice versa.
Another trend is our advancement as China's global financial centre. Hong Kong has been ranked number three in the City of London's Global Financial Centres Index, trailing London and New York. Our high degree of economic freedom and business friendly environment are recognised around the world.
Blurring of boundaries
There has also been a blurring of boundaries among different financial sectors. Banks in Hong Kong provide a full range of financial services to their customers, including securities and insurance services. Some banking staff sells a variety of investment products in addition to handling deposits for customers. These call for unique solutions to meet the regulatory challenges.
Of course, this snapshot would not be complete without mentioning the repercussions of the global financial tsunami.
International financial organisations such as the G20 and Financial Stability Board have come up with a long list of reform proposals following the financial crisis. A few key themes have emerged consistently on the global financial agenda, including disclosure, investor protection and financial stability.
The financial crisis highlighted the importance to market confidence of reliable valuations and disclosure of market risks. In this regard, the Financial Stability Board has launched a peer review concerning risk disclosures by market participants to enhance market resilience.
Investor protection in spotlight
Investor protection has come to the forefront as regulatory gaps were exposed during the financial crisis. Governments in the West are stepping up efforts to protect the investing public. For instance, the UK has proposed establishing a Consumer Protection & Markets Authority and, in the US, there is the new Consumer Financial Protection Bureau.
The international community has paid increasing attention to previously unregulated or under-regulated areas for strengthening macro-prudential oversight and promoting financial stability. Measures on the agenda seek to monitor emerging systemic risks; regulate "too big to fail" financial institutions and credit rating agencies; enhance the transparency of hedge funds and over-the-counter derivatives, and so on.
A key cross-border reform initiative close to the heart of the banking industry now being actively pursued in Basel is capital and liquidity reforms. Indeed, the financial tsunami reveals that the risk coverage of the Basel II framework needs to be strengthened in a number of aspects.
Risk coverage enhanced
The Hong Kong Monetary Authority will continue to participate in the Basel process and work together with the local banking industry for implementing the relevant enhancement measures.
These global reform proposals would affect our financial industry to varying degrees. For instance, additional capital requirements may exert pressure on the profitability of banks, especially the smaller ones. Also, the EU proposal to regulate alternative investment managers may inadvertently limit the operation of the fund managers.
We are mindful of any potential protectionist repercussions of these overseas regulatory measures, which may lead to market fragmentation and regulatory arbitrage. Through our active participation in the international financial fora, we endeavour to ensure that our concerns are factored into the policy review and formulation processes of these overseas jurisdictions.
Opportunities arise
In parallel, we are keen to capture market development opportunities arising from the cross-border regulatory changes. For example, we have been engaging the Hong Kong Exchanges & Clearing Limited and are pleased to note that it would consider expanding its clearing services to selected over-the-counter products, as part of its strategic plan.
Our banks - large and small - could potentially benefit from the service provided by a local central counterparty to clear standardised over-the-counter derivatives, in response to a G20 initiative to enhance the surveillance of over-the-counter trading.
The financial crisis has transformed the landscape of the global economy, one manifestation being the Mainland's emergence as a more prominent and influential player.
While we need to align with the regulatory standards of key overseas jurisdictions to ensure continued market access for our players, we are acutely mindful of the need to maintain a predictable and consistent regulatory regime for financial institutions to operate in Hong Kong.
'China advantages'
Our compatibility with international standards and best practices will help to attract overseas financial institutions wishing to harness the business potential in the region. At the same time, they will be able to service their clients worldwide.
We must bring together our unique "China advantages" and "global advantages" to reinforce Hong Kong's status as the preferred springboard to carry out not only China-related activities in the global financial arena, but also global operations in the Greater China market.
As China's global financial centre, Hong Kong is leveraging its advantages in conducting activities in asset management, offshore Renminbi business and capital formation, attracting and anchoring capital and talent from within and outside the country. In the process, Hong Kong should seek to better serve the needs of our country in its ongoing economic transformation.
Local regulatory updates
To achieve our vision, we are pursuing a number of initiatives to enhance market transparency, improve our regulatory regime to protect investors and maintain financial stability, and remove any unnecessary hurdles to facilitate compliance and promote market development.
These initiatives do not only echo the agenda of international financial reform that I have just outlined, but also aim to cater for our own market needs. Let me update you on some of the Government's initiatives in several action areas.
We are committed to promoting a continuous disclosure culture among our listed corporations. We have consulted the public on a proposal to introduce certain statutory requirements for listed companies to disclose price-sensitive information earlier this year. The proposed legislation will require listed companies to make available more information for investors to make informed decisions. It will help enhance the transparency and quality of our equity market.
We have received over 100 written submissions. Most of the respondents support the proposal to adopt the concept of "inside information" already used in our insider-dealing regime to define "price-sensitive information".
We have also received detailed comments on the statutory disclosure requirements on the listed companies, directors and officers involved in the management of listed companies, and what would constitute a breach. We are studying the submissions in detail, and are planning to introduce a Bill into the Legislative Council next year.
Scripless trading mooted
We are pleased to note that the working group on scripless securities market led by the Securities & Futures Commission will publish later today its consultation conclusions on the proposed operational model for a scripless securities market.
This represents the renewed efforts of concerned market participants in pressing ahead with an important initiative to enhance shareholder transparency and promote corporate governance.
Banks, being a significant player in the securities market, have also provided valuable input in the consultation process. The Government will continue to lend support to this important exercise. As a first step, we have already enacted amendments to the Companies Ordinance in July this year to allow for scripless trading. We look forward to pursuing further legislative changes to operationalise the agreed scripless model.
Enhanced risk disclosure
Our investor protection measures have to evolve with local market needs and international standards. After the collapse of Lehman Brothers in 2008, our regulators have introduced a series of requirements to enhance risk disclosure for investment products and tighten the regulation of sale conduct.
Preventive measures are as important as remedial measures in protecting investors. Our regulators, together with the Consumer Council, have stepped up efforts in educating investors. In addition, we are working with the regulators to establish an Investor Education Council to enhance the financial literacy of our investing public in Hong Kong. We aim to introduce legislation next year to bring the Investor Education Council into operation.
Our financial regulators have also invited the Government to establish a financial dispute-resolution mechanism. At present, the regulators have full power to handle complaints against the conduct of market intermediaries, but not monetary disputes with their clients.
Safety nets
We see merits to establish a Financial Dispute Resolution Centre. It will help aggrieved investors to settle their disputes with financial institutions through a simple and quick resolution mechanism. We have consulted the public earlier this year and are mapping out plans for implementation.
Another key lesson from the financial tsunami is the need for robust safety nets to enhance investor confidence in our financial market, which is vital for maintaining systemic stability during crises.
We have been working on the safety nets for our banking and insurance sectors. With the enactment of relevant legislation in June this year, the protection limit under our Deposit Protection Scheme will be raised five-fold to $500,000 starting from January next year. This will facilitate smooth exit from the 100% deposit guarantee introduced at the height of the tsunami in late 2008.
Policyholder's protected
At the same time, we are conducting a study in conjunction with the insurance industry for establishing an Insurance Policyholders' Protection Fund to improve insurance market stability and safeguard the interest of policyholders should an insurer default. We aim to consult the public later this year on such a proposal.
Besides, our regulatory structure will need to be modernised to meet market challenges. As you may be aware, we are conducting a public consultation on the establishment of an Independent Insurance Authority. Our proposal aims to bring ourselves more in line with international practices and to enhance the protection of policyholders.
Currently, the regulation of the conduct of our insurance intermediaries relies mostly on three self-regulatory bodies. This may give rise to real or perceived conflicts of interest and is unsustainable in the long run. Part of the proposal is for HKMA to be the frontline regulator of insurance intermediaries who are bank employees.
Of the 68,000 insurance intermediaries, 18,000 are bank employees who are registered with the Insurance Agents Registration Board for engaging in the sale of insurance products. Though over 30% of insurance products sold in Hong Kong are distributed through banks, HKMA does not have any direct power to regulate these activities.
Regulating insurance sales
We note that the client profile and sale environment in banks may be different from that of other insurance intermediaries. As such, there are merits in vesting in HKMA powers, similar to those for the proposed Independent Insurance Authority, to enable HKMA to regulate the conduct of bank employees in the sale of insurance products.
This would also allow HKMA to impose specific conduct requirements, in addition to those set by the Independent Insurance Authority in future, to cater for any unique circumstances in banks. This may better safeguard the interests of bank customers who are potential policyholders.
I do hope you will find time to study the proposals, and let us have your views, before the consultation ends in about three weeks' time.
Mainland-HK cooperation
Fourth, deepening Mainland-Hong Kong financial cooperation.
Hong Kong's strategic positioning as China's global financial centre under 'One country, two systems' gives our financial market unparalleled strengths in serving China's development needs, while safeguarding its financial security.
In effect, it is 'One country, two financial systems' with Hong Kong enjoying our own legal and financial systems. We have a simple and low tax regime, a free flow of information and capital, a stable and fully convertible currency, the rule of law, an independent judiciary, as well as a highly internationalised financial market best placed to serve as a gateway to China and a bridge to the world. These attributes set us aside from other Mainland financial centres.
In a nutshell, Hong Kong enjoys an "offshore" financial status, while remaining organically domestic in serving the giant economic powerhouse of China.
We have been leveraging this unique strength by actively taking part in such platforms as the Closer Economic Partnership Arrangement and Hong Kong-Guangdong Cooperation Framework, and putting forth our contributions in the formative process of our country's 12th five-year plan.
All these help make Hong Kong an effective testing ground for the internationalisation of the renminbi, as well as a preferred asset-management hub, and the premier listing platform for Mainland companies wishing to go global.
Shaping policies
The banking profession is at the core of Hong Kong as China's global financial centre. We rely on your expertise and dedication to help maintain and enhance this status.
The continued and sustainable development of our banking industry requires shared vision and joint efforts among the industry, the Government and the regulators.
We attach great importance to developing policies and strategies with the banking community for the best interest of depositors, investors and other users of banking services, and for enhancing our competitiveness in the financial arena.
May I encourage you all to take part in the various consultation exercises that I have briefly outlined. They aim to ensure the sustainable development of our financial services industry.
With our collective and concerted efforts, we shall be able to optimise our regulatory regime, turn crises into opportunities, and capture the shift in financial gravity from the West to the East.
Permanent Secretary for Financial Services & the Treasury (Financial Services) Au King-chi gave this address at the Hong Kong Institute of Bankers' second annual banking conference.
