Submission on the Hong Kong Monetary Authority’s Consultation Paper on Proposed Enhancements to the Banking Ordinance (Cap. 155)

1. The Consumer Council (the Council) is pleased to submit its views on the proposed enhancements to the Banking Ordinance (BO) suggested by the Hong Kong Monetary Authority (HKMA).
    

The Council’s overall views
 

2. In view of the rapid developments in the banking sector domestically and globally, the Council agrees that it is important for the HKMA to review and assess the BO to enable the Monetary Authority (MA) to effectively respond to risks and challenges in times ahead.  The Council hopes that the refinement of the BO would not only align the regulatory system in Hong Kong with international standards but also strengthen the protection of consumer interests.

3. Although the refinement of the BO would unlikely provoke tremendous reactions in the industry given that the Hong Kong banking system has long been resilient and robust, authorized institutions (AIs) might inevitably need to commit extra resources to review and/or improve their current practices in order to comply with the latest regulation once the amendments take effect.  The Council would expect the HKMA to closely monitor the market and provide guidance to AIs where appropriate to avoid unreasonable shift of AIs’ operational costs to consumers amid the regulatory changes.
    

4. In the following parts, the Council puts forward its views and comments in response to the enhancement proposals over areas which it considers particularly pertinent to consumer interests.
    

Allowing flexibility for the MA to engage skilled persons
 

5. The Council supports that the MA should be allowed flexibility to directly appoint, or require AIs to appoint, skilled persons or auditors to assist him in performing his functions under the BO, such as preparing and submitting reports on such matters relating to AIs.  In fact, the Council notes other financial regulators in Hong Kong and other jurisdictions have already adopted a similar practice.  For example, in Hong Kong the Securities and Futures Commission is granted powers by the Securities and Futures Ordinance to engage consultants, agents and advisers to assist in the performance of its functions_[1].  Meanwhile, in the UK, the Financial Conduct Authority (FCA) employs skilled persons from different backgrounds such as consultancy, accounting and cybersecurity to seek their views or assistance with further analysis_[2].   
    

6. The Council opines that the proposal, apart from keeping up Hong Kong with international developments, can ensure the MA can acquire the required expertise to support his functions under a rapidly changing banking and financial environment, which would in turn promote public confidence of the soundness and stability of AIs.
    

Considering cybersecurity and climate risk specialists in the recruitment of skilled persons
 

7. While acknowledging that factors such as qualifications, experience, competency, etc. should be taken into account in the recruitment of skilled persons, the Council emphasises it is important for the MA to particularly consider cybersecurity experts and climate risk specialists as amongst the types of skilled persons that he could engage in view of digitalisation, the adoption of Fintech and exposure of AIs’ assets and operations to climate risks.  The Council believes that having effective supervision to ensure AIs have adequately dealt with climate-related risks and have strong IT security measures can foster the sustainability of the banking sector.

Drawing up guidelines for appointing skilled persons and auditors
 

8. Furthermore, to ensure the proper performance of the skilled persons and auditors, the Council opines that the HKMA should draw up guidelines over their appointment.  The Council is aware that the Supervisory Policy Manual of the HKMA currently includes a module on reporting requirements relating to AIs’ external auditors under the BO that provides guidance on such auditors’ appointment, reporting, and communication with the HKMA_[3].  The module could serve as a reference for the suggested guidelines.  
    

9. However, the Council notes that the current version of the aforementioned module dated back to 2003, which was released over 20 years ago.  While the HKMA launched a consultation on its revision in 2019, with proposed additions such as the role of AIs’ audit committees and the rotation, ethical and independence requirements of auditors_[4], as of now the module is still under consultation according to the website of the HKMA_[5].  Given the considerable lapse of time and the rapidly-changing landscape in the banking sector in recent years, the Council deems that the HKMA should revisit the consultation to ensure the right set of requirements and guidelines are in place to govern the industry. 

10. To enhance the comprehensiveness of such guidelines, the Council also recommends that the HKMA should draw reference from the guidance issued by the FCA in the UK_[6].  The FCA lists a series of examples of when skilled persons might be recruited, including diagnosis, monitoring, prevention, remedy, etc., and there are elaborations on the appointed skilled persons’ function under each example.  The Council believes a set of clear and comprehensive guidelines could enhance transparency and facilitate the auditing work and thus foster public confidence.
     

Maintaining good communication with appointed skilled persons
 

11. According to the World Bank Centre for Financial Reporting Reform, only few bank supervisors discuss the audit strategy and plan with their appointed external auditors; therefore, it suggested that supervisors could meet with external auditors during the planning stage to discuss specific areas which they would like the auditors to focus on during the audit_[7].  Meanwhile, the Institute of Chartered Accountants in England and Wales has also issued guidance for skilled person reviews, which notes that clear communication about any subsequent enforcement action by the regulator will help the skilled person understand the type of evidence required to support report findings and adopt a proportionate approach to the review exercise while ensuring the review meets the regulator’s needs_[8].  The Council recommends the HKMA to consider these suggestions and maintain good communication with appointed skilled persons or auditors throughout the audit process to enhance the quality of external audits.
     

Reviewing the scope of section 63A of the BO
 

12. To make use of the knowledge and expertise of appointed skilled persons or auditors to draw the attention of the MA to matters that may endanger the interests of banking consumers in a timely manner, the Council considers the scope of section 63A of the BO be closely reviewed.  Currently, this section requires only appointed auditors to report to the MA any matter which they become aware of during their course of duty that adversely affects the financial position of AIs to a material extent.  The HKMA might consider making revisions with appropriate extension such that skilled persons who are appointed to examine critical information of AIs (such as information technology and corporate governance) would also be required to make a report to the MA.   In addition, apart from matters adversely affecting the financial positions of AIs, matters that impact the interests of banking consumers should also be required to be directly reported to the MA.  Although the HKMA has already provided guidance on this, the Council suggests giving this good practice legal force by including this provision in the BO, so as to provide greater strength and clarity, thus enhancing the protection of consumer interests.  
     

Introducing a number of technical amendments
 

13. While understanding the needs to introduce technical amendments to the BO, the Council wishes to emphasise that the HKMA should ensure consumers remain adequately protected after the amendments.  The Council sets out its views towards specific amendments proposed as follows.
     

Prohibition time limit (paragraph 52[I]d of the consultation paper)
 

14. The Council notes that it is proposed to impose a seven-year time limit of the prohibition from acting as employees of AI in section 73 of the BO.  While it is understood that the amendment is proposed so as to enhance the practical operation of the provision and alleviate the burden of relevant AI employees, the Council considers consumer interests need to be adequately protected.  Given the rapid developments in the financial sector and the proliferation of new types of scams, the Council is concerned that seven years may be too short for the MA to relinquish his powers to gatekeep prohibited persons, particularly those convicted of offences involving serious fraud or dishonesty.  The Council seeks the HKMA to clarify the rationale of setting seven years as the time limit, elaborate how it can still gatekeep prohibited persons, and ensure adequate consumer protection should the current proposal be adopted.
     

Publication channels (para. 52[II]g)
 

15. In response to the proposal that the MA be given flexibility to decide the channels of guideline publication, the Council urges the HKMA to take the public’s right to know into consideration when publishing related guidelines.  When the MA considers using other publication channels than the Gazette, which is the current required channel, it should ensure such channels are readily-accessible, familiar to the general public and traceable.  More importantly, there should be consistency and transparency over the types of channels used by the MA to publish guidelines, to ensure the industry and the public would not miss out on crucial information.
     

Contract requirements (para. 52[II]h)

16. The Council welcomes the proposal of adding a provision emphasising the qualifications, skills, experience, resources and independence of auditors appointed by AIs.  To further ensure their independence, the Council suggests the HKMA make reference to the FCA, which sets out requirements on the contracts made by a firm with such skilled persons.  For example, such contracts must require and permit the skilled persons to cooperate with the FCA in the discharge of its functions and to inform the FCA on matters if they reasonably believe the firm has contravened regulatory requirements and conditions or has solvency issues.  The FCA can also request the firm to provide a copy of the draft contract and inform the firm of any matters requiring further clarification or discussion before the finalisation of the contract_[9].  The HKMA may consider whether such practices could be adopted as additional provisions in the BO or in the module mentioned above.
     

Inclusion of an express reference to the “public interest” in the conditions for initiating resolution of a “within scope financial institution”
 

17. The Council recognises “public interest” as a critical condition to consider for triggering the resolution of a “within scope financial institution” and agrees that the amendment of existing conditions could enhance the flexibility of the resolution authorities in handling various crisis scenarios.  Besides the proposed condition, the Council suggests the HKMA further explore whether there are other important conditions to be included to ensure the comprehensiveness of the resolution mechanism.
     

18. For instance, the Monetary Authority of Singapore (MAS) specifies that apart from public interest and the stability of the Singapore financial system, it would also consider the interest of the affected persons (including depositors, policy owners and investors) in its resolution regime_[10], demonstrating it takes both industry- and consumer-related factors into account.  The Council proposes that the HKMA could draw further reference from the MAS and its overseas counterparts in refining its resolution mechanism.
     

Conclusion
 

19. The Council concurs with the necessity and importance of reviewing and assessing the BO to ensure regulatory efforts and consumer safeguards keep up with the latest developments.  The Council sincerely calls upon the HKMA to take into consideration the above comments when refining the BO, for benefits of the public.