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Hong Kong: Offshore Investment

Bank Deposits

Hong Kong has one of the largest representation of international banks in the world: 71 of the world's 100 largest banks have a presence there. Hong Kong is the world's 9th largest international banking centre in terms of the volume of external transactions, and the second largest in Asia after Japan.

At the end of May 2011, there were 149 licensed banks (126 of which were incorporated outside Hong Kong), 20 restricted licence banks (of which eight were incorporated outside Hong Kong) and 26 deposit-taking companies in business (all incorporated in Hong Kong). These 195 authorised institutions operate a comprehensive network of 1,300 local branches. In addition, there were 66 local representative offices of overseas banks in Hong Kong.

The banking system in Hong Kong is characterized by its 3-tier system, which is formed by 3 types of banking institutions, namely licensed banks, restricted licensed banks and deposit-taking companies, which are authorised to take deposits from the general public. The 3rd tier of deposit-taking institutions operate under different restrictions. Only licensed banks and restricted licensed banks can be called banks.

The Banking Ordinance is the basis of the legal framework governing the banking sector. The Ordinance sets forth minimum capital requirements for authorized institutions. Locally incorporated banks must have paid-in capital equal to US$388 million and net assets of US$518 million dollars for authorization to operate a licensed bank. Applicants for a restricted-license bank must have paid-in capital equal to US$12.8 million.

Since 1997, the HKMA has been issuing a series of circulars to set out its regulatory approach on e-banking services and to provide authorised institutions with recommendations on the risk management for these activities.

Among the issues discussed, the arrangements adopted by institutions to ensure adequate information security for their services are one of the key focuses of the HKMA. While absolute information security does not exist, institutions are expected to implement information security arrangements that are "fit for purpose", i.e. commensurate with the risks associated with the types and amounts of transactions allowed, the electronic delivery channels adopted and the risk management systems of individual institutions.

In line with existing authorisation policies for conventional banks, a locally incorporated virtual bank cannot be newly established other than through the conversion of an existing locally incorporated authorised institution. Furthermore, local virtual banks should be at least 50% owned by a well-established bank or other supervised financial institutions. For applicants incorporated overseas, they must come from countries with an established regulatory framework for electronic banking.

Hong Kong banks evidently offer many opportunities to non-resident investors. However, some care is needed when approaching a 'private banker' or a bank offering customised relationship management (there are lots of expressions all amounting to the same thing). What matters is the structure of the bank. This is not to say that one kind of bank is necessarily more reliable than another, just to understand why the bank is offering personal attention, and what it hopes to gain from it.

Some banks are little more than front ends for investment funds. They may be safe enough, but are they objective? Perhaps it is best to look for a bank that is trying to make money out of private banking as an activity in itself, rather than just using it as a scoop for customers for its financial products. If you just want a bank that will give you a good rate of interest without deduction of withholding tax, then the choice is simpler.

Private banking doesn't just mean investment: banks like to lend money, and especially to richer people. This raises the question of how a private banker is going to get rewarded. Depositing money with a bank is reward enough, of course, whether into the bank or into one of its financial products, but private banking when it has an advisory nature and is not accompanied by lending or borrowing may be fee-based. Provided the sum involved is large enough to justify the fee costs, an advisory private banking relationship is probably a good way to go. The bank will get the benefit from time to time of being able to offer bridging finance, or of holding large amounts in transit etc. It can hope for more substantial involvement with you in future. But the immediate relationship is between financial adviser and client.

Deposit Protection Scheme

Hong Kong’s enhanced deposit protection scheme, (DPS) providing a higher protection limit of HKD500,000 (US$64,300), from a previous limit of HKD100,000, came into operation on January 1, 2011.

In addition to the increase in the protection limit per depositor per bank, the scheme also now includes deposits pledged as security for banking services. However, as restricted-licence banks and deposit-taking companies are not members of the scheme, the scheme does not cover deposits placed with those institutions.

The Full Deposit Guarantee provided by the Government was introduced on 14 October 2008, which guarantees all deposits held with authorized institutions (i.e. all licensed banks, restricted licence banks and deposit-taking companies) until the end of 2010. This special guarantee is a contingency measure introduced at the onset of the global financial crisis in late 2008 to reinforce confidence in Hong Kong’s banking system.

The Financial Secretary, John Tsang, said the full deposit guarantee had functioned effectively to shore up public confidence in Hong Kong's banking system during the global financial crisis, but “as the global economy has become more stable, the provision of this special guarantee by the government should come to an end as originally planned."

The Financial Secretary, Mr John Tsang, said, "The Full Deposit Guarantee has functioned effectively to shore up public confidence in Hong Kong’s banking system during the global financial crisis. As the global economy has become more stable, the provision of this special guarantee by the Government should come to an end as originally planned."

The Chief Executive of the Hong Kong Monetary Authority, Mr Norman Chan, said, “Our banking system remains healthy and robust, with capitalisation well above international standards. Public confidence in the banking system has also remained strong. The expiry of the Full Deposit Guarantee is not expected to have any impact on the banking system.”

The Hong Kong Deposit Protection Board has undertaken extensive publicity campaigns since the second half of 2010 to raise public awareness on the changes including their understanding on the coverage under the enhanced Scheme. Close collaboration with banks has been maintained to ensure that they make timely adjustments to their systems and business flows. Furthermore, the Board has worked closely with the HKMA as the banking regulator to remind Authorized Institutions to make proper representation on the expiry of the full deposit guarantee and its potential impact on their customers.

Mrs Chan Wong Shui, Chairperson of the Board, said, "The enhanced Deposit Protection Scheme stands ready to provide a means of protection to depositors. The new protection limit of $500,000 will be able to fully cover about 90% of the bank depositors. The Board has taken the necessary measures to prepare for a smooth transition to the new Scheme."

After the implementation of the enhanced DPS, the Board will continue to maintain an effective and efficient DPS in line with international practice.

Hong Kong's Deposit Protection Scheme was first launched on September 25, 2006, with a coverage limit of $100,000 per depositor per bank.

Enacted on May 5, 2004, the Deposit Protection Scheme Ordinance governs the setting up and operation of the scheme. After two years of intensive preparation,the scheme provided deposit protection and and collected contributions from members from the 25th of that month.

All licensed banks, unless otherwise exempted by the board, are required to participate as members.

The main features of the scheme are that:

  • Depositors are not required to apply for protection or compensation, eligible deposits held with scheme members will automatically come under the protection of the scheme;
  • Both Hong Kong dollar and foreign currency deposits are protected;
  • The scheme protects eligible deposits held in scheme members, it does notprotect term deposits with a maturity longer than five years, structured deposits, secured deposits, bearer instruments, off-shore deposits and non-deposit products such as bonds, stocks, warrants, mutual funds, unit trusts and insurance policies;
  • A Deposit Protection Scheme Fund with a target fund size of 0.3% of the total amount of relevant deposits (translating into a fund size of approximately $1.3 billion) will be built through the collection of contributions from scheme members; and
  • Differential contributions will be assessed based on the supervisory ratings of individual scheme members.

Members are also required to notify their customers if a financial product described as a deposit is not protected by the scheme.



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