Hong Kong: Law of Offshore
Financial Services Law
Until 1964 there were virtually no regulations governing the financial sector in Hong Kong. A banking crisis in the 1960s led the authorities to enact the Banking Ordinance 1964, which introduced basic standards such as minimum capital requirements and rudimentary disclosure laws. However, bank failures, caused by poor management and excessive investment in the real estate market in the early 1980s, coupled with the stock market crash in 1987, resulted in a complete overhaul of Hong Kong financial market regulations. The country now has a transparent legal and regulatory environment that has facilitated its role as a modern regional and international financial center.
Under the Sino-British Joint Declaration on the Future of Hong Kong, Chinese authorities were committed to enact the Basic Law of the Hong Kong Special Administrative Region. The Basic Law is the legal basis for the "One Country, Two System" guarantee and provides for the continuance of Hong Kongs system of common law and free market economic system after July 1, 1997. The Law stipulates that the Hong Kong dollar will remain freely convertible; that markets for foreign exchange, securities, futures, and other financial products will remain open; and that no controls will be placed on the flow of capital into or out of Hong Kong.
Three government agencies are responsible for regulating Hong Kongs financial market: the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC), and the Insurance Authority. In addition to being regulated and supervised by the HKMA, banks are required to become members of and adhere to the rules of the Hong Kong Association of Banks (HKAB).
The Hong Kong Monetary Authority
Hong Kong has no central bank as such, but the HKMA does assume many of the responsibilities typically assigned to a central bank, including ensuring the safety and soundness of the banking system and the stability of the currency.
Three private banksthe Hongkong Shanghai Bank, the Bank of China, and Standard Charteredare authorized to issue HK dollars. Under the currency board system, these banks are allowed to issue HK dollars only upon depositing US dollars in the Exchange Fund, which is regulated by the HKMA. In 1990, the HKMA began to issue Exchange Fund Bills and, in 1993, Exchange Fund Notes, which are both HK dollar debt securities. The issuance of debt securities through open-market operations provides the HKMA with a mechanism for adjusting interbank liquidity.
The clearing and settlements system in Hong Kong changed in April 1997. Until that time, the Hong Kong Shanghai Bank managed the Clearing House of the Hong Kong Association of Banks and settled interbank payments. The Clearing House is now managed by Hong Kong Interbank Clearing Limited, which is jointly owned by HKMA and HKAB. Under the new system, interbank payments are cleared through the Exchange Fund.
In a circular released in July, 2002, HKMA outlined the principal points of new regulations governing securities business undertaken by banks.
Currently, Hong Kong's banks are known as 'exempt dealers', because their securities departments are not regulated by the Securities and Futures Commission. However, under the Banking (Amendment) Ordinance 2002 and the Securities and Futures Ordinance implemented in 2003, a raft of new rules governing banks' securities business have been introduced.
The main points of the regulations, as outlined in the HKMA circular are as follows:
- Banks and any of their staff involved in securities business must register with the HKMA, and personnel must meet the SFC's fit and proper person requirements;
- Banks will need to appoint two senior executives to supervise the way in which securities activities are conducted
Under this regulatory regime, the Monetary Authority is in charge of the day-to-day supervision of banks' securities divisions, but cases of suspected malpractice are handed to the Securities and Futures Commission for investigation.
"This is in line with the concept that the SFC remains the ultimate authority to regulate the securities and futures industry," the circular explained.