A new Memorandum of Understanding (MOU) between the HKMA and the Securities and Futures Commission (SFC), to take effect on the commencement of the Securities and Futures Ordinance (SFO), sets out the roles and responsibilities of the two regulators.
In line with the global trend of increasing involvement of banks in cross market activities, banks in Hong Kong have also been more eager to expand their presence outside of traditional banking business, such as securities business. While this will no doubt enhance market competition, which will bring benefits to investors, there have been legitimate concerns in some sectors that a level playing field for all intermediaries should be maintained. The SFO which is targeted to commence operation on 1 April next year has laid down a sound legal framework for this. To further enhance the effectiveness of the framework, a revised MOU between the HKMA and the SFC was signed last week. The MOU elaborates on the regulatory framework in the SFO- and sets out the operational details relating to the respective roles and responsibilities of the two regulators. It also underpins the regulatory objective of achieving a level playing field for all intermediaries in the securities and futures market, whether they are supervised by the HKMA or by the SFC.
Banks have been engaging in securities business in the capacity of "exempt dealers" under the existing regulatory regime. This means they are not formally subject to most of the SFC regulatory requirements in the conduct of such business. The HKMA has nevertheless, on an informal basis, required banks engaging in the business to observe the SFC requirements. In this regard the HKMA and the SFC signed an MOU in 1995 to set out their supervisory co-operation. The content of this MOU, however, mainly covers co-ordination and liaison between the two regulators in relation to matters of common interest.
The SFO introduces a substantial change to the current situation. Banks will no longer be exempt from the relevant regulations when they engage in securities business. Instead they will have to apply for registration with the SFC. This means they will have to meet the Fit and Proper Criteria set by the SFC. Likewise, staff engaged by banks in securities business will have to meet the Fit and Proper Criteria applicable to staff of brokerage firms. It will in fact be a statutory condition of registration for banks that each member of staff engaged by them in securities business is a fit and proper person. Banks will also have to comply with the various regulatory requirements set by the SFC in relation to their securities business, including the subsidiary legislation and the business conduct codes. Last but not least, banks and their securities staff will be subject to the same range of disciplinary actions that are applicable to brokers and their staff in case they are guilty of misconduct or otherwise not fit and proper.
This substantial change in the regulatory framework necessitates a comprehensive revision of the existing MOU between the two regulators. While banks will be formally subject to the SFC regulations, the HKMA remains the frontline supervisor of banks and the new MOU is important in setting out the operational arrangements between the HKMA and the SFC in relation to their respective roles and functions. These cover a whole range of activities including application for registration, day-to-day regulatory and supervisory processes, complaint handling and investigations, as well as the taking of disciplinary actions. In respect of all these, the new MOU elaborates on the statutory requirements and sets out the detailed arrangements and procedures, with particular reference to the mechanism for referral, consultation and the giving of advice. This detailed description ensures that there will be very close communication and co-ordination between the HKMA and the SFC in discharging their responsibilities under the new regime, and reflects the commitment from both sides to adhere to such arrangements and procedures in a consistent manner. This in turn ensures that the same approach and standards will be applied by the HKMA to banks in relation to their securities business as those applied by the SFC to the brokers, and so achieves a level playing field. In addition, the new MOU provides a comprehensive list of general as well as specific matters that are the subject of information exchange between the two regulators within the ambit of the law. This means that the HKMA and the SFC essentially have access to the same pool of key information that enables them to discharge their responsibilities in a consistent manner in relation to banks and brokers, again contributing to a level playing field.
It is important that members of the investing public are given a choice to select their own securities intermediaries, be they banks or brokerage houses. The responsibility of the regulators in this regard is to set out a framework which affords investors the same degree of protection regardless of their choice of the intermediary. The new MOU, together with the SFO, will ensure that this is achieved. In the interest of transparency, the new MOU has been posted on the HKMA's public website for public reference.
Joseph Yam
19 December 2002
Related Information:
Click here for previous articles in this column.
Document in Word format
