Safeguarding the confidentiality of information obtained by regulators in the exercise of their banking supervisory functions is an established international practice. There are good reasons for this.
The principal objectives of the HKMA as banking supervisor are to provide a measure of protection to depositors and to promote the general stability and effective working of the banking system. These objectives are clearly laid down in the Banking Ordinance, from which the supervisory powers of the HKMA are derived. In order to discharge its responsibilities as the banking supervisor, the HKMA maintains a close working relationship with the banks licensed to conduct banking business in Hong Kong. This relationship, which has been built up over a long period, is characterised by a high degree of mutual trust and respect between the supervisor and the banks, and a common understanding that it is in the long-term interests of all concerned that these principal objectives are achieved. The pace and determination with which the many banking reforms have been promulgated and implemented over the last ten years of existence of the HKMA, during a most challenging period, are testimony to how well that relationship has served Hong Kong.
The series of banking crises in the 1980s focused everybody's mind on how important the general stability and effective working of the banking system are to the economic well-being of Hong Kong, particularly during a time when it was developing its role as an international financial centre. The closure of BCC(HK)in 1991 and the contagious bank runs that followed hardened this collegial resolve of everyone in the banking sector. And so when we in the HKMA brought forward the long series of proposals for banking reforms, we met a degree of co-operation that has now resulted in Hong Kong's banking system being recognised as one of the most robust in the world. Further, when at the individual bank level we initiate supervisory action of whatever nature, we meet a degree of frankness and openness that is very conducive to the resolution of issues, hopefully, before they intensify to a stage affecting confidence in that bank and therefore in the banking system.
This trust between the banks and the banking supervisor is also built upon the legal protection available in the Banking Ordinance in relation to the confidentiality of information obtained in the exercise of banking supervisory functions. Effective banking supervision requires the banking supervisor to receive timely and accurate supervisory information from the banks. This enables the supervisor to encourage or require banks to take remedial measures and improve internal controls, policies and systems in line with current international best practice. In Hong Kong most of the supervisory information is obtained by the HKMA through the returns that the banks routinely submit, or through on-site or off-site examinations. The information either is commercially sensitive, for the banks and their customers, or involves the privacy of individuals. Customers of banks have a legitimate interest in the preservation by the banks of confidentiality of customers' information arising from the banking relationship and the banks owe their customers a contractual duty of confidentiality. To promote full and frank disclosure of information by banks to the banking supervisor, there is therefore a need for tight statutory restrictions on the further disclosure by the banking supervisor of such information. This is the principal purpose of section 120 of the Banking Ordinance.
Legal protection of the confidentiality of information obtained in the exercise of banking supervisory functions is an international practice. There is much emphasis on this in banking legislation in the major economies, which generally prohibits banking supervisors from disclosing supervisory information. Not only is this confidentiality important for the proper conduct of banking supervision, it is also an important feature common in international financial centres. If the banking supervisor were at liberty to disclose the proprietary information of the banks under its supervision and that of their customers whenever requested, banking business would be turned away. Without the disclosure prohibitions imposed on the banking supervisor, it would be under enormous pressure from, for instance, overseas tax authorities to disclose confidential information to assist them with their investigations. There would be no end to "fishing expeditions". Any aspiration to be an international financial centre would be quickly dashed.
But obviously there is a need for the banking supervisor to disclose supervisory information under special circumstances, particularly when such disclosure is, in the opinion of the banking supervisor, necessary for the effective exercise of his functions. Information may also be needed for the proper investigation of criminal complaints or the institution of criminal proceedings. There is therefore a need for gateways through which disclosure is possible under certain, well-defined circumstances. This is the case in Hong Kong. The Banking Ordinance spells out these gateways clearly. But they are very restrictive, and deliberately so. Even disclosure to the courts in relation to civil proceedings is restricted. And disclosure in the public interest is restricted to specified individuals and under specified conditions. In fact, the Law attaches such importance to the observance of confidentiality by the HKMA that it imposes a penal sanction for a breach, and this includes the possibility of imprisonment for up to two years. This is how important confidentiality in banking supervisory information is.
Joseph Yam
6 November 2003
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