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The two-pronged approach to banking supervision in Hong Kong

Norman T.L. Chan, Chief Executive of the Hong Kong Monetary Authority | July 23, 2014
The approach requires HKMA to monitor the asset-liability risk of banks as well as establish two permanent departments to supervise banks' business conduct and practices.

As we have learnt from the Lehman incident, some banks and their employees may, under intense competitive pressure for market share and profits, resort to improper practices in selling wealth management products, without due regard for the customers' interests.  Drawing on these lessons, the HKMA has since 2009 required banks to implement various new measures, such as selling wealth management products only in areas segregated from general banking service counters, audio-recording of the selling process, and introducing a cooling-off period. The aim is to strengthen protection for bank customers engaged in wealth management activities. Some industry sources have described these measures as being over and above the requirements for non-bank financial institutions (for example, securities dealers and insurance intermediaries and brokers) selling similar products, thus creating "unfair" competition. So, is this "unfair"?  Not really. Why? Because the special trust and unique relationship between banks and their customers set them squarely apart from non-bank institutions, which warrant additional measures to protect bank customers.

Having said that, however, the HKMA will, without compromising investor protection, move with the times and constantly review the actual implementation, effectiveness and necessity of the relevant measures.  We will also work in consultation with the industry on any appropriate way of streamlining or enhancing the existing practices to facilitate banks and their customers.

Prior to the Lehman incident, the HKMA's supervisory resources were heavily directed towards two aspects: (i) monitoring and assessing the balance sheet risk management of banks; and (ii) amending and enhancing existing banking prudential supervisory policies and regulations. In the aftermath of the incident, the HKMA was suddenly inundated with more than 20,000 complaints of alleged mis-selling.  To cope with the extra workload, a temporary workforce, which at one stage peaked at around 200, was hired on contract to help with the investigations and necessary follow-up actions.

Strengthening Supervision of Conduct and Practices

In the midst of this additional work being shouldered by the HKMA, I decided in 2010 that a two-pronged approach should be adopted for the HKMA's banking supervision work.  The first involves the monitoring of the asset-liability risk of banks, which includes our participation in discussions on the reform of international supervisory standards and the implementation of these standards in Hong Kong. 

But more importantly, what I called the second prong, has been the establishment of two new permanent departments, namely the Banking Conduct Department and the Enforcement Department, to supervise banks' business conduct and practices.  (Please refer to the organisation structure at Chart 2.) 

The Banking Conduct Department is mainly responsible for formulating the principles and standards governing banks' dealings with customers and regulating banks' conduct when carrying out activities in the market. It also reviews banking licence applications and appointments of directors and senior management of banks. The Enforcement Department is responsible for the investigation and follow-up actions of cases of mis-selling and other bank misconduct. The work of the Enforcement Department is important. 


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