FINANCIAL LAW AND FINANCIAL LAW AND REGULATIONSREGULATIONS

WEEK 3

Regulatory Overview of the Hong Kong Financial Industry

2

Financial Systems and Markets

2 major parts:• Securities and futures markets• Banking system

Government Officers In Charge• Financial Secretary• Financial Services and the Treasury B

ureau

Regulatory Structure

3

Statutory Bodies

- Securities and Futures Commission

- Hong Kong Monetary Authority

MOU

4

Regulatory Structure

Formation of SFC- statutory body established in 1989- reports to the Financial Secretary

Securities and Futures Commission (SFC)- super-regulator of the securities industry- supervisory and regulatory authority on Hong Kong Exchanges and Clearing Ltd.

5

SFC’s Accountability

SFC – Accountability to the GovernmentThere are checks and balances on thesuper-regulatory power of SFC- Chairman and directors appointed by the HKSAR’s Chief Executive- Government’s written directions on the performance of its function- SFC reports to the Financial Secretary

6

SFC’s Accountability

SFC – Accountability to the Government

- the Financial Services and the Treasury

Bureau formulates policy for markets

and influence the activities of the SFC

- Annual budget approved by Government

- Annual report to the Financial Secretary

and the Legislative Council

7

SFC – Regulatory Objectives

- maintain and promote fairness, efficiency,

competitiveness, transparency &

orderliness

- promote public understanding of the

operation and functioning of the industry

- provide protection for investors

SFC’s Objectives

8

SFC – Regulatory Objectives (cont’d)- minimize crime and misconduct in the securities and futures industry- reduce systematic risks in the industry- assist the Financial Secretary on policies in relation to the industry

SFC’s Objectives

9

The Hong Kong Monetary Authority (HKMA)

- established in April 1993- license authorized institutions- supervise banks’ operations and activities- de facto “central bank” in HKSAR

10

The Hong Kong Monetary Authority (HKMA)

Banking System

- a 3-tier banking system including• licensed banks,• restricted licensed banks, and• deposit-taking companies

- approval of authorized institutions by HKMA

11

The Hong Kong Monetary Authority (HKMA)

Objectives of the HKMA

- maintain currency stability through

the linked exchange rate system

- ensure safety and stability of the

banking system

- promote efficiency, integrity and

development of the financial system

12

The Hong Kong Monetary Authority (HKMA)

Accountability of the HKMA

- the Chief Executive is appointed by the Financial Secretary and is a public officer

- required to submit an annual budget for approval by government

- annual report to the Legislative Council

13

The Hong Kong Monetary Authority (HKMA)

Accountability of HKMA

- Financial Services & the Treasury Bureau

formulates policy & influence the activities

of the HKMA

- responsible to the Exchange Fund Advisory Committee

14

The Hong Kong Monetary Authority (HKMA)

HKMA’s Linkage with the SFC

- securities related business conducted

by banks in HKSAR

- authorized institutions (AI) (authorized financial institutions) needed to register with SFC for regulated activities

- HKMA takes a lead role in vetting applications for such registration and in supervising SFC-regulated activities

15

The Hong Kong Monetary Authority (HKMA)

HKMA’s Linkage with the SFC

- SFC may suspend or revoke the registrations or issue reprimands and impose fines

- HKMA may remove the names of relevant employees from the Banking Ordinance register which authorizes bank staff to carry out regulated activities

16

The Hong Kong Monetary Authority (HKMA)

HKMA’s Linkage with the SFC

- HKMA and SFC signed Memorandum of Understanding (MOU) to minimize regulatory overlaps

More about SFC

18

SFC – Role and Functions

- supervise the exchanges and markets

- promote self-regulation of industry bodies

- regulate market intermediaries

- authorize securities & investment products

- regulate corporate disclosures

SFC’s Role and Functions

19

SFC – Role and Functions (cont’d)- regulate mergers and takeovers- set regulations on money laundering- set ‘secondary legislations’ e.g. rules- enforce codes of conduct- promote investor education

SFC’s Role and Functions

20

SFC – Operational Divisions

Corporate Finance

- administer codes

- raise standards of corporate governance

- oversee listing in exchange

- recommend changes to the Listing Rules

Operational Divisions

21

SFC – Operational Divisions Intermediaries and Investment Products

- licensing firms and individuals to conduct regulated activities

- monitor licensed firms financial positions - raise professional standards - monitor disclosures of investment products

Operational Divisions

22

SFC – Operational DivisionsEnforcement Division

- monitor trading irregularities- inspect books and records- disclosure of substantial shareholders- cooperate with other regulatory bodies

Operational Divisions

23

SFC – Operational DivisionsSupervision of Markets

- encourage participation in markets - strengthen markets - regulate share registrars - manage compensation funds

Operational Divisions

24

Regulatory Power

SFC has regulatory power on

- Hong Kong Exchanges & Clearing Ltd.

- Listed companies

- Approved share registrars

- Investor Compensation Company Ltd

- Participants in markets

25

Regulated Activities

SFC – Regulated Activities

Types

1. Dealing in securities

2. Dealing in futures contracts

3. Leveraged foreign exchange trading

4. Advising on securities

26

Regulated Activities

SFC – Regulated ActivitiesType5. Advising on futures contracts6. Advising on corporate finance7. Providing automated trading services8. Securities margin financing9. Asset management

27

Law Enforcement

SFC – Responsibilities in Law Enforcement- ensure compliance with the laws- report suspected insider dealing- supervise financial intermediaries- monitor activities of HKEx- cooperate with other regulatory bodies- take actions against misconducts

28

Legal Powers

SFC – Legal PowersSFC has specific powers- prosecution- court order- revocation / suspension / reprimand

29

SFC – Prosecution- prosecute for summary offences- involve the Police, Customs & Excise and the Department of Justice on offences tried on indictment

Legal Powers

30

SFC – Court Order - restrain from dealing securities - appoint a person to administer property - answer to contempt of court - direct a person to refrain from an act - ban a person from managing a listed co.

Legal Powers

31

SFC – Revocation/Suspension/Reprimand

SFC finds a person guilty of misconduct if: - failed to comply with requirements

- failed to comply with licensing conditions - committed by act or omission

prejudicial to the investing public - failed to comply with the Rules

Legal Powers

32

SFC – Revocation / SuspensionSFC may revoke or suspend the license of a

registrant- mental disorder- bankruptcy - criminal offence of dishonesty- offence of relevant ordinances- not carrying on business

Legal Powers

33

SFC – Revocation / SuspensionSFC may revoke or suspend a corporation

registration- liquidation- receiver appointed- enter into arrangement with creditors- not carrying on business in Hong Kong

Legal Powers

34

Legal Powers

SFC – Revocation / SuspensionSFC may revoke or suspenda corporation registration- a director convicted of crime of fraud- a director convicted of crime against the Ordinance- fail to satisfy a levy of execution

35

Appeals

SFC – Appeals

Securities and Futures Appeals Tribunal

- independent to hear appeals against

the decisions made by the SFC

- High Court judge as chairman

and 2 lay members with no conflicts of interest in the appeal

36

Three – tier System of Regulation for regulating the securities & futures

markets- Ordinances- Codes- Rules of the exchanges & clearing houses

37

Class Discussion

A Memorandum of Understanding (MOU) was executed between HKMA and SFC on 12th December, 2002.

Why is this MOU so important in terms of (a) Registration of AIs and (b) Disciplinary Actions? [READ p.1-3, Section 6: Registration] Can you draw a flow chart to show the workflows in

(a)?

38

Review questions

Describe the regulatory framework of the securities industry in Hong Kong. Focus on the main regulatory bodies and their relationship.

39

Review questions

Discuss about the main legal powers of SFC in response to offences and misconduct.