Reports on Observance of Standards and Codes

People's Republic of China in respect of the Hong Kong Special Administrative Region and the IMF

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EXPERIMENTAL IMF REPORT ON
OBSERVANCE OF STANDARDS AND CODES:
People's Republic of China--Hong Kong Special Administrative Region

August 1999

Prepared by an IMF staff team from the Asia and Pacific, Fiscal Affairs, Monetary and Exchange Affairs, Policy Development and Review, and Statistics Departments, on the basis of information provided by the Hong Kong SAR authorities

Contents

Preface

List of Acronyms

  1. Overview

  2. Data Dissemination
    1. The Transparency Standard
    2. Institutional Framework in Hong Kong SAR
    3. Description of Practice
    4. IMF Staff Commentary

  3. Fiscal Transparency
    1. Description of Practice
    2. IMF Staff Commentary

  4. Transparency of Monetary and Financial Policies
    1. Description of Practice
    2. IMF Staff Commentary on the Monetary Policy Framework
    3. IMF Staff Commentary on the Financial Policy Framework

  5. Banking Supervision Assesses only the authorities' observance of the transparency elements of the Basel Core Principles
    1. Description of Practice
    2. IMF Staff Commentary

  6. Securities Market Regulation This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a Report on Observance of Standards and Codes (ROSC).

  7. Insurance Industry Regulation This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a Report on Observance of Standards and Codes (ROSC).

  8. Accounting Practices This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a Report on Observance of Standards and Codes (ROSC).

  9. Auditing Practices This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a Report on Observance of Standards and Codes (ROSC).

Preface

This report is one in a series of experimental studies aimed at considering how to present information on an economy's transparency practices and some of the standards that lie behind these practices.

The report has been prepared by Fund staff with the cooperation of the Hong Kong SAR authorities. In February 1999, the authorities agreed to a staff request that Hong Kong SAR participate in a round of experimental case studies. Following the completion of self-assessment questionnaires by the authorities, a staff team visited Hong Kong SAR in June 1999 to discuss follow-up questions and issues. The final report was prepared by Fund staff; the Hong Kong SAR authorities provided comments on an earlier draft of this report.

The objectives of the report are twofold. It can assist the authorities in identifying areas where transparency can be enhanced further, with benefits for the accountability of policy makers and for economic performance. Second, by providing information on the extent to which countries observe internationally recognized standards deemed important for the effective functioning of financial systems, a report on transparency practices and other associated standards can contribute to well-founded lending and investment decisions.

It is important to recognize the limitations of this experimental report. It does not attempt to provide an assessment of the quality of the published information. Rather, it considers transparency practices, focusing on whether the disclosure elements of standards--requirements to make information available to the public--have been satisfied and also goes some way in considering whether the basis on which the information is reported to be compiled is consistent with the definitional or framework elements of the relevant standards.

 

List of Acronyms

AI Authorized Institution
C&SD Census and Statistics Department
DSBB Dissemination Standards Bulletin Board
EFAC Exchange Fund Advisory Committee
FSB Financial Services Bureau
HKAB Hong Kong Association of Banks
HKFE Hong Kong Futures Exchange
HKFI Hong Kong Federation of Insurers
HKICL Hong Kong Interbank Clearing Limited
HKMA Hong Kong Monetary Authority
HKSA Hong Kong Society of Accountants
HKSCC Hong Kong Securities Clearing Company
IA Insurance Authority
IAC Insurance Advisory Committee
IAIS International Association of Insurance Supervisors
IAPC International Auditing Practices Committee
IARB Insurance Agents Registration Board
IAS International Accounting Standards
IFAC International Federation of Accountants
ISA International Standards on Auditing
IASC International Accounting Standards Committee
IOSCO International Organization of Securities Commissions
MRF Medium Range Forecast
NSDP National Summary Data Page
OCI Office of the Commissioner of Insurance
PRC Practice Review Committee
PSMC Professional Standards Monitoring Committee
RTGS Real-Time Gross Settlement System
SAS Statements of Auditing Standards
SDDS Special Data Dissemination Standard
SEHK Stock Exchange of Hong Kong
SFC Securities and Futures Commission
SSAP Statements of Standard Accounting Practice
 

I.  Overview

1.  The successful transformation of the Hong Kong SAR economy over the past two decades to an international financial center owes in large part to its policy of encouraging free trade, unfettered flow of capital, open competition, and market flexibility, underpinned by a transparent, rules-based policy framework. Key macroeconomic policies--the linked exchange rate system, prudent fiscal policy, well-developed financial regulation, and a noninterventionist stance in the goods and factor markets--have facilitated economic adjustment to both shifts in global business trends as well as cyclical fluctuations.

2.  Sound institutions and good governance have also been critical ingredients of Hong Kong SAR's economic success. Safeguarding the rule of law, improving the efficiency and accountability of public administration, tackling corruption, and ensuring the free flow of information have been and will remain critical to the success of the "one country, two systems" framework. The Joint Declaration and the Basic Law, as well as the arrangements for the mutually independent monetary relationship between Hong Kong SAR and the Mainland of China, provide assurance that this framework will continue.

3.  In the context of this experimental report, the staff have considered the authorities' practices against a set of internationally accepted standards. In the areas of data dissemination, fiscal transparency, and banking supervision, Hong Kong SAR practices have been considered primarily against the Fund's Special Data Dissemination Standard (SDDS), its Code of Good Practices on Fiscal Transparency, and the transparency aspects of the Basle Committee's Core Principles of Effective Banking Supervision. The report also considers the transparency practices in the area of monetary and financial policies, using the Code of Good Practices on Transparency of Monetary and Financial Policies. In addition, the report provides a summary of the authorities' views on the extent of securities market regulation, insurance regulation, accounting and auditing, and describes how domestic standards are promulgated and enforced. However, no attempt is made to assess observance of standards in these four areas.

4.  The Hong Kong SAR authorities consider transparency in the policy-making framework and regulatory practices to be central for successful economic management and this is reflected in their approach to many of the issues discussed in this report. In the staff's view, Hong Kong SAR has achieved a high degree of transparency in the four areas assessed in this report--data dissemination, fiscal policy, monetary and financial policies, and banking supervision. Nevertheless, transparency practices can always be further improved, and the staff's suggestions in this regard may be summarized as follows:

  • additional information in budget documents on the projected path of capital spending related to Government equity injections would facilitate the analysis of the underlying economic impact of fiscal policy in a transparent manner;
  • more frequent updates, possibly on a half-yearly basis, of the current fiscal year's budget forecast and the economic assumptions underlying it;
  • inclusion in budgetary documents of a fiscal risk statement summarizing the effects of possible variations in economic assumptions on the budget; and
  • specifying more of the modalities of accountability for monetary and financial policies, which has evolved to a high level through custom and tradition, in legislation or regulations.

5.  In addition, it will be important that the final form of the legislation relating to the proposed Securities and Futures Bill maintains a high degree of transparency and accountability in securities market regulation and supervision. A clear statement of objectives, which is expected in the Bill, will further enhance transparency and accountability.


II.  Data Dissemination

A.  The Transparency Standard

6.  The principal transparency standard for disclosure of macroeconomic data is the IMF's Special Data Dissemination Standard (SDDS), which was established in April 1996 to guide Fund members that have, or that might seek, access to international capital markets in the provision of their economic and financial data to the public. The objectives of the SDDS are to enhance the availability of timely and comprehensive statistics and, therefore, contribute to the pursuit of sound macroeconomic policies, and improved functioning of financial markets.

7.  The SDDS is a "best practice" standard against which a country's dissemination practices can be measured. It covers four sectors of the economy (real, fiscal, financial, and external), as well as population, and has four dimensions, i.e., the data dimension (the coverage, periodicity, and timeliness of the data); access by the public to those data; the integrity of the data; and the quality of the data.

8.  Countries that subscribe to the SDDS are required to provide descriptions of their data dissemination practices (metadata) for posting on the IMF's Dissemination Standards Bulletin Board (DSBB) (http://dsbb.imf.org). Subscribers are also required to maintain an Internet website, referred to as a national summary data page (NSDP), which contains the actual data, and to which the DSBB is electronically linked. An NSDP is to be in place for each subscriber by the end of 1999.

9.  Staff monitoring of observance of the SDDS is limited to the coverage, periodicity, and timeliness of the data and to the dissemination of advance release calendars. Countries that subscribe to the SDDS undertake to be in full observance of the Standard by the implementation deadlines which come into effect during 1999.1

10.  The DSBB metadata also provides information on subscribers' practices for the following aspects of transparency: simultaneous release of the data; laws governing the compilation and release of the data; access to the data by other government officials prior to release; ministerial commentary accompanying the release of the data; revision policy; and advance notice of major changes in methodology.

11.  Staff have not undertaken an assessment of the quality of the data disseminated under the SDDS. The SDDS was designed to assist users to make their own assessment of data quality by providing information on the DSBB on the dissemination of documentation of methodology and the publication of more detailed data which provide an assurance of the reasonableness of the data. In addition, Summary Methodologies designed to shed light on data quality, and using a standard format for all countries for each data category, will be disseminated on the DSBB in the future.

B.  Institutional Framework in Hong Kong SAR

12.  The Census and Statistics Department (C&SD) is Hong Kong SAR's official statistical agency, and is responsible for compiling and disseminating the data for the real sector, as well as data for the balance of payments, merchandise trade, the international investment position, and population.

13.  The C&SD operates under the Census and Statistics Ordinance, enacted in 1978 and most recently updated in 1993. Under the terms of this Ordinance, the Commissioner for Census and Statistics has the responsibility for matters of methodology and compilation, and for the dissemination of official statistics. The Ordinance also provides that all censuses or statistical surveys conducted by C&SD, whether of a mandatory or voluntary nature, are subject to the same legal provision for confidentiality of information supplied, and that only aggregated information are to be published such that information relating to a particular individual or undertaking will be kept strictly confidential and will not be divulged to other parties.

14.  There is no legal requirement for the C&SD to publish its data, and the agency does so as a service to the public.

15.  The Treasury is responsible for compiling and disseminating the data for the fiscal sector (government operations and government debt). There is no statutory requirement for the publication of monthly data on the government's operations, and the Treasury publishes these data as a service to the public. However, for annual data on government operations, the Audit Ordinance (1971) provides that the Director of Accounting Services shall submit the statements of accounts to the Director of Audit within five months of the close of the financial year (March 31) for the purpose of audit, and that the latter shall within seven months of the close of the financial year submit the audit report to the President of the Legislative Council of Hong Kong SAR. The Treasury publishes the statistics on government debt as a service to the public.

16.  The Hong Kong Monetary Authority (HKMA) is the agency responsible for compiling and publishing the data on the financial sector, international reserves, and exchange rates. The HKMA is governed by the provisions of the Exchange Fund (Amendment) Ordinance 1992, which came into operation on April 1, 1993. The Ordinance provides the Financial Secretary with the power to appoint a Monetary Authority to assist in the performance of the Secretary's functions under the Exchange Fund Ordinance. Section 7 of the Ordinance requires that the accounts of the Exchange Fund be audited in accordance with the directive of the Chief Executive of the Hong Kong SAR.

17.  The HKMA also operates under the terms of the Banking Ordinance (1995) and the Monetary Statistics Ordinance (1995). The Banking Ordinance requires Authorized Institutions (AIs)2 to submit periodic returns to the HKMA with the required information. The Monetary Statistics Ordinance has provisions protecting the confidentiality of data for individual Authorized Institutions.

18.  There is no legal requirement for the HKMA to publish the data for the financial sector, international reserves and the exchange rate, and the agency publishes these data as a service to the public.

C.  Description of Practice

19.  Since it subscribed to the SDDS on October 28, 1996, Hong Kong SAR has announced a total of 20 transition plans3, affecting ten data categories--national accounts, wages/earnings, producer prices, general/central government operations, the analytical accounts of the banking sector, the analytical accounts of the central bank, balance of payments, international reserves, the international investment position, and exchange rates. (In the case of four of these ten data categories--producer prices, the analytical accounts of the central bank, balance of payments, and the international investment position--no data have previously been disseminated.) Fifteen transition plans also have been acknowledged for the dissemination of advance release calendars to meet the SDDS requirements.

20.  In addition to the transition plans, Hong Kong SAR is taking a permanent flexibility option4 for the periodicity and timeliness of the data for the production index.

21.  Since 1996 Hong Kong SAR has made significant progress towards completing its transition plans. As of May 20, 1999, 11 data dimension transition plans, affecting 8 data categories, and 13 advance release calendar transition plans have been completed.

22.  The authorities also have decided to convert a further four data dimension transition plans, affecting three data categories, into permanent flexibility options or "as relevant" options.5 (Permanent flexibility is being taken for the periodicity and timeliness of the data on producer prices, which will continue to be published quarterly with a timeliness of three months, and for the timeliness of the data on balance of payments, with the first set of quarterly balance of payments due to be published with a timeliness of 9 months at the end of 1999. An "as relevant"option is being taken for the timeliness of the data on the analytical accounts of the banking sector owing to an extensive branch network, and part of the data for this category will continue to be published with a timeliness of two months).

23.  Hong Kong SAR has a hyperlinked NSDP, which shows the latest available data for each prescribed data category and component (http://www.info.gov.hk/hkma/stat/eco_fin.html).

D.  IMF Staff Commentary

24.  Continuous and systematic monitoring of SDDS observance will begin in practice as evidence of a country's degree of observance becomes available by mid-1999.

25.  As at June 24, 1999, Hong Kong SAR still had five data dimension transition plans, affecting two data categories, (for the coverage and timeliness of the balance of payments, and for the coverage, periodicity and timeliness of the data on the international investment position) remaining to be completed. The advance release calendar transition plans for the balance of payments and the international investment position also remain to be completed. (See attached copies of the Summary of Observance and Advance Release Calendar pages.)

26.  The coverage, periodicity, and timeliness of the data published in the attached NSDP (printed on June 24, 1999) is consistent with the practices described in the DSBB metadata.


III.  Fiscal Transparency

27.  This section provides an assessment of fiscal management practices in Hong Kong SAR against the requirements of the IMF Code of Good Practices on Fiscal Transparency--Declaration on Principles. The authorities have completed the fiscal transparency questionnaire prepared by the IMF staff. The assessment has two parts. The first part is a description of practices, prepared by the IMF staff on the basis of the questionnaire response. The second part is an IMF staff commentary on fiscal transparency in Hong Kong SAR.

A.  Description of Practice6

28.  Clarity of Roles and Responsibilities: Hong Kong SAR is essentially a unitary authority with no extrabudgetary operations and noncommercial government activities are clearly separated from the rest of the government and the private sector. There are five specialized funds--the Capital Works Reserve Fund, the Capital Investment Fund, the Civil Service Pension Reserve Fund, the Loan Fund, and the Disaster Relief Fund7--whose operations are included in separate accounts in the budget documents. Regulation of the private sector is clearly defined and nondiscriminatory.

29.  Public finances are regulated by clear laws and regulations. The Basic Law establishes the independence of finances within the Hong Kong SAR from the Mainland of China, provides for the policy of low tax rates previously pursued in Hong Kong SAR as reference when enacting laws concerning taxation, and prescribes that the authorities "strive to achieve a fiscal balance, [and] avoid deficits." In addition, the authorities announced guidelines for the appropriate level of fiscal reserves; the guidelines indicate that fiscal reserves may be used for three purposes--operational requirements of the Government; to offset the effects of a cyclical downturn or unforeseen external shocks; and to underpin exchange rate stability. Fiscal reserves are held with the Exchange Fund. There are no investment guidelines for the fiscal reserves, although the Exchange Fund announces a long-term investment strategy for its entire asset portfolio (which includes fiscal reserves). Holdings of equity by the Exchange Fund are publicized and are to be reduced over time (without disruption to the market).8

30.  The Public Finance Ordinance defines roles and responsibilities for all key aspects of fiscal management and the Inland Revenue Ordinance and other related legislation clearly define tax liabilities. There are clear regulations establishing high standards of behavior for public servants.

31.  Public Availability of Information: Comprehensive budget information is published and there is a clear commitment by the Government to publish fiscal information under the Audit Ordinance and the Public Finance Ordinance, which prescribe deadlines for the publication of the annual accounts and require the submission of the annual estimates to the Legislative Council. There are few contingent liabilities of the Government; details of these items are not published at the time of the budget, but are given in the Annual Report and Accounts which are published about seven months after the release of the budget. There is no government debt. Data on the level of fiscal reserves are published on a monthly basis. Advance release calendars are published for monthly reporting under the IMF SDDS.

32.  Open Budget Preparation, Execution, and Reporting: The Budget documentation gives a clear statement of policy objectives and sustainability of fiscal policy over the medium term. A Medium Range Forecast (MRF) is published as an annex to the budget speech. The data included in the MRF allow the fiscal position to be assessed over the medium term. The Basic Law sets rules for fiscal policy, including the requirements that expenditures and revenues be balanced and that expenditure growth not exceed the rate of growth of GDP. Policy objectives and targets are published annually at the time of the Chief Executive's Policy Address. Existing policies are clearly separated from new expenditure proposals during budget preparation. Major risks to the budget are identified as part of budget preparation, but these are not published. The budget estimates are presented on a gross basis, and in a way that facilitates analysis. Aims and performance indicators are specified for various program areas. A Target-based Management Process--the mechanism for establishing and monitoring service delivery targets associated with specific policy areas--emphasizes output and performance rather than resource input. The accounting system is on a cash basis but commitments are registered and can be reported.9 Internal controls, and procurement and employment regulations are well established and followed. Fiscal reporting is timely, comprehensive, and reliable. Annual Progress Reports are published showing actual achievements against previously announced policy initiatives.

33.  Independent Assurance of Integrity: An independent Audit Commission is established under the Basic Law. Its functions are prescribed by the Audit Ordinance and cover the financial audit of the accounts of the Hong Kong SAR Government as well as twice-yearly value for money audits. Audited year-end financial reports are tabled in the legislature approximately six months after the end of the financial year. Both sets of reports are submitted to the President of the Legislative Council and are considered by the Public Accounts Committee of the Legislative Council. Economic forecasts are clearly explained and open to public scrutiny both during the budget discussion and through published quarterly updates. The macroeconomic model is not available to the general public but is subject to technical discussion with experts. There is a long tradition of institutional independence of the Census and Statistics Department on technical matters.

B.  IMF Staff Commentary

  • The fiscal management system of Hong Kong SAR gives a heavy emphasis to financial compliance and fiscal policy is clearly stated and effectively constrained by rules prescribed under the Basic Law. As well as following policies of limited government activity and strict compliance with financial regulations, the authorities have introduced elements of output-oriented budgeting and value for money auditing, which should lead to greater public awareness of the effectiveness of public spending.
  • Transparency could be further enhanced by publishing information that would facilitate the calculation of the underlying structural balance implied by budgetary targets in an accurate manner. The Government, in almost every fiscal year, has injected equity in public corporations through the Fund Accounts to finance capital expenditure. However, the actual spending of these injections has not necessarily been carried out in the same fiscal year when the equity injections were made. As a result of the unsynchronized timing between financing and investment, it has been difficult to uncover the underlying economic impact of the equity injections in a transparent manner. While it is not practicable for the Government to project the total capital spending of public corporations--which includes spending on projects financed by sources other than equity injections--publishing the projected path of corporations' capital spending financed by equity injections would facilitate the assessment of the economic impact of the equity injections.
  • While the transparency and accountability provisions in the budget framework reach a high standard in terms of traditional financial compliance with the Code of Good Practices on Fiscal Transparency, some further improvements could be made in terms of specifying requirements for economic and fiscal forecasting and reporting. For example, it would be desirable to update the current fiscal year's budget forecast--and the economic assumptions underlying it--on a half-yearly basis. In addition, a summary half-yearly update of the MRF (covering the next three years) would also be helpful.

Transparency could also be further enhanced by including, in the budget documents, a fiscal risk statement summarizing the effects of possible variations in economic assumptions on the budget.

  • To provide a complete picture of the fiscal environment, it would be desirable to include a statement of contingent liabilities in the budget documents. While these items are small in Hong Kong SAR, and are set out in the annual accounts, it would nonetheless be helpful to at least include, in the budget documents, estimates for them together with the actual levels for the previous year.

IV.  Transparency of Monetary and Financial Policies

34.  In the context of strengthening the architecture of the international monetary system, the Interim Committee, in its April and October 1998 communiqués, called on the Fund to develop a code of good transparency practices for monetary and financial polices, in cooperation with appropriate institutions. The Fund, in consultation with others, has prepared a Code of Good Practices on Transparency in Monetary and Financial Policies, which was adopted by the Executive Board on July 9, 1999.10

35.  The following considers the transparency practices of Hong Kong SAR's monetary and financial policy frameworks as they relate to the broad principles underlying the Fund's Code based on information provided by the authorities.

A.  Description of Practice11

36.  Clarity of roles and responsibilities: Monetary policy. The Hong Kong Monetary Authority (HKMA) is responsible for the conduct of monetary policy. Its Chief Executive is appointed by the Financial Secretary under the Exchange Fund Ordinance. The predominant monetary policy objective of Hong Kong is currency stability under the linked exchange rate system. While this objective is not explicitly defined in legislation, it is publicly disclosed and explained through various channels, including publications of the HKMA, such as its annual reports, press releases, policy statements to the Legislative Council, the HKMA website on the Internet, technical briefings to reporters, and seminars to the public. The Exchange Fund Ordinance specifies that the use of the Exchange Fund is primarily for affecting directly or indirectly the exchange rate of the domestic currency.

37.  The HKMA also acts as an agent to manage the Government's fiscal reserves. There is no provision in the Exchange Fund Ordinance for the Exchange Fund to finance fiscal operations; however, the Financial Secretary may transfer excess assets to the general revenue and other funds of the government, after consulting with the Exchange Fund Advisory Committee (EFAC) and with the approval of the Chief Executive in Council provided such a transfer does not adversely affect the use of the Exchange Fund to influence the exchange value of the currency and maintain Hong Kong SAR as an international financial center, and the assets of the Fund are maintained at a minimum of 105 percent of its obligations. To cover the contingency under which assets may need to be transferred to the Exchange Fund, injections of public funds to the Exchange Fund may be provided by Legislative Council resolution under the Public Finance Ordinance, or through specific legislation. The Exchange Fund Ordinance also provides that, under certain conditions, the Financial Secretary may borrow for the account of the Exchange Fund, on the security of the general revenue.

38.  Financial policy. Under Hong Kong SAR's regulatory framework, the Financial Services Bureau (FSB) plays a policy role and is responsible for translating policies into regulation. Specialist regulatory agencies are, in turn, responsible for the regulation and supervision of providers of financial services.

39.  Authorized institutions (AIs)12 are supervised by the HKMA, whose principal function under the Banking Ordinance is to "promote the general stability and effective working of the banking system." The Ordinance empowers the HKMA to authorize and revoke banking licenses and establish prudential norms.13

40.  The Securities and Futures Commission (SFC) has oversight responsibility for the Stock Exchange of Hong Kong (SEHK), the Hong Kong Futures Exchange (HKFE), and their clearing houses, and is responsible for administering laws relating to the trading of securities, futures, and leveraged foreign exchange contracts. The SFC also licenses and supervises securities dealers, commodities dealers, investment advisers and the managed funds industry. The responsibilities and functions of the SFC are set out in the Securities and Futures Commission Ordinance (and other related ordinances). These include "to encourage the development of securities and futures markets in Hong Kong and the increased use of such markets by investors in Hong Kong and elsewhere."14 The proposed Securities and Futures Bill, which is currently being drafted, aims to consolidate, update, and amend nine existing ordinances pertaining to the securities and futures markets. The Bill is expected to provide clearer objectives for the SFC, and introduce additional checks and balances as well as more effective regulation.15

41.  The Insurance Authority (IA) supervises the insurance industry. The IA's principal functions and objectives under the Insurance Companies Ordinance are to regulate and supervise the insurance industry for the promotion of the general stability of the industry and the protection of existing and potential policyholders.16

42.  The HKMA has responsibility for oversight of the payment system, although this is not specifically addressed in legislation. The Exchange Fund Ordinance provides that the Financial Secretary may by notice require an AI to open and maintain a settlement account with the HKMA, and to maintain and operate it on terms and conditions as the Financial Secretary considers appropriate. The Financial Secretary has delegated this power to the HKMA. The Real-Time Gross Settlement System (RTGS), which is used for settling interbank payments in Hong Kong SAR, is provided and operated by the Hong Kong Interbank Clearing Limited (HKICL), as publicly stipulated in the Clearing House Rules for Member Banks set by the Hong Kong Association of Banks (HKAB) Committee, pursuant to the Hong Kong Association of Banks Ordinance.

43.  Each regulatory agency is autonomous and issues its own rules and regulations. The SFC and HKMA have adopted a lead regulator approach to the supervision of financial groups that include both AIs and SFC license holders. The arrangements are set out in a memorandum of understanding, and the two regulators meet regularly under that memorandum. In addition, a Cross-Market Surveillance Committee was established in October 1998, comprising representatives of the FSB, HKMA, the SFC, the SEHK, the HKFE, and the Hong Kong Securities Clearing Company. The Committee meets on a regular basis to exchange market information and to formulate prompt and appropriate actions where necessary.17

44.  Open process for formulation and reporting of monetary and financial policies: Hong Kong SAR operates under a linked exchange rate framework, with limited scope for independent monetary policy action. The analytical framework of the linked system--including monetary policy instruments available to the HKMA--is widely publicized by the HKMA.18

45.  Substantive changes to monetary regulations are generally preceded by a consultative process with the relevant industry associations and parties that would be affected by the proposed changes. The HKMA operates a discount facility from which banks may borrow overnight funds against their holdings of Exchange Fund and other eligible paper. Since November 1998, the interest rate charged for access to the facility has been based on a pre-announced formula, although the HKMA reserves the right to limit banks' access to the facility if they are judged by the HKMA to be aiding market manipulation.. The HKMA has recently issued a detailed policy statement reaffirming its role as lender of last resort to all authorized institutions. This role involves the provision of support to institutions that are basically solvent but face short-term funding difficulties. The preconditions for obtaining support include the possibility of systemic risk that could arise from the failure of a troubled institution if it is deprived of liquidity assistance; sufficient margin of solvency; adequate collateral; and a demonstration that the institution has already sought other reasonably available sources of funding. The resources for providing such support would be drawn from the Exchange Fund in accordance with the Exchange Fund Ordinance.

46.  The EFAC, and its Subcommittee on Currency Board Operations, hold monthly meetings as well as ad hoc meetings when appropriate to review the operation of the linked exchange rate system. Starting from the November 1998 meeting, a record of each meeting of the EFAC Subcommittee on Currency Board Operations has been published within six weeks of the meeting. The Exchange Fund Ordinance provides that the control of the Financial Secretary over the Exchange Fund "shall be exercised in consultation with an Exchange Fund Advisory Committee," with the Financial Secretary as ex officio chairman and other members to be appointed by the Chief Executive. Detailed procedures for appointing members of the EFAC and members of the EFAC Subcommittee on Currency Board Operations are not stipulated in the Ordinance, however. The composition, structure, and terms of reference of the EFAC and its subcommittee are published in the Annual Report and Quarterly Bulletin, respectively, of the HKMA.

47.  The regulatory framework and operating procedures for banking regulation and supervision are publicly disclosed and explained in a variety of ways, including through publications of the HKMA and on the HKMA website.19 The HKMA maintains regular contacts with other local and overseas supervisors to exchange views and information on matters relating to AIs. The general nature of this information sharing and exchange is made known to the public through HKMA publications. Any substantive changes in regulatory policies are preceded by a consultative process and are publicly announced and explained. The Banking Ordinance and the Monetary Statistics Ordinance provide the legal basis for the HKMA to collect information from AIs for prudential supervision and monitoring the developments; reporting requirements under the two ordinances are made known to the public.

48.  The regulatory framework for the securities market is publicly disclosed and explained through a variety of channels, including the SFC's Annual Report, press releases, and the SFC website on the Internet (http://www.hksfc.org.hk). Substantive changes to securities market regulations generally involve public consultation for a period of two months; major changes to policy usually require legislative amendments to principal ordinances, and are therefore subject to approval by the Legislative Council. A notable exception was in August 1998, when the HKMA, arguing that markets were being manipulated, intervened in the stock and futures markets. Although the authorities have not explicitly ruled out the possibility of further intervention if manipulation reemerges, they have emphasized in public statements that this was a one-time measure taken in exceptional circumstances. Subsequent to the intervention, details on the Government's holdings of shares--as well as the amount spent on each stock--were published, and an independent investment company was established to manage and dispose of the share holdings in an orderly and transparent manner. The investment company has been licensed by the SFC as an investment adviser and is subject to SFC supervision.

49.  The regulatory framework for the insurance industry is disclosed to the public through press releases and the publication of an Annual Report by the Office of the Commissioner of Insurance (OCI). The OCI also maintains a website on the Internet (http://oci.gov.hk). The Insurance Advisory Committee (IAC), which is comprised of representatives from the insurance industry and the public, would be consulted on substantive changes to be introduced to regulation of the industry. The industry and related bodies are consulted after endorsement of the changes by the IAC.

50.  Policies relating to the payments system must be agreed between the HKMA and the HKAB, which jointly own the HKICL. Any amendment to the rules governing the payments system must be endorsed by both the HKMA and the HKAB. Detailed system operations and procedures are documented in the Clearing Regulation and Operating Procedure--issued by the HKICL--and User Terminal Operations Manual, both of which are distributed to all users of the payments system.

51.  Public availability of information: To enhance the availability of information for public access, the FSB maintains a website on the Internet (http://www.info.gov.hk/fsb/), which includes a quarterly updated fact sheet and basic statistics about the financial services sectors. Policy objectives, speeches, press releases, reports, and consultative documents on policy proposals (e.g. the securities and futures market reform) are also available on the website. In addition, there is a section on Year 2000 readiness of the financial services sectors, and a link to the Hong Kong SAR economy website (http://www.info.gov.hk/hkecon/).

52.  The HKMA produces several regular publications such as the Monthly Statistical Bulletin, the Quarterly Bulletin, the Annual Report, and frequent press releases. In addition, an Internet website (http://www.info.gov.hk/hkma/) is maintained by the HKMA for public access. Guidelines and circulars of the HKMA are available at this website. Information on the aggregate clearing balance of licensed banks maintained with the HKMA is publicly available almost on a real-time basis and, from November 1998, the size of the monetary base and its components have been published on a daily basis. As of March 1999, the HKMA publishes on a monthly basis an Abridged Exchange Fund Balance Sheet and a Currency Board Account containing, inter alia, data on the Exchange Fund's foreign currency and Hong Kong dollar assets. The Exchange Fund's net forward position is also published in the HKMA's monthly bulletin. Information on foreign exchange reserve assets, liabilities, and commitments is disclosed on a preannounced schedule, consistent with the SDDS.

53.  The HKMA reports on developments in banking regulation and supervision through its regular publications, including the quarterly bulletin and annual report, as well as through speeches and press releases, which are available on the HKMA website. Banking supervision topics, as well as other monetary and financial topics, are included in the HKMA's annual report. Texts of regulations, directives, and guidelines issued by the HKMA on banking supervision are also available on the HKMA website and in its quarterly bulletin.20

54.  The SFC publishes an annual report; investment industry statistics are maintained on its website on the Internet (http://www.hksfc.org.hk). A list (and in most cases the text) of the SFC's codes, guidelines, consultation papers, and other reports are also available on the website. Codes and other policy documents are available from the SFC and, in most cases, from the SFC's website. Decisions to restrict the activities of an intermediary are made public through media release and must also be published in the Government Gazette. The SFC has a wide range of rule making powers, but all such rules must be laid before the Legislative Council and are liable to disallowance under a negative vetting procedure. The rules must also be published in the Gazette.

55.  Financial and institutional data relating to the insurance industry are published in the OCI's Annual Report. The OCI maintains a website on the Internet (http://oci.gov.hk); press releases of the OCI are available on the website. Public information services are also maintained, subject to the secrecy provision of the Insurance Ordinance and the Code on Access to Information.

56.  The HKMA routinely publishes payment and payment-related statistics through a variety of channels, including its monthly bulletin.

57.  Accountability and assurance of integrity by the central bank and financial supervisory agency: A high degree of accountability for monetary and financial policies has developed, primarily through custom, tradition, and evolution, rather than being specified in legislation or regulation. The Financial Secretary, who is accountable to the Legislative Council, has overall responsibility for the monetary and financial policy framework. The Financial Secretary and the Secretary for Financial Services reply to questions and speak on motions concerning the HKMA when the Council is in formal session. In addition to senior FSB officials, the Chief Executive and other senior officials of the HKMA, as well as the Chairman and Executive Directors of the SFC, regularly appear before the Council's Financial Affairs Panel. Audited financial statements of the Exchange Fund are published in the HKMA's Annual Report, while the Annual Report and Annual Estimates of the SFC are presented to the Legislative Council under the Securities and Futures Commission Ordinance. Senior officials of the FSB, the HKMA, and the SFC also attend the ad hoc Bills Committees established by the Legislative Council to review pending legislation.

58.  Standards for the conduct of personal financial affairs of officials in all financial regulatory agencies are publicly disclosed. Immunities granted to employees of financial agencies are also publicly disclosed.

B.  IMF Staff Commentary on the Monetary Policy Framework

  • The institutional arrangements of Hong Kong SAR's linked exchange rate system limit the monetary policy flexibility of the HKMA. They have resulted in a high degree of transparency in the formulation and conduct of monetary policy.
  • The transparent operation of the linked system has been further enhanced by recent measures, including the announcement of a formula for determining the interest rate charged for access to the HKMA's discount window, the publication of the aggregate clearing balance of the banking system almost on a real-time basis, and the publication of the size of the monetary base on a daily basis. The formalization of the HKMA's undertaking to convert banks' clearing balance into foreign exchange has also strengthened the transparency and operation of the linked exchange rate system.
C.  IMF Staff Commentary on the Financial Policy Framework

  • The information summarized above suggests that there is also a high degree of transparency in the formulation and conduct of financial policies in Hong Kong SAR.
  • The legal and regulatory framework for banking supervision is clear and well-structured. The considerable widening in recent years of the scope of financial information that banks are required to disclose is commendable.
  • A high degree of accountability for monetary and financial policies has evolved in Hong Kong SAR through custom and tradition. There may nonetheless be advantages to specifying more of the modalities of accountability in legislation or regulations.
  • While the changes in the proposed Securities and Futures Bill aim to increase the efficiency and responsiveness of the securities and futures markets , it will be important to ensure in the forthcoming legislation that the regulatory and supervisory activities of the SFC remain transparent and accountable. A clearer statement of objectives will further enhance transparency and accountability.

V.  Banking Supervision

Assesses only the authorities' observance of the transparency elements of the Basel Core Principles.

59.  The Basle Committee on Banking Supervision (Basle Committee) prepared the Core Principles for Effective Banking Supervision (Core Principles) in order to strengthen national financial market supervision and stability.21 Intended to serve as a basic reference and minimum standards for supervisory and other public authorities in countries generally and internationally, the Core Principles address the major dimensions of banking sector supervision: preconditions for effective supervision; licensing process and approval for changes in structure; prudential regulations and requirements; methods of ongoing banking supervision; information requirements; formal powers of supervisors; and cross-border banking.

60.  An assessment of Hong Kong SAR's practices against the full set of 25 Basic Core Principles is outside the scope of this study.22 Instead, this section focuses on the transparency aspects of the Core Principles. The staff's commentary is based on consideration of a questionnaire completed by the authorities.

A.  Description of Practice23

61.  The HKMA is responsible for banking supervision in Hong Kong SAR. The Banking Ordinance provides the legal framework for banking supervision in Hong Kong SAR. Under the Banking Ordinance, the principal function of the HKMA is to "promote the general stability and effective working of the banking system." The Ordinance is regularly reviewed and updated to improve its working in the light of practical experience and to take account of developments in the banking industry. The HKMA reports to the Financial Secretary, who reports to the Chief Executive. In addition, the Financial Secretary and the Secretary for Financial Services reply to questions and speak on motions concerning the HKMA to the Legislative Council. The Chief Executive (HKMA) and other senior officials from the HKMA regularly appear before the Legislative Council's Financial Affairs Panel to brief the Panel and to consult it on policy proposals, and to exchange views on the state of the financial system.

62.  Legal Framework: An effective legal basis for banking regulation exists in Hong Kong SAR. The Banking Ordinance includes provisions relating to the establishment of prudential limits, authorization to carry on banking activity, and revocation or suspension of such authorization. The HKMA is responsible for monitoring regulatory compliance and enforcing the law. In regard to enforcement, authorization criteria under the Banking Ordinance are continuing requirements and a breach of these would mean that the HKMA could exercise its powers of revocation of authorization. There are other grounds for revocation as well, such as providing materially false, misleading, or inaccurate information to the HKMA. In addition, under the Banking Ordinance, the HKMA has powers to enforce regulations and, if necessary, to appoint a Manager to take control of an institution's affairs. The Banking Amendment Bill, introduced to the Legislative Council in May 1999, aims to bring Hong Kong SAR's framework of banking supervision fully in line with the Basle Core Principles, provide more flexibility in the regulations governing Authorized Institutions' (AIs')24 publication and submission of annual accounts and improve the working of certain provisions of the Banking Ordinance. Among its provisions is the requirement that a locally incorporated AI should seek the HKMA's prior approval of any major acquisition or investment in a company which constitutes 5 percent or more of the AI's capital base.

63.  Accounting and disclosure aspects: One of the criteria for authorization is that all authorized institutions (AIs) under the Banking Ordinance should have in place adequate accounting and internal control systems.25 Every AI is subject to examination by either the HKMA's own examiners or its external auditors to determine the adequacy of such systems and whether they are working effectively. The statutory framework relating to the annual accounts of companies in Hong Kong SAR (including AIs) and the external audit of these is contained in the Companies Ordinance. Under this Ordinance, companies are required to include balance sheet and profit and loss accounts in their audited annual accounts.

64.  Under the HKMA's loan classification system, which is in line with international best practice, all AIs are required to report to the HKMA their loans according to five categories--Pass, Special Mention, Substandard, Doubtful and Loss--with the latter three categories comprising "classified loans." The loan classification was introduced in 1994 and is similar to such systems used by other supervisory authorities such as in the United States. The HKMA does not currently mandate minimum levels of provisions, either general or specific, in relation to the various categories of classified loans. However, benchmark provisioning levels have been established to assist examiners in assessing the adequacy of individual AIs' provisions. The HKMA has put high priority on the integrity of the asset quality classification, especially for local banks. Two on-site examinations of local banks are conducted each year, with the objective of checking that these banks are classifying their loans properly and making adequate provisions. The HKMA may also require an institution to commission reports from their external auditors on the adequacy of the loan classification and provisioning systems.

65.  Accounting standards in Hong Kong SAR are embodied in the Statements of Standard Accounting Practices issued by the Hong Kong Society of Accountants (HKSA), which is responsible for regulating the accounting profession in Hong Kong SAR. The statements are largely based on similar statements issued by the accounting bodies in the United Kingdom. More recently, the statements are generally in line with International Accounting Standards (IAS). Disclosure standards for banks are set out in a "Best Practice Guide on Financial Disclosure By Authorized Institutions" (HKMA, 1998), which is backed up by an authorization criterion in the Banking Ordinance requiring all AIs incorporated in Hong Kong SAR to make adequate disclosure of information in their audited annual accounts. Consistent with IAS, AIs are required to disclose levels of nonaccruing, overdue, and rescheduled loans. All AIs are required to disclose financial information semi-annually, including net income, and provisioning.

66.  External audits of banks' annual financial statements are required. Although the appointment of a bank's external auditor does not require supervisory approval, the HKMA has the power to require a second audit by an auditor that it does approve.

67.  Basle Core Principles (transparency): The HKMA's practices and procedures in the areas covered by the Basle Core Principles relating to transparency are as follows:

  • Principle 9 (relating to banks' internal systems for identifying loan concentration): The HKMA checks that there are policies in place in relation to concentrations of various kinds within an AI's loan portfolio, and checks to see that there are systems in place to ensure that these policies are being properly applied. AIs incorporated in Hong Kong SAR must not incur financial exposure to any one entity of more than 25 percent of their capital base. There is no statutory limitation on lending to any particular economic sector, although locally incorporated institutions' holdings of interests in land (excluding bank premises) or in shares are limited to a maximum of 25 percent of their capital base in each case. The HKMA monitors institutions' large exposures by requiring regular reporting of any exposures exceeding 10 percent of capital base.
  • Principle 12 (relating to banks having in place systems to accurately measure, monitor, and adequately control market risks): The HKMA checks AIs' systems for managing market risk as part of its program of regular on-site examination. AIs are required to report to the HKMA their foreign currency positions monthly and, in some cases, weekly; and they are required to maintain their net open foreign exchange positions within specified limits.
  • Principle 13 (relating to banks' internal systems for managing all other material risks): The HKMA expects AIs to have in place policies and procedures to cover various risks and compliance is checked through regular on-site examinations.
  • Principle 18 (relating to banks' reporting, on both a solo and consolidated basis): The Banking Ordinance gives the HKMA powers to collect such data on both a routine and ad hoc basis, including prudential data.
  • Principle 19 (under which supervisors must have a means of independent validation of supervisory information): The Banking Ordinance empowers the HKMA to examine books, accounts, and transactions of any AI. In addition, under the Ordinance, the HKMA can require an AI to submit a report from an external auditor on the accuracy of any return or information submitted by an institution.
  • Principle 21 (relating to the adequacy of records, accounting policies, and financial statements): The authorization process requires that AIs have in place adequate accounting systems. Every AI is subject to examination by the HKMA to determine the adequacy of such systems.

68.  Deposit protection: Hong Kong SAR does not have a deposit insurance system. There is, however, a priority payment scheme which, in the event of a bank liquidation, entitles depositors to receive priority for their deposits up to a maximum of HK$100,000. This scheme was introduced in 1995 under the Companies Ordinance. The scheme has not been used to date.

B.  IMF Staff Commentary

  • Hong Kong SAR has a well structured supervisory agency and a highly transparent legal and regulatory framework for banking and supervision, which is consistent with the transparency aspects of the Basle Core Principles. According to the HKMA's self-assessment, its framework also substantially complies with the other Basle Core Principles.

  • The transparency of the prudential supervision framework has been strengthened over the past 18 months with the introduction of tighter accounting standards and measures to enhance disclosure by the banking system. In May 1998, guidelines on the recognition of interest were issued with the purpose of achieving more standardized interest recognition policies. Also, since June 1998, all listed banks have been required to disclose in their interim reports the breakdown by industry of advances to customers, problem loans by length of overdue period, and the total amount of rescheduled loans. Foreign banks have been required since end-1998 to disclose summary financial information on a half-yearly basis. With effect from June 1999, in line with listed local banks and foreign banks, all local institutions are recommended to disclose selected financial information on a half-yearly basis.


VI.  Securities Market Regulation26

This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a ROSC.

Institutional structure

69.  The regulation of investment businesses in Hong Kong SAR is undertaken by the Securities and Futures Commission (SFC). The SFC was established in 1989 as an independent statutory body, accountable to the Chief Executive of Hong Kong SAR for the discharge of its responsibilities. The SFC comprises an equal number of executive and independent non-executive directors, appointed by the Chief Executive. As established under the Securities and Futures Commission Ordinance, the annual report of the SFC and its annual estimates are laid before the Legislative Council. Officials of the Commission attend the Financial Affairs Panel of the Council frequently throughout the year, or any Bills Committee or any committee of the Council set up to review legislation introduced in the Council, or examine any other major issues related to the work of the Commission. In addition, the SFC also submits a report to the Chief Executive (delegated to the Financial Secretary) on a quarterly basis.

70.  The Commission has oversight responsibility for the Stock Exchange of Hong Kong (SEHK), the Hong Kong Futures Exchange (HKFE), and the securities and derivatives Clearing Houses, which in turn regulate their own members. However, the SFC retains full authority to supervise the conduct of all entities licensed with it, including the members of the Exchanges and the Clearing Houses. All rules made by the two Exchanges and the Clearing Houses are subject to the approval of the SFC, as provided in the Stock Exchanges Unification Ordinance, Commodities Trading Ordinance, and Securities and Futures (Clearing Houses) Ordinance. The SFC also has front-line regulatory responsibility for takeovers and merger activity; regulation of offers of investment products; financial intermediaries other than SEHK and HKFE members; and the enforcement of laws regarding market malpractice. In addition, the SFC is responsible for advising the Financial Secretary, through the Financial Services Bureau, on all matters relating to the securities, futures, and leveraged foreign exchange markets.

71.  The SFC's regulatory and investigative powers are established through a set of ordinances. The SFC also uses a set of codes to define the parameters for market practitioners, particularly those whom it licenses as intermediaries. Although these codes do not carry the force of law, they make clear how the SFC administers its statutory powers.

Attitude to international standards and cooperation

72.  The SFC endorsed the International Organization of Securities Commissions' (IOSCO) standards, Objectives and Principles of Securities Regulation and Cross-Border Offerings and Initial Listings by Foreign Issuers, in September 1998.27 The SFC's representative to the IOSCO chaired the international committee that drafted the Objectives and Principles and proposed their adoption by IOSCO. At present the SFC's representative chairs the IOSCO international committee that is responsible for developing strategies to promote and assess implementation of the Objectives and Principles.

73.  Hong Kong SAR's securities market regulations fully comply with the IOSCO principles. The SFC is empowered under the relevant Ordinances to conduct routine inspections of licensed intermediaries, to investigate alleged breaches of the Ordinances, license conditions or Codes and to take disciplinary actions and civil and criminal sanctions ranging from private or public censure to suspension or revocation of a license. Regarding criminal actions, the SFC is responsible for the investigation of various criminal offences and while it prosecutes minor offences, serious matters are prosecuted at the independent discretion of the Director of Public Prosecutions.

74.  The SFC has entered into many memoranda of understanding with foreign regulatory authorities. These memoranda set out the basis for bilateral cooperation and information sharing. The statutory underpinning for information sharing with foreign regulators is to be found in the Securities and Futures Commission Ordinance and operates as an exception to the general requirement to maintain the confidentiality of information obtained in the exercise of its SFC powers. In 1996, the SFC completed an IOSCO evaluation of its adherence to resolutions for cooperation. In addition to cooperation in enforcement matters, the SFC has entered into memoranda of understanding with several countries to enhance supervision in the area of managed funds.

Pending changes

75.  The Financial Secretary announced a market reform package in March 1999 with three sets of objectives. The first objective is to modernize the regulatory framework by putting in place a new framework with clearer regulatory objectives and strengthened supervisory and investigative powers for the SFC; establishment of an independent Market Misconduct Tribunal; regulation on electronic trading; and a streamlined licensing regime for market intermediaries. The Financial Services Bureau and the SFC, in consultation with the public and market participants, are to advise the Government on the nature of these reforms and the necessary legislation is expected to be introduced before the end of this year.

76.  The market reform package's second objective is to further enhance market infrastructure by setting up a single clearing arrangement for securities, stock options, and futures transactions; enhancing the financial technology architecture to facilitate direct processing of transactions across the financial markets; and moving towards a secure, scripless securities market through the use of robust networks. A Steering Committee on the Enhancement of the Financial Infrastructure was appointed to look at these issues and report to the Financial Secretary by September 1999.

77.  The third objective of the market reform package is to modernize the market structure through the demutualization, merger, and public listing of the two Exchanges and their Clearing Houses and the separation of ownership from trading rights. These changes are aimed at enhancing responsiveness to market forces, bringing about economies of scale in terms of operational efficiency and infrastructure investment, facilitating risk management, and boosting Hong Kong's competitive position vis-à-vis other international markets. Public listing is also expected to enhance market discipline. The separation of ownership and trading rights is expected to bring about greater financial flexibility for members of the new entity, since the reforms would allow existing members to sell their shares in the company while retaining their trading rights.


VII.  Insurance Industry Regulation28

This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a ROSC.

Institutional structure

78.  The Government of Hong Kong SAR is a charter member of the International Association of Insurance Supervisors (IAIS).

79.  The Insurance Authority (IA) is responsible for regulating the insurance industry under the Insurance Companies Ordinance. The Hong Kong SAR Government has appointed the Commissioner of Insurance to assume the role of the IA in the Ordinance. The Office of the Commissioner of Insurance (OCI) is a government department, but operates independently in administering the Ordinance. The OCI is vested with legal powers under the Ordinance for the regulation of the insurance industry, including authorization and deauthorization of insurance companies; approval of their directors and controllers; requiring insurers to submit financial information, maintain assets in Hong Kong SAR , and comply with statutory valuation regulation on assets and liabilities; taking interventionary action against noncompliance; and the regulation of insurance intermediaries.

80.  The Hong Kong Federation of Insurers (HKFI) is the representative body for insurers in Hong Kong SAR. The Insurance Agents Registration Board (IARB), which is set up by the HKFI, is charged with the responsibility of regulating insurance agents.

81.  The IA approves a body of insurance brokers on the basis of requirements specified in the Insurance Companies Ordinance. The Ordinance also specifies the roles and responsibilities of an approved broker body. The two approved broker bodies--the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited--have been delegated authority to regulate insurance brokers who are their members.

Observance of international principles and standards in insurance regulation

82.  The IA follows international standards with regard to capital requirements, solvency margin requirements, fit and proper requirements, financial reporting, valuation regulations, and the power of intervention.

83.  The IA has substantially complied with all relevant IAIS standards and guidelines, including the Principles Applicable to the Supervision of International Insurers and Insurance Groups and their Cross-Border Establishments; the Supervisory Standard on Licensing; the Supervisory Standard on On-Site Inspections; and the Supervisory Standard on Derivatives. In addition, the IA is in the process of implementing the IAIS model Memorandum of Understanding on Exchange of Information with Other Countries.

84.  The IA has undertaken a self assessment of the IAIS Insurance Supervisory Principles, and has concluded that there is no need for Hong Kong SAR to make legislative amendments in order to meet IAIS standards.

Enforcement of Standards

85.  The IA enforces existing standards through regular company visits--at least once every three years--and annual reporting. Staff of the IA are required to follow work procedures that comply with the relevant IAIS standards. On-site inspection checklists have been updated to enforce the IAIS standards on on-site inspections and derivatives. Since compliance with the standards is not a statutory requirement, there are no statutory penalties for noncompliance. However, noncompliance may constitute grounds for the IA's intervention if the IA considers that the noncompliance reflects adversely on the fitness of the insurer.


VIII.  Accounting Practices29

This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a ROSC.

Institutional Structure

86.  The Hong Kong Society of Accountants (HKSA) was incorporated by the Professional Accountants Ordinance in 1973 and is the only statutory licensing body of professional accountants in Hong Kong SAR. The HKSA is empowered under the Ordinance to regulate the professional conduct of professional accountants. Amendments to the Ordinance and its subsidiary legislation have to be approved by the Legislative Council of Hong Kong SAR.

87.  The Professional Accountants Ordinance also empowers the HKSA to formulate accounting and auditing standards. Compliance with these standards, which are specified in the HKSA's Statements of Standard Accounting Practice (SSAP), is required of all members of the HKSA and, through the audit process for companies, they are indirectly underpinned by statute. While the Ordinance does not specifically make the HKSA accountable to any public body, in practice the HKSA engages in a broadly-based consultative process in its regulatory activities. The SEHK and the SFC are represented on the HKSA's Financial Accounting Standards Committee and Accounting Standards Advisory Panel. Other market regulators are involved in certain special projects.

88.  The HKSA is also responsible for maintaining a register of professional accountants, conducting accountancy examinations jointly with the Chartered Association of Certified Accountants of the U.K., and taking all actions necessary in any matter affecting the professional interest of its members. Persons who have passed the Society's professional examinations and obtained the prescribed accounting experience can apply for admission to the HKSA. Membership is also open to chartered accountants from a number of other countries.

89.  The HKSA is a member body of the International Accounting Standards Committee (IASC).

Standards in Hong Kong SAR and Policy Toward International Accounting Standards

90.  Statutory reports are required annually for companies incorporated in Hong Kong SAR under the Companies Ordinance (the latter was originally derived from the United Kingdom Companies Act 1948) and for overseas companies listed on the Stock Exchange of Hong Kong. There are special accounting requirements for regulated entities, such as banks, securities dealers, and insurance companies. The Companies Ordinance stipulates the minimum disclosures that should be made in financial statements and, as it requires financial statements to give a "true and fair view," companies also make mandatory disclosures as specified by the SSAPs issued by the HKSA. In addition, there are Accounting Standards and Guidelines which, unlike the SSAPs, are not mandatory but which define best practices and should normally be followed.

91.  Prior to 1993, the body of accounting and auditing standards and guidelines was primarily based on equivalent U.K. standards. Since 1993, the HKSA has modeled its SSAPs on the International Accounting Standards (IAS) and its statements of auditing standards on the International Standards on Auditing (ISA), with the long term objective of achieving full harmonization with IAS and ISA.

92.  At present, the HKSA has issued or revised 14 final SSAPs which are very closely modeled on the equivalent IAS. A further five Exposure Drafts of new or revised proposed SSAPs (also closely modeled on IAS) have been issued and are at various stages of finalization. A total of six more IAS are presently under consideration and Exposure Drafts are expected to be released later this year.

93.  The HKSA currently has nine Accounting Standards and Guidelines in force which are "legacy" standards promulgated before 1993 and which, with a few exceptions, are consistent with IAS. Those "legacy" standards which are not consistent with current IAS are being revised, with standards relating to group accounts and goodwill scheduled to be revised this year while others--which include standards on business combinations; consolidated financial statements and accounting for investments in subsidiaries; impairment of assets; and provisions, contingent liabilities, and contingent assets--are expected to be finalized within the next 1-2 years. In addition, Hong Kong SAR's standards in certain areas are more specific than IAS, including on retirement schemes and accounting for investments in nontradable securities.

94.  The HKSA considers that harmonization with IAS over the treatment of financial derivatives should proceed cautiously in light of the ongoing international debate over the most appropriate treatment. SSAPs under development are intended to ensure partial observance of IAS 32 (Financial Instruments: Disclosures and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement). The first step in this process is the SSAP on "Accounting for investments in securities," finalized in April 1999. The HKSA has also established a subcommittee to develop guidance on derivatives and hedging, based on the relevant IAS.

Promulgation and enforcement of standards

95.  The HKSA promulgates accounting standards after detailed evaluation of the relevant international standard and the preparation of an Exposure Draft incorporating any additional guidance or amendments arising from Hong Kong SAR legislation or regulations. The Exposure Draft is released to all members, listed companies, regulators, chambers of commerce, and academics (and posted on the HKSA's website on the Internet) for comment, and finalized after review of the comments.

96.  The HKSA has statutory review, investigation, and disciplinary powers over its members. It has formal mechanisms for review of publicly listed companies' annual reports and for dealing with individual inquiries and complaints. In appropriate cases, disciplinary action is taken against members, and sanctions include the suspension of licenses and fines.

97.  The Professional Standards Monitoring Committee (PSMC) of the HKSA--which is a nonstatutory committee set up by the Council of the HKSA--carries out a regular review of annual reports of listed companies. Occasionally, the PSMC also considers accounting and auditing matters of listed companies which originate from referrals from outside parties. The PSMC communicates its review findings to auditors and may require them to respond to certain points. Auditors' responses are on a voluntary basis, as the PSMC does not have statutory power to force a response. However, the PSMC reports cases of significant noncompliance with professional standards to the Council of the HKSA, which has statutory investigative and disciplinary powers under the Professional Accountants Ordinance. Compliance with accounting standards is also enforced by the HKMA (over authorized banking institutions), the SFC (over securities dealers), the IA (over insurance companies), and the SEHK (over listed companies).


IX.  Auditing Practices30

This section is a self assessment on the part of the authorities and was not independently verified by IMF staff. It is not therefore a ROSC.

Institutional Structure

98.  The HKSA is a member body of the International Federation of Accountants (IFAC) and a HKSA Council Member is currently also a member of the International Auditing Practices Committee (IAPC).

99.  The HKSA is incorporated under the Professional Accountants Ordinance. The HKSA authorized to regulate the accountancy profession and is the only statutory licensing body of professional accountants in Hong Kong SAR. The HKSA has been codifying auditing techniques and issuing auditing standards and guidelines since its establishment in 1973. Qualifications of auditors are specified in the Professional Accountants Ordinance, under which auditors must be professional accountants holding practicing certificates and must be members of the HKSA. All auditors of Hong Kong SAR registered companies must hold practicing certificates issued by the HKSA.

100.  Statutory reports are required annually for companies incorporated in Hong Kong SAR and for overseas companies listed on the Stock Exchange of Hong Kong (SEHK). The reports must contain audited financial statements for the current year, with corresponding amounts for the preceding year, including a balance sheet, profit and loss account, notes and a cash flow statement. Public companies are required to file their reports with the Registrar of Companies. The Companies Ordinance stipulates the minimum disclosures that should be made in the financial statements and directors' reports.

Policy toward international standards

101.  The HKSA has to date finalized 22 new Statements of Auditing Standards (SAS) which are consistent with the equivalent International Standards on Auditing (ISA). The SAS contain basic principles and essential procedures (Auditing Standards) with which auditors are required to comply in the conduct of any audit. In a number of cases, the HKSA standards are more prescriptive than the equivalent ISA. For instance, SAS 600 "Auditors Reports on Financial Statements" is based principally on the equivalent U.K. SAS, which is longer and more exacting than ISA 700.

102.  The few remaining ISA which have not yet been finalized in Hong Kong SAR are mostly covered by "legacy" standards, which are based on U.K. standards and have been brought forward from 1993. These standards are currently under review, with most reviews expected to be finalized within the next year.

103.  In addition, the HKSA has issued a number of Practice Notes, relating to significant local regulatory audit matters, which apply the same principles as those embodied in ISA. The HKSA also publishes Auditing Bulletins which provide guidance on new issues. Both the Practice Notes and the Bulletins are persuasive rather than prescriptive, being indicative of good practice.

104.  Copies of these Standards, Guidelines and Notes are published in the handbook issued to all members of HKSA.

Promulgation and enforcement of standards

105.  The HKSA promulgates auditing standards after detailed evaluation of the relevant international standard and the preparation of an Exposure Draft incorporating any additional guidance or amendments arising from Hong Kong SAR legislation or regulations. The Exposure Draft is released to all members, listed companies, regulators, chambers of commerce, and academics (and posted on the HKSA's website on the internet) for comment, and finalized after review of the comments.

106.  The HKSA has statutory review powers over working papers and working practices of all audit firms in Hong Kong SAR. Professional auditing standards are enforced by the HKSA's Practice Review Committee (PRC), which is a statutory committee established under the Professional Accountants Ordinance. Accounting firms are selected for review randomly, not as a response to any complaint or referral. Reviewers are full-time employees of the HKSA, and undertake on-site visits to the firms. They are given statutory powers of access to files and other information generated by the auditors. In appropriate cases, disciplinary action is taken in response to noncompliance with professional standards. Sanctions include the suspension of licenses and fines.


1As the implementation deadlines vary for the individual data categories, evidence of countries' degree of observance of these commitments in many cases will not be available until the second half of 1999, or even the end of 1999 for some data categories. Details of these deadlines are shown on the DSBB.

2AIs comprise licensed banks, restricted license banks, and deposit-taking companies.

3Transition plans are submitted by SDDS subscribers outlining the steps to be taken with respect to statistical practices to come into observance of the SDDS requirements for a data category.

4A flexibility option allows a subscriber to disseminate data with lower frequency (periodicity) or with greater lag (timeliness), or both, than prescribed for the data category under the SDDS. The SDDS allows all subscribers two flexibility options on an ongoing basis. The Executive Board of the IMF has agreed to provide subscribers with an additional temporary flexibility option to smooth transition to the observance of the SDDS. This temporary option expires at the end of 1999. In addition, permanent flexibility may be taken for the timeliness element only of the data on national accounts and balance of payments, provided that the data for the tracking categories fully meet the SDDS requirements. (The tracking categories are the production index in the case of the national accounts data, and international reserves and merchandise trade in the case of the balance of payments data.)

5"As relevant" options are permitted for certain data categories in certain circumstances (for example, for the timeliness of certain prescribed components of the analytical accounts of the banking sector in cases where a country has an extensive branch banking system, or for the periodicity and timeliness of the labor market data where these data may be of limited relevance to the country's economy). "As relevant" options can be used in addition to "flexibility" options.

6This section has been prepared by Fund staff based on information provided by the authorities.

7In addition to the five specialized funds there are two others--the Land Fund and the Lotteries Fund.

8See Section IV for further institutional information on the Exchange Fund.

9A Task Force on Government Financial Reporting Policy has been set up to examine, among others, the use of accrual accounting in Government. The Task Force will submit its recommendation to the Financial Secretary by end-2000.

10See the Code of Good Practices on Transparency in Monetary and Financial Policies, which is posted on the IMF website (http://www.imf.org).

11This section has been prepared by Fund staff based on information provided by the authorities.

12AIs comprise licensed banks, restricted license banks, and deposit-taking companies.

13See Section V for further details on the legal framework and accounting and transparency aspects of banking supervision.

14See Section VI for further details on the institutional structure of securities market regulation.

15See Section VI for further details on the proposed Securities and Futures Bill.

16See Section VII for further details on the institutional structure of insurance industry regulation.

17Information on the nature of the Cross-Market Surveillance Committee and its sharing of information is available to the public.

18Information on the linked system may be found on the HKMA's website on the Internet (http://www.info.gov.hk/hkma/); in various HKMA bulletins, speeches, and seminars; and in the HKMA publication entitled The Story Behind HK$7.8.

19See, in particular, the HKMA publications entitled Prudential Supervision in Hong Kong and Guide to Applicants for Authorization under the Banking Ordinance.

20Other related publications of the HKMA include Banking Returns and Completion Instructions and Guide to Applicants for Authorization under the Banking Ordinance.

21For more information, see the BIS website at http://www.bis.org/.

22A self-assessment by the HKMA has been published. See "Core Principles for Effective Banking Supervision--An Assessment of the Position in Hong Kong," Hong Kong Monetary Authority, December 1997.

23This section has been prepared by Fund staff based on information provided by the authorities.

24AIs comprise licensed banks, restricted license banks, and deposit-taking companies.

25See Guide to Applicants for authorization under the Banking Ordinance, Hong Kong Monetary Authority, paragraph 10.

26This represents a summary of the authorities' description of practices in this area. No attempt has been made to provide an independent assessment of observance of standards in this area.

27For more information on these standards see the IOSCO web site at http://www2.iosco.org/.

28This represents a summary of the authorities' description of practices in this area. No attempt has been made to provide an independent assessment of observance of standards in this area.

29This represents a summary of the authorities' description of practices in this area. No attempt has been made to provide an independent assessment of observance of standards in this area.

30This represents a summary of the authorities' description of practices in this area. No attempt has been made to provide an independent assessment of observance of standards in this area.

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