Financial Markets in Hong Kong ch2

Part I Finance in Hong Kong, 2 Financial
Regulatory Structure
Douglas W Arner, Berry FC Hsu, Say H Goo, Syren Johnstone, Paul
Lejot, Maurice Kwong-Sang Tse
From: Financial Markets in Hong Kong (2nd Edition)

Douglas W Arner, Berry Hsu, Say H Goo, Syren Johnstone, Paul Lejot,
Maurice Kwok-Sang Tse (Consulting Editor)
Content type: Book content

Product: Financial Law [FBL]
Published in print: 24 March 2016
ISBN: 9780198706472
Subject(s):
Debt — Equity — Securities — Investment business
From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved.
Subscriber: University of Hong Kong; date: 08 September 2023
(p. 37) 2 Financial Regulatory Structure
A. Regulatory Evolution 2.01
(1) Early development (1840–1948) 2.02

(2) Emerging market (1949–87) 2.04
(3) Developed markets (1987–2008) 2.11
B. Foundations: Government and Legal System 2.18
(1) Basic Law and common law: The legal framework 2.22
(2) Legislative process and the Executive 2.28
(3) Judiciary 2.30
(4) Basic Law: Monetary and financial systems 2.34
C. Financial Regulatory System 2.36
(1) Financial regulatory framework 2.38

(2) Role of the Hong Kong government 2.43
(3) Financial supervisory agencies 2.44
(4) Companies: Legal framework 2.63
(5) Other agencies 2.95
D. Pre-global Financial Crisis Weaknesses 2.108
(1) Pre-existing weaknesses 2.108

(2) International Monetary Fund review 2003 2.109
(3) Other issues: Review of banking stability 2.126
(4) The global financial crisis 2.129
E. Post-crisis Evolution and Reforms 2.135
(1) The international response to the crisis 2.136

(2) Post-crisis reforms in Hong Kong 2.139
(3) Lehman Minibonds 2.148
(4) Other international best practice reforms 2.154
(5) An international financial centre for China 2.159
F. Conclusion 2.163
A. Regulatory Evolution
2.01 Hong Kong has undergone three stages of financial regulatory development that here
are described as early, emerging, and developed, followed by a series of post-crisis reforms
largely adopted from recommendations made by the Financial Stability Board (FSB) in
2009–10 and endorsed by the G20 states. Regulatory reforms of Hong Kong’s financial
markets have typically been implemented after financial crises resulting from market
failure. Financial regulation in Hong Kong prior to the 1990s developed as post-hoc
responses to serious financial crises. Indeed, prior to the mid-1980s, Hong Kong had no
public financial law, instead cartels of financial sector corporations largely regulated
themselves, mainly avoiding official interest and functioning as an informal club.1 According
to one leading scholar, ‘[t]he (p. 38) banking crisis of 1982–1986 and the near bankruptcy of
the futures market during the world stock market crash of October 1987, forced the
authorities to undertake a far-ranging reform of the regulatory framework’.2 While Hong
Kong has not always had effective systems of financial regulation, it has been steadily
strengthening its regulatory framework both for financial markets and institutions.3 In
tandem with these developments, particularly since the introduction of the Securities and
Futures Ordinance4 (SFO) in April 2003, the mandate given to regulators to supervise
market participants and to take steps to enforce laws and regulations has strengthened.
This has led to an increasing effectiveness of Hong Kong’s legal and institutional regulatory
framework which has enhanced its development as an international financial centre over
the past two decades. Ensuring this evolution continues in response to new market
developments will be vital to its continued success in the future.
(1) Early development (1840–1948)

2.02 The stage of early development is the period commencing from the beginnings of
significant international trade being undertaken in Hong Kong up to the establishment of
the People’s Republic of China in 1949. For much of its history, the Pearl River Delta region
of Southern China has always been involved in international trade, beginning with Canton,
then centred on Macau, with Hong Kong beginning to emerge as a centre of international
trade following the cession of Hong Kong island to Britain in 1842, as more fully explained
in Chapter 1. In its early years, it served as a centre for colonial banking institutions such
as the Chartered Bank (established in Hong Kong in 1859 and continuing to operate as
Standard Chartered Bank, although headquartered in London). Given travel times between
London and Hong Kong, this situation posed increasing challenges to financing and
payments in the context of trade between China and the rest of world via Hong Kong. As a
result, in 1865 the Hong Kong and Shanghai Banking Corporation Limited (then the
‘Hongkong Bank’, now HSBC)was established in Hong Kong and Shanghai to provide local
financing to support international trade through Hong Kong and Shanghai. This was
followed by the 1981 establishment of the first stock exchange in Hong Kong,‘The
Association of Stockbrokers in Hong Kong’. A second exchange was established in 1921,
‘The Hong Kong Stockbrokers’ Association’. These exchanges merged in 1947 to become
‘The Hong Kong Stock Exchange Ltd’.
(p. 39) 2.03 During this period, in common with other centres of international finance and
trade at the time, there was virtually no regulatory supervision of the financial markets.5
There were no statutory requirements regulating the listing of securities beyond general
prospectus requirements for companies and limited provisions under other statutes. The
securities industry was loosely regulated under the relevant provisions of the Companies
Ordinance6 and the Stamp Duty Ordinance;7 virtually anyone could establish a financial
market or provide credit. By the end of the nineteenth century, Hong Kong operated on the
basis of English common law and statutory systems supporting international trade and
finance. At the same time, Hong Kong had ceded to Shanghai its position as the premier
financial and trading centre in China, a situation which would continue until 1949.
(2) Emerging market (1949–87)

2.04 Events in mainland China leading up to the establishment of the People’s Republic of
China on 1 October 1949 resulted in financial and trading activities shifting from Shanghai
to Hong Kong. Likewise, the period from the end of the Second World War to the 1970s
marked a period of rapid industrial, financial, and economic development in Hong Kong.
Capital and industrial expertise from Shanghai in particular, combined with large volumes
of mainland immigration, put in place the elements necessary for Hong Kong to develop as
a major industrial centre for global exports. This combined with the need to build large
volumes of housing to support the massive increase in population as well as development of
transport and logistics infrastructure drove increased demands for financing, provided both
by the influx of capital from the mainland as well as domestic savings produced by workers
out of necessity in Hong Kong’s highly capitalist environment. These factors led to a rapid
growth in banking and securities in particular. In 1969 the Far East Stock Exchange Ltd
was established to suit the interests of small companies. Several other stock exchanges
were established in the early 1970s and several collapsed during the market crash in 1973,
when the Hang Seng Index lost over 90 per cent of its value. The only commodities trading
in Hong Kong from 1910 to 1977 was at the Chinese Gold and Silver Exchange Society, a
self-regulated organization.8
2.05 These financial markets remained largely unregulated, with the Hongkong Bank
acting as the territory’s de facto central bank and LLR. Most investors were uninformed
and unsophisticated individuals, and securities prices were excessively (p. 40) determined
by demand as compared to their value. According to the then Commissioner of Banking in
1973, ‘[t]here was very little real investing going on in Hong Kong; it was sheer gambling’.9
The problems were aggravated by a lack of expertise in this area.10 During this period,
some interested parties even argued that regulatory control of the financial markets was
unnecessary.11 They suggested that since there were few public companies, capital did not
have to move through the financial markets.12 This situation gradually changed as a result
of a series of financial crises, in particular in 1965, 1973, and 1987.
2.06 Hong Kong’s first Banking Ordinance was gazetted in 1948 and amended in 1964 and
1986 paralleling British developments. In April 1962 the Companies Law Revision
Committee was commissioned, and published its first report in June 1971. However, few of
its recommendations were brought into law.13 In February 1970 the Companies
(Amendment) Ordinance was enacted to govern company prospectuses. It was the first
legislative attempt in Hong Kong to provide a firm informational basis for the financial
market. The Stock Exchange Control Ordinance of 1973 restricted the number of stock
exchanges to four: Hong Kong Stock Exchange (1891), Far East Stock Exchange (1969),
Kam Ngan Stock Exchange (1971), and Kowloon Stock Exchange (1972). In the same year,
the Commodity Exchange (Prohibition) Ordinance was also gazetted, restricting the
establishment and operation of commodities exchanges.14 However, regulatory control was
still far from adequate. Withholding of relevant information, misrepresentation, forgery, and
fraud were prevalent in the financial markets. There was no regulatory control over
investment advisers and dealers, save for the ineffective anti-fraud and anti-theft provisions
of the criminal law statutes.15
2.07 As a result of the financial market crash in 1973, thousands of people lost their life
savings. The government then began to introduce piecemeal legislation regulating the
financial markets. In 1974 the then Securities Ordinance16 was introduced into law,
establishing a watchdog body for financial markets, the Securities Commission, and
providing a regulatory framework for the operation of the stock exchanges. The Securities
Commission was vested with investigative powers. The ordinance classified market
professionals as dealers, investment advisers, or representatives and required them to
register with the Securities Commission. The (p. 41) ordinance also established a Stock
Exchange Compensation Fund to partially compensate clients of defaulting securities firms.
At the same time, the Protection of Investors Ordinance17 was introduced. This was
intended to protect potential investors by ensuring that they were given accurate
information and by prohibiting fraudulent and reckless advertisements. In 1975 the
Securities Commission approved the introduction of the ‘Code on Takeovers and Mergers’
as a voluntary code to regulate takeovers and mergers of listed and public companies in
Hong Kong. In 1976 the Commodities Trading Ordinance was established, making
provisions for establishing a commodities exchange, the Hong Kong Commodity Exchange
Limited later renamed in 1985 to Hong Kong Futures Exchange Limited (HKFE), and
controlling trading in commodities futures contracts. This ordinance also established a
Commodities Trading Commission with functions similar to those of the Securities
Commission.18
2.08 This series of ordinances provided some form of stability in the financial markets.
Critics argued that an effective regulatory framework could not arise from these ordinances
due to the general philosophy of non-intervention by the government and the lack of
resources.19 In the 1970s and 1980s all financial markets underwent rapid growth but the
regulatory framework of the financial markets in Hong Kong remained static. A number of
new financial products were introduced into the financial markets, with increasing
sophistication. As a result, the regulatory framework had to catch up with international
trends. The four private stock exchanges continued to operate under their own listing rules
and procedures. The next major development was in 1980 when the Stock Exchanges
Unification Ordinance20 was legislated in 1980. This ordinance provided a mechanism to
merge the four stock exchanges into ‘The Stock Exchange of Hong Kong Limited’ (SEHK),
with the principals and traders of the constituent stock exchanges maintaining their rights
to trade in the new exchange. In February 1986 The Securities (Stock Exchange Listing)
Rules took effect. The merger was completed and trading on the SEHK began on 2 April
1986. Under this ordinance, the trading activities of the SEHK were regulated by the
Commissioner of Securities. The currency board was established in 1983 to help restore
confidence after foreign exchange and banking crises.
2.09 In October 1987 there was a worldwide stock markets crash and Hong Kong was not
immune. Immediately after the crash, the SEHK ceased trading for four working days.
Many individual investors lost their life savings as they had to meet margin calls and settle
previous purchases but could not realize the value of their shares. In the meantime, large
investors continued to trade over-the-counter (OTC) or on a private basis. After the
exchange resumed business, the Hang Seng (p. 42) Index fell to 2,242 points from its all-
time high of 3,950 points.21 The Hong Kong government had no legal capacity to take
mitigating action, and according to the then Financial Secretary:22
The question of government approval does not arise since the exchange has the
power to take such action under its own rules. The Government was, however,
informed in advance of the proposed action, which it regards as a sensible response
to the situation . . . The exchange considers that it will take four days to clear the
backlog . . . I think it is preferable for self-regulatory bodies such as the exchange to
make use of their own powers where these are available instead of resorting to
government intervention. This is in line with our general philosophy towards the
financial markets in Hong Kong.
2.10 The SEHK's unprecedented closure immediately impacted Hong Kong’s reputation
and eroded confidence in its already fragile financial market.23 The 1987 crash prompted
the government to reform the financial markets in line with international standards. In
November 1987 the Securities Review Committee was formed and its criticisms went to the
core of the regulatory architecture, stating that ‘the concept of self-regulation and market
self-discipline had failed to develop in Hong Kong. What is equally unfortunate is that, faced
with this, the supervisory bodies charged with overseeing the markets had lost effective
control.’24 As for the Securities Commission and the Commodities Trading Commission
(both operating from within the civil service) that had been given oversight of the industry
with a mandate to be independent and authoritative, they had ‘been relegated … to a
passive and reactive role’25 in part due to a lack of sufficient resources and other support
from the government. The conclusions and recommendations set out in its report are the
source of the modern financial regulatory framework in Hong Kong.
(3) Developed markets (1987–2008)

2.11 As in many jurisdictions, the regulatory framework of financial markets in Hong Kong
is a product of various attempts by regulators to address the deficiencies of the financial
markets learned from each financial crisis, after compromising with market participants.
The market crash of 1987 led to the creation in 1989 of the Securities and Futures
Commission Ordinance,26 in accordance with the Review Committee’s recommendations to
create a new and more effective regulatory agency to supervise the financial industry. The
Securities and Futures Commission (SFC) was thus created in 1989 with new powers of
supervision, intervention, (p. 43) investigation, prosecution, and even adjudication.27
Similarly, the Hong Kong Monetary Authority (HKMA) (formerly two government
departments) was created in 1993 following the collapse of the Bank of Credit and
Commerce International (BCCI). The demutualization and merger of the stock and futures
exchange took place after the Asian financial crisis of 1997. The SFO belatedly and
reluctantly passed into law after this crisis as a result of the review following the 1987
market crash and also in response to the events of 1997–8.
2.12 Since its establishment in 1989, the SFC has played a key role in setting and
developing standards for intermediaries. In 1994 it introduced the ‘Code of Conduct for
Persons Registered with the Securities and Futures Commission’, which set basic standards
and requirements covering both operational and client-facing matters for persons
registered under the then Securities Ordinance and the Commodities Trading Ordinance. In
1992 it introduced revised codes on takeovers and mergers, and addressing share
repurchases. In 2001 it introduced a code of conduct governing corporate finance advisers,
and sponsors of new listing applications involving public offers. Each of these codes,
together with others introduced since 2002, is regularly updated. However, the SFC was at
that time operating in a legal environment that was compartmentalized and fractured so far
as financial market regulation was concerned.
2.13 Prior to the creation of the SFO,28 the securities regulatory framework was scattered
across some twelve ordinances, including the then Companies Ordinance.29 In 1991 the
Securities (Insider Dealing) Ordinance30 replaced the relevant provisions in the Securities
Ordinance of 1974 with more detailed and comprehensive provisions. The Securities
(Disclosure of Interests) Ordinance31 was introduced in the same year imposing mandatory
disclosure on those who acquire more than 10 per cent of a company’s shares. This was a
new approach in promoting transparency and preventing fraud and improper practices in
the financial markets. In 1992 the Securities and Futures (Clearing Houses) Ordinance
empowered the SFC to declare which clearing houses were to be recognized and make
rules and procedures for their operation. However, the Securities Commission did not
normally intervene in the management and governance of the SEHK or the HKFE. As a
result of the 1987 crash, these exchanges voluntarily made significant reforms in their
settlement, risk management, and trading systems.32
(p. 44) 2.14 As a result of the recommendation by the Securities Review Committee, in
April 1996, the SFC published ‘A Consultation Paper on a Draft for a Composite Securities
and Futures Bill’, which proposed consolidating and rationalizing eight of these ordinances,
as well as updating certain other provisions.33 The objective was to provide a modern,
simplified, and user-friendly ordinance. As expected, the Securities and Futures Bill met
resistance from the financial sector and listed companies34 but was finally passed into
legislation in March 2002 and became effective on 1 April 2003.
2.15 The period since 1987 has thus been marked by a reform of the regulatory
architecture that strengthens the regulation and supervision of financial institutions and
markets, with the overriding goal of achieving ‘international standards’. The period through
to 1995 was also a time of modernization and a search for standards of best practice, not
only in Hong Kong but globally. Following the financial crises of recent years associated
with Mexico, East Asia, Russia, Argentina, and elsewhere attention has focused on the
importance of developing such standards and their implementation into domestic legal
systems and supervisory practice.35 This is an on-going process that is likely to shape the
development of public financial law in both Hong Kong and throughout mainland China.
2.16 The final phase of regulatory reform considered here is Hong Kong’s application of
internationally coordinated responses to the 2007–8 financial crisis, extending from 2009
and subject to a lengthy period of implementation. The main concerns are with bank capital
adequacy regulations, broadly in accordance with the Basel III Accord, more intense
requirements for the conduct of business by intermediaries of all kinds, new rules for the
orderly resolution of distressed intermediaries, and mandatory requirements for centralized
reporting and clearing of new or amended OTC derivative contracts, the migration of
certain of those contracts to a new central counterparty (CCP), and new arrangements for
contract execution through regulated trading platforms. Section E deals with the intentions
of the reforms and succeeding chapters address specific measures, either implemented, in
progress, or subject to on-going study or consultation.
2.17 A sound regulatory framework is vital for long-term stability. Hong Kong’s prosperity
depends on its success as a centre for trade and finance. While Hong Kong has not always
practiced effective financial regulation, it has been steadily strengthening its regulatory
framework both for financial markets and (p. 45) institutions.36 The increasing effectiveness
of this legal and institutional framework has enhanced its development as an international
financial centre over the past decade and will be vital to its continued success in the future.
The question is what system should Hong Kong adopt and to what extent should the
financial markets be regulated? As in other common law jurisdictions, Hong Kong has
developed a number of regulatory agencies, each with its own specific jurisdiction, to
enforce specific financial regulations. These are discussed in the following section and in
Part II of this book.
B. Foundations: Government and Legal System

2.18 At the base of financial markets are Hong Kong’s economic, governance, legal, and
taxation systems. Upon that base, financial markets in Hong Kong are underpinned by legal
and institutional arrangements addressing: company law and corporate governance;37
property and collateral; insolvency;38 financial information (accounting39 and auditing40);
market integrity;41 and financial regulation (structure, banking42 and payment and
settlement,43 securities,44 insurance,45 pensions, and conglomerates).
2.19 Hong Kong’s legal and institutional framework is an interesting case: under British
rule, it developed as a laissez-faire capitalist system based on English common law and
imported statutes, with a colonial administration with few democratic features reporting to
the government in London. Since the 1997 transfer of sovereignty to the People’s Republic
of China, Hong Kong has continued as part of the ‘one country, two systems’ principle46 to
operate a capitalist system based upon (p. 46) common law principles and procedures but
with a largely administrative government now reporting to the central government in
Beijing, although with modest democratic features. As such, it is an unusual jurisdiction in
terms of its economic, governmental, and legal foundations.
2.20 Historically, Hong Kong has been known for its laissez-faire system of capitalism;
however, this has never been a completely accurate picture. While Hong Kong has lacked
the sort of linked financial and governmental systems of Asian economies such as South
Korea, Japan, or Singapore, there has historically been a close working relationship
between leading businesses and the government, with business typically assuming self-
regulatory responsibility, largely as a result of government dependence on a property-based
revenue system. This has changed over the past two decades with the relationship between
government, business, and the financial system becoming more rule-based and transparent
though with continuing influence by dominant economic elites.
2.21 Following its transfer of sovereignty to the People’s Republic of China, Hong Kong
remains largely legally and administratively separate under the ‘one country, two systems’
principle. As a corollary in respect of financial systems, there exist ‘two markets, two
monetary systems and two responsible monetary authorities’, one for the mainland and one
for Hong Kong. Although administratively separate, they are nevertheless becoming
increasingly interlinked.
(1) Basic Law and common law: The legal framework

2.22 From 1 July 1997 Hong Kong became a Special Administrative Region (SAR) of the
People’s Republic of China enjoying a high degree of autonomy. The fundamental legal
framework of Hong Kong is the ‘Basic Law’ adopted by the People’s Republic of China
National People’s Congress on 4 April 1990 pursuant to the Sino-British Joint Declaration47
registered with the United Nations on 12 June 1985 by the People’s Republic of China and
United Kingdom governments. The Basic Law is thus a People’s Republic of China law
establishing the framework for the SAR of Hong Kong and as such is the constitutional
document of post-colonial Hong Kong and the blueprint for its future development. It sets
out the general principle of ‘one country, two systems’, with the capitalist system of Hong
Kong and the socialist system of mainland China coexisting side by side for a minimum of
fifty years. The Basic Law grants Hong Kong a high degree of autonomy and executive,
legislative, and independent judicial powers and guarantees the existence of its current
political, economic, and financial system until at least 2047.48
(p. 47) 2.23 Article 8 of the Basic Law provides that:
laws previously in force in Hong Kong, that is, the common law, rules of equity,
ordinances, subordinate legislation and customary law shall be maintained, except
for any that contravene this Law, and subject to any amendment by the legislature
of the Hong Kong Special Administrative Region.
Article 18 of the Basic Law provides that:
laws in force in the Hong Kong Special Administrative Region shall be this Law, the
laws previously in force in Hong Kong as provided for in Article 8 of this Law, and
the laws enacted by the legislature of the Region.
2.24 English statutes and judicial decisions were the primary source of existing Hong Kong
law prior to the 1997 handover. The pre-existing legal framework continues under the Basic
Law. As a former British colony governed by common law, judicial precedent has served to
develop most aspects of financial law. While decisions of the Privy Council (formerly the
highest appeal court in the Hong Kong court system) on appeals from Hong Kong delivered
prior to 1 July 1997 continue to be binding on all Hong Kong courts other than the Court of
Final Appeal, decisions of the Privy Council on non-Hong Kong appeals together with those
of lower British courts, whether delivered before or after 1 July 1997, merely carry
persuasive weight, as do decisions from other common law jurisdictions.49
2.25 Because of the importance of Hong Kong as an international financial market to both
Hong Kong and the mainland, seventy of the Basic Law’s 160 articles are related to
economic matters.50 For instance, articles 109, 112, 114, and 116 determine that Hong
Kong remains a free port, a separate customs territory, and an international financial
centre, with its markets for foreign exchange, gold, and securities and futures remaining in
place. According to article 115, Hong Kong shall pursue a policy of free trade and safeguard
the free movement of goods, intangible assets, and capital. Hong Kong shall also have
independent finances and use its financial revenues exclusively for its own purposes.51
Under article 105, rights of individuals and legal persons to the acquisition, use, and
inheritance of property remain protected in Hong Kong.
2.26 It is, therefore, clear that the pre-existing laws relating to banking and finance in
Hong Kong remain in force after 30 June 1997 and until changed by the legislature.
(p. 48) 2.27 This section first discusses the legislative process in establishing financial
regulations and the legal framework under which they are administered and adjudicated. It
then mentions the relevant provisions of the Basic Law that provide a constitutional
framework in promoting Hong Kong as a financial centre.
(2) Legislative process and the Executive

2.28 The law-making body in Hong Kong is the Legislative Council. The Basic Law spells
out the authority and composition of the Legislative Council.52 The Basic Law also regulates
the exercise of legislative power, in that it defines that power and where the authority
resides to create legislation through ordinances.53 The Legislative Council with the assent
of the Chief Executive passes ordinances into law. The Basic Law provides that members of
the Legislative Council may introduce bills, other than those relating to public expenditure,
political structure, or operation of government.54 Drafting of legislation is the function of
the Department of Justice (though in practice in the financial field a draft will be produced
by the relevant government agency) and a bill is then submitted to the legislative process.
In the financial sphere, the Financial Services and Treasury Bureau have also made an
important contribution to the reform process. The written consent of the Chief Executive is
required before bills relating to government policies are introduced. This applies to most of
the ordinances relating to banking and finance. In any event, the Legislative Councils of the
Hong Kong SAR and former British Hong Kong have traditionally taken a passive role in
financial matters. Like other jurisdictions, legal reforms in financial markets tend to come
from regulatory agencies rather than legislators. There is an active programme of law
reform: the Law Reform Commission of Hong Kong was established in 1980, and considers
aspects of the law referred to it by the Secretary for Justice or the Chief Justice but does not
prepare draft legislation.
2.29 The Basic Law provides the ambit of executive and legislative powers by enumerating
the power of the Chief Executive and the government respectively.55 These powers conform
to the traditional common law view that the executive function involves performing
particular acts or issuing particular orders in accordance with the law. It also enumerates
the powers of the Legislative Council.56 Such powers (p. 49) fall within the traditional
common law view that the legislative function involves formulating rules for general
application. The administration and enforcement of ordinances relating to banking and
finance are vested in the HKMA, SFC, Insurance Authority (IA), and the Mandatory
Provident Fund Schemes Authority (MPFA). In addition, there is a variety of self-regulatory
organizations that undertake varying roles, including the Hong Kong Association of Banks
(HKAB) and Hong Kong Exchanges and Clearing (HKEx). There is a complicated separation
of authority among these agencies, each with its own investigative styles and enforcement
priorities.
(3) Judiciary
2.30 Adjudicative power is vested in the judiciary in accordance with the provisions of the
relevant ordinances and the inherent power of the court on judicial review. As a major
banking and finance centre, Hong Kong requires, and possesses, a sound system of
adjudication, to provide international investors with confidence. In case of disputes in
enforcing the provisions of an ordinance, there should be internal mechanisms for their
resolution. If a resident remains aggrieved after exhausting all such internal panels, there
are further channels available for redress, for example, in bringing a complaint before a
court of law. The judiciary in Hong Kong is independent from other branches of
government. Article 2 of the Basic Law provides:
The National People’s Congress authorizes the Hong Kong Special Administrative
Region to exercise a high degree of autonomy and enjoy executive, legislative and
independent judicial power, including that of final adjudication, in accordance with
the provisions of this Law.
2.31 Judicial independence is prescribed in the Basic Law which entrenches the doctrine
of separation of powers by providing that the executive, legislative, and judicial powers are
to be vested in the Chief Executive and government, the Legislative Council, and the
judiciary respectively.57 Part IV of the Basic Law spells out the ambit of judicial power.
Article 80 of the Basic Law provides that the ‘courts of the Hong Kong Special
Administrative Region at all levels shall be the judiciary of the Region, exercising the
judicial power of the Region’. The Basic Law does not expressly define judicial power.
Article 83 of the Basic Law, however, provides that the structure, powers, and functions of
the courts of Hong Kong shall be prescribed by law. Article 84 of the Basic Law provides
that precedents of other common law jurisdictions may be referred to by the courts of Hong
Kong. Therefore, Australian and Canadian sources, for example, are relevant, in addition (p.
50) to English sources.58 According to Brandy v Human Rights and Equal Opportunity
Commission,59 the Australian High Court said:
Difficulty arises in attempting to formulate a comprehensive definition of judicial

power not so much because it consists of a number of factors as because the
combination is not always the same. It is hard to point to any essential or constant
characteristic. Moreover, there are functions which, when performed by a court,
constitute the exercise of judicial power but, when performed by some other body,
do not. One is tempted to say that, in the end, judicial power is the power exercised
by courts and can only be defined by reference to what courts do and the way in
which they do it, rather than by recourse to any other classification of functions. But
that would be to place reliance upon the elements of history and policy, which,
whilst they are legitimate considerations, cannot be conclusive.
2.32 The Basic Law only invests the courts with judicial power. Accordingly, article 80 of
the Basic Law intends that only judges can exercise the judicial power of Hong Kong.
Article 85 of the Basic Law provides that:
The courts of the Hong Kong Special Administrative Region shall exercise judicial
power independently, free from any interference. Members of the judiciary shall be
immune from legal action in the performance of their judicial functions.
2.33 This provision is possible only if judges can only exercise judicial power and powers
incidental to it. They must be separated and not be meddled with by any other branch of the
government in the performance of their functions. In ensuring their independence, judges
should not perform any executive or legislative function unless it is necessary and essential
in the performance of their judicial functions. They should not be polluted by being required
to consider political issues. The separation of judicial power implies that the legislature
cannot dictate to the judiciary as to the manner and outcome of the exercise of its
jurisdiction. It is within the ambit of the legislative power to grant or withhold substantive
rights. However, it will be an encroachment of judicial power if the legislature makes law to
interfere with the judicial process itself,60 as this would be considered as an exercise of
judicial power by the legislative branch.
(4) Basic Law: Monetary and financial systems

2.34 The current banking and finance framework in Hong Kong is derived from a capitalist
market-based model. The Basic Law expressly states that the socialist system and policies
shall not be practised in Hong Kong, and the established capitalist system and way of life
shall remain unchanged for fifty years.61 The Basic Law (p. 51) provides constitutional
protection for holders of Hong Kong currency. It provides that Hong Kong shall have its own
legal tender.62 All laws regulating the issue of currency must abide by article 111 of the
Basic Law, which also provides that:
The authority to issue Hong Kong currency shall be vested in the Government of the
Hong Kong Special Administrative Region. The issue of Hong Kong currency must
be backed up by a 100 per cent reserve fund. The system regarding the issue of
Hong Kong currency and the reserve fund system shall be preserved by law.
2.35 The Basic Law ensures the continuation of the financial markets in Hong Kong by
providing, inter alia, that the markets for foreign exchange, gold, securities, futures, and
the like shall continue in Hong Kong. In ensuring that the SAR remains a centre of trade,
commerce, and finance, it also provides that there will be free flow of capital within, into,
and out of Hong Kong.63 Exchange control policies shall not be applied in Hong Kong. The
Basic Law provides that Hong Kong shall manage and control its own exchange fund and
that it shall pursue a policy of free trade and safeguard the free movement of goods,
intangible assets, and capital.64 Article 110 of the Basic Law provides that:
The monetary and financial systems of the Hong Kong Special Administrative
Region shall be prescribed by law. The government of the Hong Kong Special
Administrative Region shall, on its own, formulate monetary and financial business
and financial markets, and regulate and supervise them in accordance with law.
C. Financial Regulatory System

2.36 As with many other financial centres, Hong Kong’s financial regulatory system has
developed gradually and, with some exceptions, largely in response to a range of financial
crises, in particular major international financial crises of 1973, 1987, 1997, and 2008.
While it is strong in individual sectors, gaps, and overlaps remain a factor in Hong Kong’s
regulatory system, as shown in clear relief by the fallout from the current global financial
crisis.
2.37 Hong Kong’s sectoral regulatory structure for its financial system, which has
developed largely in response to individual crises and specific objectives, is based on
separate supervisory bodies for each of the three major financial sectors, instead of there
being one single regulatory body for the entire industry, as with the Monetary Authority of
Singapore.(p. 52)
(1) Financial regulatory framework

2.38 Hong Kong’s financial regulatory framework, in general, is a sectoral structure,65
operating through a ‘three-tier system’. Under the first tier, the Financial Secretary is
responsible for overall policy and the Financial Services and Treasury Bureau (FSTB) is
responsible for translating policies into regulation. Under the second tier, specialist
regulatory agencies are responsible for regulation and supervision of financial services
business. This tier includes the HKMA (regulating banking and banks), the SFC (regulating
the securities and futures markets), the IA (regulating insurance business), and the MPFA
(regulating the pensions industry). Under the third tier, self-regulatory organizations are
responsible for oversight of the activities of their members, albeit under the supervision of
the relevant specialist regulatory agency and, increasingly, pursuant to legislation (e.g.
HKEx, HKAB).
2.39 Each regulatory agency operates within the framework of one or more major
ordinances and each regulatory agency is autonomous (though necessarily not independent
from the government) and issues its own rules and regulations, pursuant to an increasing
array of rule-making powers.
2.40 This sectoral structure has one major caveat: the HKMA is the frontline supervisor of
all activities of banks, including activities involving securities, insurance, etc., though
subject to standards established by other sectoral regulators.
2.41 A Cross-Market Surveillance Committee, comprised of representatives of the FSTB,
HKMA, SFC, and HKEx (and now including the IA and MPFA as well) was established in
October 1998 to exchange market information and to formulate prompt and appropriate
actions where necessary, as well as facilitate supervision of financial groups.
2.42 In addition, other bodies also play important roles, especially the Financial Reporting
Council (FRC—responsible for accounting and auditing standards for listed companies66),
the Companies Registry (responsible for the Companies Ordinance (Cap. 622)67), the Hong
Kong Deposit Protection Board (HKDPB—responsible for Hong Kong’s deposit insurance
scheme68), the Competition Commission, the Independent Commission Against Corruption
(ICAC),69 the Joint Financial Intelligence Unit (JFIU), and the Consumer Council.70
(p. 53) (2) Role of the Hong Kong government

2.43 The government is not involved in the day-to-day regulation of the financial system.
Under articles 106–13 of the Basic Law, it is responsible for a range of aspects of public
finance and monetary and financial affairs. The Financial Secretary is responsible for the
monetary system, Exchange Fund, public finance, financial system, and status of Hong
Kong as an international financial centre.71 The FSTB implements the policies set by the
Financial Secretary in relation to public finance, the financial system, and Hong Kong’s
status as an international financial centre, including ensuring that Hong Kong’s regulatory
regime is up-to-date and meets the needs of investors. To advise on related issues, the Chief
Executive established the Financial Services Development Council in 2013.
(3) Financial supervisory agencies

HKMA
2.44 The HKMA performs the functions of both a limited central bank and a financial
regulator, that limitation resulting from the automaticity introduced into monetary policy by
the existence of a linked exchange rate. The legal framework for banking is based on the
Banking Ordinance (Cap. 155) and the Exchange Fund Ordinance (Cap. 66) supplemented
by the Clearing and Settlements Systems Ordinance (Cap. 584), Companies Ordinance, Bills
of Exchange Ordinance (Cap. 19), and common law. This legal framework is further
complicated by the division of authority between the HKMA and the HKAB.72
2.45 Under the Exchange Fund Ordinance, the HKMA is responsible for administering the
official monetary policy in ensuring the stability of the HK dollar and for managing the
Exchange Fund. The HKMA manages the Exchange Fund under powers delegated by the
Financial Secretary in accordance with the Exchange Fund Ordinance.73 Its mandate is to
ensure the safety, stability, and effectiveness of the banking system74 and to maintain the
stability of Hong Kong’s currency by regulating the banking business, by supervising
banking institutions, and by managing the Exchange Fund.75 The Exchange Fund forms the
basis of Hong Kong’s linked exchange rate mechanism.76
2.46 The HKMA also regulates all activities of ‘Authorized Institutions’ (i.e. banks,
restricted licence banks, and deposit-taking companies) under the framework of (p. 54)
consolidated supervision. Under the Banking Ordinance, the HKMA is responsible for
banking business, defined to include only deposit-taking and cheque-related services.77 As a
result, lending activities are not addressed by the Banking Ordinance but rather by the
common law, the Money Lenders Ordinance (Cap. 163), and the rules of the HKAB. Under
its rule-making powers, most importantly, the HKAB issues the Code of Banking Practice78
with the endorsement of the HKMA, establishing standards, enforceable by the HKAB, for
consumer-related aspects of banking business, including terms and conditions, fees, use of
customer information, marketing, handling of consumer complaints, and loan recovery.
2.47 In addition to the HKMA and HKAB, the HKDPB is responsible for the Hong Kong
Deposit Protection Scheme (DPS), both established under the Deposit Protection Schemes
Ordinance in 2004, with the DPS commencing operations in 2006. Under the DPS, in which
all licensed banks are required to participate, deposit insurance of up to HK$500,000 (in
HK dollar, Renminbi (RMB) or foreign currency equivalent) per depositor per member is
provided with funding through member contributions.
2.48 The HKMA is also responsible for implementing LLR provisions, in accordance with
policy and the Banking Ordinance, with funding sourced from the Exchange Fund. Under
the 2009 policy, support will be given when a local bank failure may pose systemic risk.79
The policy provides for the deployment of a wide range of financial instruments and eligible
collateral over varying time horizons. Foreign bank branches are not normally covered by
the policy. Further liquidity assistance is available to banks under various scenarios to help
promote the smooth operation of the interbank lending market and enhance confidence in
the banking system. These additional liquidity assistance instruments are available to banks
in the form of foreign exchange swaps, term repurchase agreements, and credit facilities.80
SFC and HKEx
2.49 As a result of the 1987 market crisis, the Securities Review Committee was
commissioned to develop a plan to upgrade Hong Kong’s securities market infrastructure to
international standards in November 1987.81 This report, known as the ‘Hay Davison
Report’, served as a blueprint for the modernization of capital (p. 55) market regulation in
Hong Kong throughout the late 1980s and the 1990s. One fundamental aspect of this
transformation has been the establishment of Hong Kong as the preferred international
market for mainland Chinese enterprises to raise capital.
2.50 Following the recommendations of the Hay Davison Report, the SFC was established
on 1 May 1989 under the Securities and Futures Commission Ordinance (Cap. 24)
(repealed) (now consolidated into the SFO (Cap. 571)). Under the SFO, the SFC is the
regulator of the securities and futures industry in Hong Kong.82 The main objectives of the
SFC are to maintain and promote the fairness, efficiency, competitiveness, transparency,
and orderliness of the industry; promote understanding by the public of financial services
including the operation and functioning of the financial services industry; provide
protection to the investing public; minimize crime and misconduct in the industry; reduce
systemic risks in the industry; and assist the Financial Secretary in maintaining the
financial stability of Hong Kong.83 It has the statutory duties to help maintain Hong Kong’s
position as a competitive international financial centre, to facilitate innovation in financial
products, to avoid restrictions on competition, act in a transparent manner, and needs to
make efficient use of its resources.84
2.51 In addition to the SFC, HKEx has also been vested with limited regulatory powers
under the three-tier system. Under the Securities and Futures (Transfer of Functions—
Stock Exchange Company Order) (Cap. 571AE, Sub. Leg.), the SFC’s functions, under the
Companies Ordinance and the SFO, of authorizing prospectuses relating to listings have
been transferred to the HKEx. The HKEx is thus the frontline regulator of all listed and
prospective listed companies. On 10 April 2014 the SFC and the China Securities
Regulatory Commission announced the Shanghai–Hong Kong Stock Connect (see Section
2.161). Under the scheme, investors can directly access the Shanghai Stock Exchange
through HKEx.85 The SFC remains responsible for supervising, monitoring, and regulating
all the activities of HKEx.86
Office of the Commissioner of Insurance and Hong Kong Federation of Insurers
2.52 The legal and regulatory framework for the insurance market in Hong Kong
comprises the Insurance Companies Ordinance (Cap. 41), a statutory body called the Office
of the Commissioner of Insurance (OCI) headed by the Commissioner of Insurance
(Insurance Authority), and self-regulatory measures. These are supplemented by a large
body of common law.
(p. 56) 2.53 The OCI was established in 1992 and is the regulatory authority responsible
for the insurance industry in Hong Kong. The OCI is headed by the Commissioner of
Insurance, who has been appointed as the Insurance Authority for administering the
Insurance Companies Ordinance. The main functions of the Insurance Authority are to
authorize insurers to carry on insurance business in or from Hong Kong and to regulate
insurers and intermediaries to ensure the financial soundness and integrity of the insurance
market.87 While the OCI is responsible for regulation of insurance companies and
intermediaries, securities activities of such firms and persons generally fall within the remit
of the SFC, unlike the securities activities of banks.88
2.54 The Insurance Companies Ordinance does not provide the OCI with statutory power
to intervene in cases of disputes between policyholders and insurers or insurance
intermediaries. The industry has a self-regulatory system responsible for dispute resolution.
Under this system, the Insurance Claims Complaints Bureau (established in 1990) handles
disputes involving personal claims up to HK$800,000 against insurers on behalf of policy
holders.
2.55 In addition to the OCI, the Hong Kong Federation of Insurers (HKFI), established in
1988, plays a key self-regulatory role in respect of insurance business in Hong Kong, similar
in many ways to that of the HKAB in relation to banking. Most significantly, it is responsible
for the Code of Conduct for Insurers,89 initially adopted in May 1999, which provides
standards of insurance conduct enforceable by the HKFI against its membership.
2.56 In 2015, legislation was established that will eventually result in the replacement of
the OCI in favour of a new independent IA. Regulatory responsibilities of the OCI will be
taken up by the IA under key legislative amendments to the Insurance Companies
Ordinance.90 Additional regulatory responsibilities shall include, inter alia, a new licensing
regime for insurance intermediaries. The principle function of the IA is to regulate and
supervise the insurance industry for the promotion of general stability of the insurance
industry and for the protection of existing and potential policyholders.91 Strengthening of
regulatory infrastructure by the IA would help systemic stability and sustainable growth of
the insurance sector. Promoting the stability and growth of the insurance sector is viewed
by the government as important to the economy of Hong Kong and its status as an
international financial centre (see discussion in paragraph 2.156).92
(p. 57) MPFA
2.57 The MPFA is responsible for major pension funds regulation under the Mandatory
Provident Fund Schemes Ordinance (Cap. 485) (MPFSO) and the Occupational Retirement
Schemes Ordinance (Cap. 426) (ORSO). The MPFA was established in September 1998 and
now regulates, supervises and monitors schemes regulated by the MPFSO (mandatory
provident fund (MPF) schemes) and oversees compliance with the MPFSO. This includes
registering MPF schemes, approving qualified persons as trustees and custodians of MPF
schemes, and registering intermediaries that are marketing, selling, or advertising in
relation to MPF schemes.93
Cooperation and coordination between regulators
2.58 A Cross-Market Surveillance Committee (CMSC), composed of representatives of the
FSTB, HKMA, SFC, HKEx, OCI, and MPFA, was established to exchange market information
and to formulate prompt and appropriate actions where necessary, as well as facilitate
supervision of financial groups. The CMSC in 2003 was reconstituted into two separate
committees, the Financial Stability Committee and the Council of Financial Regulators. The
Council of Financial Regulators comprises the Financial Secretary (as chair) and
representatives from the HKMA, SFC, OCI, MPFA, and FSTB. It is charged with
contributing to the efficiency and supervision of financial institutions, promotion, and
development of Hong Kong’s financial markets and the maintenance of financial stability.94
In turn, the Financial Stability Committee (FSC) comprises the Secretary for Financial
Services and the Treasury (as chair) and representatives from the HKMA, SFC, and OCI.
The FSC is charged with monitoring the functioning of the financial system in Hong Kong,
deliberating on issues with possible cross-market and systemic implications, and
formulating and coordinating responses.95
2.59 A significant number of institutions operating in Hong Kong are active in banking,
securities, insurance, and/or pensions business and so their activities may fall under the
supervision of more than one of the regulatory authorities. To address this overlap, the
regulators have agreed Memoranda of Understanding (MOUs) with each other as a means
of defining the boundaries and relationships, and delineating roles and responsibilities
between them.96 For example: pursuant to the (p. 58) MOU between the HKMA and the
SFC, for banks engaged in securities activities, the frontline supervisor is the HKMA while
the SFC will remain the industry regulator, the two authorities collaborating in relation to
investigation and disciplinary matters; an asset manager will need to be licensed by the
SFC to engage in the management of products registered by the MPFA, but the SFC’s
responsibility will be focused on prudential regulation of the asset manager’s activities
whereas the MPFA will be focused on the on-going compliance of the product with the
MPFSO. The presence of so many MOUs addressing the relationships between regulatory
bodies is testimony to the regulatory gaps and overlaps in the roles of each of the
regulators or that their roles are inadequately delineated in relation to the financial
marketplace as a whole. The present arrangements have resulted in a complex statutorily
defined architecture and this contributes to a lack of clarity and certainty among both
regulators and the financial intermediaries they regulate.
2.60 Although all four regulatory agencies are independently responsible for their
respective sectors, their day-to-day supervisory work cannot be entirely separated, simply
because a large number of the supervised institutions are active in banking, securities,
insurance, and pensions undertakings. In addition to the CMSC discussed above, the HKMA
and the SFC work closely in certain respects of their regulatory functions and have entered
into a mutual MOU (see Chapter 3), which sets out the operational details relating to the
respective roles and responsibilities of the two regulators regarding the securities activities
of banking institutions. (p. 59) The HKMA and the SFC hold regular meetings to discuss
matters of mutual interest.
2.61 The HKMA has further entered into a MOU with the OCI in 2003 to strengthen
cooperation in respect of supervision of entities or financial groups in which both
supervisors have a regulatory interest.
2.62 Overall, the current legal and regulatory framework for financial conglomerates in
Hong Kong is in need of further strengthening, both from the standpoint of addressing risks
as well as supporting competitiveness. These issues are discussed in the final section of this
chapter as well as in subsequent chapters, especially Chapter 13.
(4) Companies: Legal framework
Company law development
2.63 Modern company law should have sufficient transparency to instil investor
confidence, minimize transaction costs, maximize efficiency in the running of a company,
and place a reasonable burden on corporate management. Hong Kong company law was
once derived heavily from the nineteenth-century version of the British Companies Act. The
Companies Law Revision Committee, appointed in 1962, made its two most significant
recommendations in 1971 and 1973.97 The Companies (Amendment) Ordinance 1984
modelled the present Companies Ordinance upon the 1948 version of the British Companies
Act in implementing most of the recommendations of the Committee. Between 1973 and
1984, four new versions of the Companies Act were enacted in the United Kingdom;
however, few of these developments were implemented in Hong Kong. In fact, many of the
provisions of the Hong Kong Companies Ordinance remained unchanged over many
decades.
2.64 In March 1997, a ‘Consultancy Report on the Review of the Hong Kong Companies
Ordinance’98 was released, providing a new direction for corporate governance. It
addressed the problems of the present requirements for financial disclosure99 and standard
of care for directors,100 as well as conflicts of interest in corporate governance.101 It also
set out new incorporation procedures102 and a simplified share structure,103 which would
substantially reduce transaction costs. (p. 60) According to this report, the information
required in books of account under the Companies Ordinance was outdated and no longer
consistent with accounting practice.104 It recommended the adoption of generally accepted
accounting principles (GAAP), which are to be set by an independent accounting standards
body.105
2.65 Following decades of discussion, Hong Kong created a new Companies Ordinance
(Cap. 622) in 2012, which came into effect on 3 March 2014. The Companies Ordinance is
the primary piece of legislation governing companies and their activities. As an
international financial centre, Hong Kong and its markets host many non-Hong Kong
companies. The Companies Ordinance also deals with non-Hong Kong companies, that is,
companies incorporated outside Hong Kong but which have established a place of business
in Hong Kong (see the discussions from paragraphs 2.70 and 2.154).
2.66 Other significant bodies of company law applicable in Hong Kong are, first, those
developed under common law and equity, and second, those imposed through statute (the
most important of which is the SFO) and rules (especially the Listing Rules of HKEx). The
latter are discussed further below and in subsequent chapters. In regard to the former, in
broad terms this aspect of Hong Kong company law follows that which has developed in the
English courts, subject to the post-handover context that decisions taken since 1 July 1997
merely carry persuasive weight.
Registrar of Companies and Companies Registry
2.67 The primary administrator of the Companies Ordinance is the Registrar of
Companies, supplemented by the Official Receiver for insolvency matters and the SFC for
certain securities matters, and HKEx for certain prospectus-related matters concerning
listing applications.
2.68 The Registrar of Companies administers and enforces certain aspects of the: (i) the
Companies Ordinance, (ii) Limited Partnerships Ordinance, (iii) Trustee Ordinance, (iv)
Registered Trustees Incorporation Ordinance, (v) Money Lenders Ordinance, and (vi)
Miscellaneous Incorporation Ordinances. The Registrar of Companies does not directly
regulate companies, limited partnerships, trustees, or money lenders; such functions are
assumed by different bodies. As a member of the Standing Committee on Company Law
Reform, the Registrar of Companies takes an active interest in corporate governance issues
and may make recommendations.
2.69 The Companies Registry maintains and makes available for public inspection financial
and other returns, charges registered by companies, and so on. It will follow up defaults in
making the prescribed returns of the entities covered by these (p. 61) Ordinances and may
strike off companies for failure to make returns and for not carrying on business.
2.70 In addition, the Standing Committee on Company Law Reform (SCCLR) is responsible
for the on-going review of the Companies Ordinance. The SCCLR was set up in 1984 by the
government to advise on amendments to that Ordinance. It consists of ex-officio members
(such as the Registrar of Companies and the Official Receiver), while non-official members
come from the legal, accountancy, and banking professions.106
Companies Ordinance
2.71 The Companies Ordinance (Cap. 622), which has now replaced the SFO as the longest
ordinance in the history of Hong Kong, comprises 921 sections and eleven schedules. It is
divided into twenty-one parts.
2.72 Part 1, Preliminary, includes five divisions: (i) short title and commencement; (ii)
interpretation: general; (iii) interpretation: types of companies;107 (iv) interpretation:
holding company and subsidiary, and parent undertaking and subsidiary undertaking; and
(v) application.
2.73 Part 2, Registrar of Companies and Companies Register, includes eight divisions: (i)
preliminary; (ii) Registrar of Companies; (iii) Companies Register; (iv) registration of
document;108 (v) Registrar’s powers in relation to keeping Companies Register; (vi)
inspection of Companies Register; (vii) materials in Companies Register unavailable for
public inspection;109 and (viii) miscellaneous.
2.74 Part 3, company formation, includes eight divisions: (i) company formation;110 (ii)
company articles;111 (iii) company name;112 (iv) membership; (v) capacity and powers of
company; (vi) contracts of company; (vii) execution of documents;113 and (viii) re-
registration of unlimited company as company limited by shares.
2.75 Part 4, share capital, includes eight divisions: (i) nature of shares; (ii) allotment and
issue of shares; (iii) commissions and expenses; (iv) transfer and transmissions of (p. 62)
shares;114 (v) replacement of listed companies’ lost share certificates; (vi) alteration of
share capital; (vii) classes of shares and class rights;115 and (viii) supplementary and
miscellaneous.116
2.76 Part 5, transactions in relation to share capital, includes five divisions: (i) preliminary;
(ii) solvency test; (iii) reduction of share capital;117 (iv) share redemptions and buy-
backs;118 and (v) financial assistance for acquisition of own shares.119
2.77 Part 6, distribution of profits and assets, includes four divisions: (i) preliminary; (ii)
prohibitions and restrictions; (iii) provisions supplementary to Division 2; and (iv) specified
financial statements.
2.78 Part 7, debentures, includes five divisions: (i) preliminary; (ii) register of debenture
holders; (iii) allotment of debentures or debenture stock; (iv) transfer of debentures or
debenture stock; and (v) miscellaneous provisions.
2.79 Part 8, registration of charges, includes seven divisions: (i) preliminary; (ii) obligation
to register specified charges after creation; (iii) obligation to register existing charges; (iv)
obligation to register other particulars of debentures; (v) provisions supplementary to
Divisions 2, 3, and 4; (vi) notice to Registrar of enforcement of security; and (vii) company’s
and registered non-Hong Kong company’s records and register of charges.
2.80 Part 9, accounts and audit, includes eight divisions: (i) preliminary; (ii) reporting
exemption; (iii) a company’s financial year; (iv) preparation of financial statements and
directors’ reports;120 (v) auditor and auditor’s reports;121 (vi) laying and publication of
financial statements and reports; (vii) summary financial reports; and (viii) miscellaneous.
(p. 63) 2.81 Part 10, directors and company secretaries, includes five divisions: (i)
requirements to have directors;122 (ii) director’s duty of care, skill and diligence; (iii)
directors’ liabilities; (iv) appointment and resignation of company secretaries; and (v)
miscellaneous provisions relating to directors and company secretaries.
2.82 Part 11, fair dealing by directors, includes six divisions: (i) preliminary; (ii) loan,
quasi-loan and credit transaction; (iii) payment of loss of office; (iv) directors’ service
contracts; (v) material interests in transaction, arrangement or contract; and (vi)
miscellaneous.123
2.83 Part 12, company administration and procedure, includes five divisions: (i) resolutions
and meetings;124 (ii) registers;125 (iii) company records; (iv) registered office and
publication of company names; and (v) annual return.
2.84 Part 13, arrangements, amalgamations, and compulsory share acquisition in takeover
and share buy-back, includes five divisions: (i) preliminary; (ii) arrangements and
compromises; (iii) amalgamation of companies within group; (iv) compulsory acquisition
after takeover offer; and (v) compulsory offer after general offer for share buy-back.126
2.85 Part 14, remedies for protection of companies’ or members’ interests, includes five
divisions: (i) preliminary; (ii) remedies for unfair prejudice to members’ interests; (iii)
remedies for others’ conduct in relation to companies, etc.; (iv) derivative action for
remedies for misconduct against companies etc.; and (v) members’ inspection of company’s
records.
2.86 Part 15, dissolution by striking off or deregistration, includes four divisions: (i)
striking off;127 (ii) deregistration; (iii) property of dissolved company and other
miscellaneous matters; and (iv) restoration to Companies Register.128
2.87 Part 16, non-Hong Kong companies, includes nine divisions: (i) preliminary; (ii)
registration; (iii) addition, change, or cessation of corporate name; (iv) regulation (p. 64) of
names used by registered non-Hong Kong companies to carry on business in Hong Kong; (v)
authorized representatives of registered non-Hong Kong companies; (vi) returns and
accounts of registered non-Hong Kong companies; (vii) other obligations; (viii) striking off;
and (ix) miscellaneous.
2.88 Part 17, companies not formed but registrable under the ordinance, includes three
divisions: (i) preliminary; (ii) registration of eligible companies; and (iii) consequences of
registration.
2.89 Part 18, communications to and by companies, includes four divisions: (i) preliminary;
(ii) service of documents on company; (iii) other communication to company by person who
is not company; and (iv) other communication by company to another person.
2.90 Part 19, investigations and enquiries, includes six divisions: (i) preliminary; (ii)
investigation of company’s affairs by inspectors;129 (iii) enquiry into company’s affairs by
Financial Secretary; (iv) enquiry by Registrar; (v) supplementary provisions to Divisions 2,
3, and 4;130 and (vi) investigation of company’s affairs by persons appointed by the
company.
2.91 Part 20, miscellaneous, includes four divisions: (i) miscellaneous offences; (ii)
miscellaneous provisions relating to investigation or enforcement measures; (iii)
miscellaneous provisions relating to misconduct by officer or auditor of company; and (iv)
other miscellaneous provisions.
2.92 Part 21, consequential amendments, and transitional and saving provisions, includes
three divisions: (i) consequential and related amendments; (ii) transitional and saving
provisions; and (iii) supplemental provisions.
2.93 The Ordinance is supplemented by eleven schedules: (i) parent undertakings and
subsidiary undertakings; (ii) content of incorporation form; (iii) specified qualifying
conditions for sections 361–6; (iv) accounting disclosures; (v) contents of directors’ report:
business review; (vi) information to be contained in annual return and documents by which
annual return must be accompanied; (vii) offences in respect of which proceedings not
instituted under certain conditions; (viii) amendments relating to paperless holding and
transfer of shares and debentures; (ix) consequential and related amendments to
Companies Ordinance (Cap. 32) and its subsidiary legislation; (x) omitted as spent; and (xi)
transitional and saving provisions.
(p. 65) 2.94 As of December 2015, the Companies Ordinance is supported by the following
subsidiary legislation:
• Companies (Words and Expressions in Company Names) Order (Cap. 622A)
• Companies (Disclosure of Company Name and Liability Status) Regulation (Cap.
622B)
• Companies (Accounting Standards (Prescribed Body)) Regulation (Cap. 622C)
• Companies (Directors’ Report) Regulation (Cap. 622D)
• Companies (Summary Financial Reports) Regulation (Cap. 622E)
• Companies (Revision of Financial Statements and Reports) Regulation (Cap. 622F)
• Companies (Disclosure of Information about Benefits of Directors) Regulation (Cap.
622G)
• Companies (Model Articles) Notice (Cap. 622H)
• Company Records (Inspection and Provision of Copies) Regulation (Cap.622I)
• Companies (Non-Hong Kong Companies) Regulation (Cap. 622J)
• Companies (Fees) Regulation (Cap. 622K)
• Companies (Unfair Prejudice Petitions) Proceedings Rules (Cap. 622L)
(5) Other agencies
Insolvency and the Official Receiver’s Office
2.95 Hong Kong has a well-developed system of accounting and auditing rules.
Incorporated by the Professional Accountants Ordinance (Cap. 50) on 1 January 1973, the
Hong Kong Society of Accountants (now renamed by statute as the Hong Kong Institute of
Certified Public Accountants) is the only statutory licensing body of accountants in Hong
Kong responsible for regulation of the accountancy profession. Relevant procedures are
detailed in the Professional Accountants By-Laws (Cap. 50A). Rules are supplemented by
the Listing Rules (discussed in Section 2.121 following and in Chapters 4 and 6) and
regulatory rules of the various agencies.
2.96 Insolvency matters are addressed primarily by the Bankruptcy Ordinance (Cap. 6)
and, in respect to companies, the Companies (Winding-Up and Miscellaneous Provisions)
Ordinance (Cap. 32).
2.97 The Bankruptcy Ordinance comprises over 140 sections and three schedules. It is
divided into ten parts, addressing the following matters: (i) short title and interpretation;
(ii) proceedings from bankruptcy petition to discharge; (iii) administration of property; (iv)
criminal bankruptcy (Part IIIA); (v) Official Receiver (Part IV); (vi) trustees and provisional
trustees (Part V); (vii) constitution, procedure, and powers of court (Part VI); (viii)
supplemental provisions (Part VII); (ix) bankruptcy offences (Part VIII); and (x)
miscellaneous (Part IX).
(p. 66) 2.98 As of December 2015, the Bankruptcy Ordinance is supported by five pieces of
subsidiary legislation:
• Bankruptcy Rules (Cap. 6A)
• Bankruptcy (Forms) Rules (Cap. 6B)
• Bankruptcy (Fees and Percentages) Order (Cap. 6C)
• Meeting of Creditors Rules (Cap. 6D)
• Proof of Debts Rules (Cap. 6E)
2.99 The Companies (Winding-Up and Miscellaneous Provisions) Ordinance (CWUMPO)

(Cap. 32) is the primary legislation addressing company insolvency. It is an unusual piece of
legislation in that it is essentially the amended remainder of the previous Companies
Ordinance (Cap. 32), which has been amended by the Companies Ordinance (Cap. 622) into
the CWUMPO. This is reflected in its long title:
To make provision for the winding up of companies; for receivers and managers; for
offering of shares and debentures; for prospectuses, for disqualification of
directors; for prevention of evasion of the Societies Ordinance, and for incidental
and connected matters.
As such, it contains amended prospectus requirements (discussed in Chapter 6) in addition

to provisions relating to insolvency.
2.100 The rules which apply to corporate insolvency are found in Parts V and X of the old
Companies Ordinance, now CWUMPO, and are in many respects based on the United
Kingdom Companies Act of 1929.131 The detailed rules regarding the procedures to be
followed in a liquidation are in the Companies (Winding-Up) Rules (Cap. 32H). However, the
Bankruptcy Ordinance, which pertains to individuals is also relevant. The Bankruptcy
Ordinance was substantially reformed by the Bankruptcy (Amendment) Ordinance 1996. Its
relevance to corporate insolvencies arises primarily because in some areas the bankruptcy
provisions are applicable in corporate insolvencies (e.g. section 34 regarding proof of debts,
section 35 regarding insolvency set-off, and section 50 regarding the setting aside of unfair
preferences). These statutory provisions are interpreted in a substantial body of case law, in
accordance with the common law system which continues to prevail in Hong Kong.
2.101 Laws generally provide a structure for corporate rescue as an alternative to
liquidation, and this may include provision for temporary administration. Alternatively, as is
well known, under Chapter 11 of the United States Bankruptcy Code, a company may
continue to operate under existing management, subject to a moratorium with regard to its
debts. A different model is the appointment by the court of (p. 67) administrators with
power to continue the business shielded from creditor action (as in the case of the
administration procedures in the United Kingdom Insolvency Act 1986).
2.102 The CWUMPO does not include an effective mechanism for corporate rescue. The
powers to compromise with creditors and members, formerly in section 166 of the
CWUMPO now in sections 668–70, 673, 674, and 677 of the new Companies Ordinance are
rarely used in the corporate rescue context.132 Recently, corporate rescue by way of private
workout has been more likely under the HKMA/HKAB ‘Guidelines on the Hong Kong
Approach to Corporate Difficulties’, and some practical attempts have even been made
through provisional liquidation. However, this cannot substitute for an effective formal
corporate rescue procedure. Proposals have been made in the form of the ‘Provisional
Supervision’ procedure, in the Companies (Corporate Rescue) Bill 2001, as well as in more
recent proposals.
Financial Reporting Council
2.103 Gazetted in 2006, the Financial Reporting Council Ordinance (Cap. 588) largely
follows similar legislation in the United States and Europe resulting from corporate
insolvencies such as that of Enron. The ordinance provides for the following:
• the establishment of a Financial Reporting Council to investigate irregularities of
listed company audits and financial reports and to enquire into non-compliance with
legal, accounting, and regulatory requirements in financial reports;
• the establishment of an Audit Investigation Board to conduct investigations; and
• the appointment of a Financial Reporting Review Committee by the Financial
Reporting Council to conduct enquiries.
2.104 The Financial Reporting Council Ordinance marked a major shift from a largely self-
regulatory model of financial information to a self-regulatory model operating within an
administrative framework, similar in many ways to reforms in other areas of financial
markets regulation (e.g. banking, securities, and futures).
Hong Kong Institute of Certified Public Accountants
2.105 In regard to accounting and auditing rules, Hong Kong has a well-developed system.
Incorporated by the Professional Accountants Ordinance (Cap. 50) on 1 January 1973, the
Hong Kong Society of Accountants (recently renamed by statute as the Hong Kong Institute
of Certified Public Accountants) is the only statutory licensing body of accountants in Hong
Kong responsible for regulation of the (p. 68) accountancy profession. Relevant procedures
are detailed in the Professional Accountants By-Laws (Cap. 50A). Rules are supplemented
by the Listing Rules and regulatory rules of the various agencies.
Market integrity and enforcement agencies
2.106 The primary agencies responsible for market integrity in Hong Kong are the police
force, Department of Justice, and the ICAC. Further, the various individual regulatory
agencies (e.g. HKMA, SFC, OCI, MPFA) are all active in addressing these issues in the
context of their respective areas of responsibility (respectively banks and banking,
securities, insurance, pensions). In addition, Hong Kong is a member of the Financial Action
Task Force on Money Laundering (FATF), the leading international organization setting
standards with respect to money laundering and terrorist financing (see discussion in
paragraph 2.157). Related market abuse issues are discussed in Chapter 11.
Taxation and the Inland Revenue Board
2.107 Hong Kong maintains a simple, low-rate taxation system, with government finances
heavily reliant on revenue from the sale of land use rights and imposts on property
development and transfer. Under the Basic Law, Hong Kong shall take the low tax policy as
a reference.133 The Basic Law also expressly states that Hong Kong shall have its own
independent finances and its revenues shall be used exclusively for its own purposes.134
Under the Inland Revenue Ordinance (Cap. 112), profits exclude profits arising from the
sale of capital assets. One resulting question is whether or not the receipt is considered as
capital or revenue: this is a matter for the courts to decide. The absence of a capital gains
tax is arguably conducive to the financial markets, but government revenues are drawn
from a narrow tax base, and the tax system is relatively regressive and inequitable.
D. Pre-global Financial Crisis Weaknesses

(1) Pre-existing weaknesses
2.108 As can be seen from this brief overview, for a jurisdiction of seven million people,
Hong Kong has a complicated system of financial regulation. In some cases, these
complexities stem from piecemeal responses to previous crises and from accommodating:
(i) local consumers and businesses; (ii) Hong Kong’s role as an international financial
centre; (iii) Hong Kong’s traditional role as an international trading port; and (iv) starting
from the late 1970s, Hong Kong’s role as the gateway (p. 69) to and from China. At the
same time, even before the global financial crisis of 2008, a number of weaknesses in Hong
Kong’s financial system had been identified in the context of relationships between
regulators and activities of a cross-sectoral nature.
(2) International Monetary Fund review 2003

2.109 In looking at these issues a useful starting point is the Hong Kong SAR-Financial
System Stability Assessment 2003.135 The Financial System Stability Assessment (FSSA) is
part of the Financial Sector Assessment Programme (FSAP), a joint International Monetary
Fund (IMF) and World Bank effort introduced in 1999. It is directed at improving the
effectiveness of efforts to promote the soundness of financial systems in member countries.
2.110 In respect of Hong Kong’s financial markets, the FSSA concluded that:
The financial system in Hong Kong is resilient, sound and overseen by a

comprehensive supervisory framework. The banking system is sufficiently well
capitalized and profitable to be able to withstand the more likely macroeconomic
shocks, although some pressures on banks are emerging. Weak domestic demand
and shifts in global financial activity in Hong Kong are driving banks, both the
internationally active large institutions and some smaller banks to expand into
investment banking, brokerage, insurance and asset management services. These
trends highlight the need to strengthen regulatory and insolvency procedures for
financial conglomerates and for enhanced supervisory coordination among domestic
and cross border regulators. The small but growing insurance sector poses some
supervisory challenges, particularly as regards the risks involved in life insurance
and embedded guarantees in life insurance products. Recent reforms in payments
and securities settlement systems have strengthened the market infrastructure.
Further strengthening is needed in the areas of transparency, accounting, and
regulatory and corporate governance to help maintain Hong Kong’s competitiveness
as an international financial center. The financial system is facing several important
challenges as economic integration with the Mainland of China deepens and efforts
continue at managing the fiscal deficit. Strong macroeconomic fundamentals thus
remain the key to HKSAR’s prospects for continuing to grow and compete as a
financial services center. In this context further strengthening of regulatory
governance arrangements dealing with systemic and financial stability issues is
recommended . . .136
2.111 In order to further strengthen Hong Kong’s financial system, the FSSA made
recommendations in three key areas: banking, securities, and insurance.
2.112 According to the assessment, Hong Kong’s banking sector has so far proven to be
strong and flexible, specifically because of its high profitability and liquidity as well as a
comparatively low level of credit delinquency and non-performing loans. It has a very high
degree of compliance with the international best practices in banking (p. 70) regulation and
supervision137 and well-functioning legal, accounting, and payments and securities
settlements systems are in place.
2.113 In terms of reinforcing the banking sector, the FSSA particularly suggests to:
• improve the governance of banking regulation and supervision;
• enhance the measures for dealing with liquidity risk;
• raise supervisory attention to reputational risk and legal risks to banks; and
• strengthen the cooperation between banking and other supervisors in respect to
cross-market activities. 138
2.114 In relation to securities, according to the FSSA:
general preconditions for effective securities regulation are in place in Hong Kong.
The securities markets are competitive and open to domestic and foreign
participants. The [SFC] is a regulator with decision-making authority and a clear
responsibility and accountability. It is well-resourced, professionally staffed and has
sufficient surveillance, inspection and enforcement powers. Since the adoption of
the [SFO] in March 2002, the SFC has been provided with a comprehensive legal
framework, which covers all aspects of securities related activities. Furthermore, an
adequate infrastructure for well functioning securities markets with efficient
trading, clearing and settlement systems as well as appropriate listing rules is in
place.139
2.115 In terms of improvement, the FSSA points out one primary deficiency with respect
to the responsibilities of the Financial Secretary and the Chief Executive of Hong Kong
regarding a number of important regulatory decisions. Although the SFC enjoys full
autonomy in daily operational practice, the Chief Executive of Hong Kong has the power to
give directions to the SFC about any matter relevant to the performance of its functions.140
In addition, in a significant number of decisions the SFC has to consult or seek the consent
of various bodies, which restricts its independent functioning and hinders its ability to react
quickly to any emergency situation. Those peculiarities are not in line with international
best practices, namely the International Organization of Securities Commissions (IOSCO)
principles,141 and the FSSA suggests it is crucial to consider them.142
2.116 In relation to insurance, the FSSA concludes:
the HKSAR satisfies the prerequisites for effective insurance regulation, which
include comprehensive accounting standards and strong supervision of the banking
and securities sectors. In addition, the [OCI] has a range of supervisory powers to
solve problems incurred by insurance companies. So far, however, the OCI is a (p.
71) government department subject to specific budgetary and administrative
procedures. Although it has factual independence in day-to-day operations, there is
no comprehensive operational independence. This situation in particular has been
pinpointed by the FSSA, as it may delay the development of a regulatory
infrastructure that complies with international best practices, such as the IAIS
principles.143
2.117 The IMF concluded that Hong Kong largely has in place an appropriate legal and
regulatory framework for financial stability, though with some weaknesses, especially in
relation to financial conglomerates, the relationship between the SFC and HKEx, and
independence of regulatory agencies. The FSSA, however, does not address issues of
competitiveness; yet all three of these issues (discussed in subsequent chapters) also
impact upon Hong Kong’s competitiveness as an international financial centre. Moreover,
this chapter has highlighted an additional concern arising from Hong Kong’s legal and
regulatory framework for financial markets and relating to Hong Kong’s competitiveness,
namely the complexity of its current regulatory structure. Given the size of the jurisdiction
and its need for competitiveness, this should be a major issue of concern and requires
urgent attention. We return to this issue in Chapter 10.
2.118 In addition, an issue of more specific legal concern arises in relation to the
constitutionality of special appeals tribunals in the context of Hong Kong’s financial
regulatory system. Increasingly, special tribunals are established under financial ordinances
to provide means of appeal. The first major example occurred in the context of the SFO,
namely the Securities and Futures Appeals Tribunal (SFAT).144 The operations of these
tribunals attract special legal considerations largely beyond the scope of this volume.
2.119 In 2003, the IMF published its review of Hong Kong’s financial regulatory system,145
as part of FSAP, a joint IMF/World Bank project directed at improving the soundness of
financial systems in member countries.146 It concluded that Hong Kong largely had an
appropriate legal and regulatory framework for financial stability, though with some
weaknesses, particularly in relation to accounting practices, financial conglomerates, the
relationship between the SFC and HKEx and independence of regulatory agencies. The
global financial crisis has brought into clearer focus certain of these issues, as well as
others not raised by the IMF. Of these issues, the two most significant are the relationship
between the HKMA and SFC in relation to the securities activities of banks, and the
relationship between the SFC, HKEx, and the Listing Rules.
(p. 72) Relationship between the HKMA and SFC
2.120 Although Hong Kong has a primarily sectoral regulatory framework, an important
qualification to this structure concerns the activities of banks. While in the context of
insurance and pensions activities, the HKMA retains primary authority, in the context of
securities activities of banks the role is divided between the SFC, as the lead regulator for
the securities industry, and the HKMA as the main supervisor of banks undertaking
securities business. This anomaly has been one of the important points of focus in
considering the problems surrounding the sale of Lehman Brothers Minibonds to retail
investors in Hong Kong.
Listed company matters: The SFC and HKEx
2.121 As already mentioned, HKEx, via its wholly-owned subsidiary the SEHK, is
empowered under the SFO to make rules for, inter alia, applications for the listing of
securities and the requirements to be met before securities may be listed.147 The Listing
Rules have been made under such provisions and the SEHK is responsible for administering
them.
2.122 The Listing Rules operate on a contractual basis between the SEHK and the issuer
and its related parties. They are not themselves laws and so do not have the force of law.
However, the Listing Rules do enjoy a measure of statutory backing by virtue of the
Securities and Futures (Stock Market Listing) Rules (SMLR), which is subsidiary legislation
under the SFO made by the SFC.148 The SMLR require an applicant for listing to comply
with the Listing Rules and is specifically concerned with the quality of information
disclosure by listed companies and listing applicants. Under the SMLR, companies that
disseminate information to the public have to file a copy of the disclosure materials,
including prospectuses and listing documents, with the SFC (the ‘dual filing’ system).149
Further, the SMLR provides that a company may simply authorize the SEHK to make the
filing on its behalf.
2.123 The three-tier structure relating to listing matters was the subject of an external
review that led to the publication of a report in March 2003.150 Although the dual filing
regime was introduced as a means to improving the effectiveness of enforcement as
regards the disclosures of listed companies by providing for an increased role for the SFC
as regards the quality of disclosures, the report was critical of the dual filing regime as: (i)
‘inherently inefficient and costly’ as a result of work duplication; (ii) not dealing adequately
with instances of non-disclosure;(p. 73) (iii) a complicated delineation of responsibility
between the HKEx and the SFC; and (iv) giving rise to the possibility of exacerbating
frictions between the SFC and HKEx.151
2.124 The report further recommended these issues be addressed with two primary
changes. First, HKEx should be relieved of its listing responsibilities. This should instead be
taken up by a new entity which the report calls the ‘Hong Kong Listing Authority’, which
would operate as part of, or under the auspices of, the SFC. While the report expresses the
hope this would improve communication between the SFC and the HKEx, such a
consequence is obviously far from certain. Second, the Listing Rules should receive further
statutory backing than at present under the SMLR in order for a stronger array of statutory
sanctions to be available to deal with instances of non-compliance. However, the report
considered that the Listing Rules should retain their present non-statutory status so as to
preserve flexibility, for example, to deal with market developments.
2.125 A further consultation undertaken in 2005 proposed amendments to the SMLR.152
Under that proposal, a number of Listing Rules were to be removed to form part of the
SMLR. Such matters relate to disclosure, namely, as to price-sensitive information, annual
and periodic reports, and notifiable and connected transactions (discussed in Chapter 10).
While the proposal would make no substantive changes to the provisions, the effect of
removing them would be that they cease to be contractual matters between the SEHK and
the issuer and its related parties and would instead become statutory requirements. As
such, this proposal had the potential to enhance an area of weakness in Hong Kong’s
regulation of listed companies and public offerings of securities. The 2007 ‘Consultation
Conclusions on Proposed Amendments to the SMLR’ recommended the introduction of part
IIIA to the SFO to give statutory backing to the SMLR and thereby increasing Hong Kong’s
competitiveness as an international financial centre. Part IIIA was to address the
aforementioned weakness by placing an obligation on listed issuers to disclose price
sensitive information, disclose periodic financial reports, and oblige listed issuers to seek
shareholders’ approval for certain notifiable and connected transactions. However, part IIIA
in this form was never promulgated. Statutory backing for the disclosure of price sensitive
information took until 1 January 2013 to take legal effect under part XIVA of the SFO. The
inability to address all of these SMLR weaknesses erodes Hong Kong’s competitiveness as
an international financial centre. Furthermore, there remain strong arguments for moving
the Listing Rules from the SEHK to the SFC, as has been done in the United Kingdom in
2000 through the transfer of authority in this regard from the London Stock Exchange to
the Financial Services Authority.
(p. 74) (3) Other issues: Review of banking stability

2.126 In July 2008, the HKMA released an external review of its work in the area of
banking stability.153 Overall, echoing the IMF’s conclusion, the Carse Report concluded:
No fundamental deficiencies in the regulatory and supervisory framework have

been identified. But a number of enhancements can be made which will provide an
even sounder foundation to cope with the challenges ahead.154
2.127 The report was prescient in the context of the need to review deposit protection
arrangements155 and regulatory structure.156 It is also certainly correct in stating that
‘priorities over the next few years will be set to a large extent by the lessons learned
internationally from the sub-prime crisis’ and at the same time that ‘[t]he future agenda in
Hong Kong will also be set by local considerations, including particularly the need to
manage the increasing business integration with the Mainland’.157
2.128 At the same time, the Carse Report did not anticipate the scale of problems which
would emerge as the global financial crisis intensified and how these would highlight a
range of particular problems beyond the context of banking stability.
(4) The global financial crisis

2.129 Although certain problems were known to exist with financial regulation in Hong
Kong, the global financial crisis highlighted certain of these and also brought to light new
issues.
2.130 The global financial system experienced its first systemic crisis since the 1930s in
autumn 2008, with the failure of major financial institutions in the United States and
Europe and the seizure of global credit markets. Although Hong Kong was not at the
epicentre of this crisis, it was nonetheless affected. While the global financial system did
not collapse as the result of a series of significant government interventions, the full extent
of the economic impact of the global financial crisis of 2007–9 was nonetheless severe,
resulting in the worst recession since the 1930s. The causes of the global financial crisis are
now generally understood, with major initiatives underway around the world to restructure
financial systems and economies. Reform of financial regulation has also been initiated,
with potentially far-reaching consequences for the future of banking and finance.158
(p. 75) 2.131 Hong Kong was not immune from the impact of the global financial crisis. On
15 September 2008, Lehman Brothers filed for bankruptcy triggering the highest profile
incident in Hong Kong flowing from the global financial crisis, though the insolvency of the
firm caused less disruption to the wholesale markets in Hong Kong than in the other major
financial centres. The near failure of American International Group (AIG) during this time
triggered a rush by insurance policyholders of its subsidiary AIA (Hong Kong) to redeem
their policies. While the United States government’s effective nationalization of AIG
prevented serious consequences in Hong Kong, had AIG actually been allowed to fail like
Lehman Brothers, in all likelihood Hong Kong’s financial regulatory system would have
been hard pressed to cope.
2.132 As a consequence of market turmoil, especially the rapid decline of the Australian
dollar against the US dollar in foreign exchange markets, CITIC, a company listed on the
SEHK, issue a profit warning statement on 20 October 2008 that it had lost approximately
HK$15.5 billion (US$2 billion) on leveraged foreign exchange contracts including, among
others, target redemption forward contracts. Following the announcement, CITIC’s share
price fell 55 per cent. The SFC subsequently initiated a formal investigation leading to the
commencement of proceedings before the Market Misconduct Tribunal under section 277
of the SFO (discussed in Chapter 11) against the company, its former Chairman and several
of its former directors in September 2014.159
2.133 Lehman Brothers’ collapse produced second order effects on many local individual
investors, which led to popular disquiet and public protests, and produced lessons for
effective financial regulation in Hong Kong. Both the SFC160 and the HKMA161 produced
reports for the Financial Secretary addressing issues that have arisen out of the incident.
The saga of the Minibond fiasco highlights:
• the legislative, regulatory, and supervisory weaknesses in respect of proper and
orderly sales of complex investment products aimed at protecting retail investors;
• the lacuna in the current system of dual supervision by the SFC and the HKMA of
securities brokers and bank distributors respectively, in respect of the sale of
investment products to retail investors; and
• the lack of a system to quickly and effectively bring a resolution to disputes, as is
clearly highlighted by the disparities in levels of settlement, the unwillingness of
Citibank Hong Kong to come to similar settlement, and the Legislative Council (p. 76)
inquiry that continues to drag on despite being unlikely to add anything further to the
compensation arrangements already reached.
2.134 While the first of the above issues have been addressed through the introduction of
new laws addressing complex products and accompanying regulatory codes (both discussed
in Chapter 7), the latter two items remain unresolved and largely unaddressed.
E. Post-crisis Evolution and Reforms

2.135 As stated in the previous section, a number of problems were known to exist with
financial regulation in Hong Kong prior to 2008. The global financial crisis crystallized this
fact as well as exposing other inconspicuous issues. Consequently, the Chief Executive
announced in the 2008–9 Policy Address162 that a temporary Task Force on Economic
Challenges (TFEC) would be established to monitor the impact of the unfolding crisis on
local and global markets in order to identify proposals for the government and business
community to deal with long-term challenges.163 TFEC initially concentrated on formulating
economic stability measures and maintaining employment. During the last meeting held on
22 June 2009, six knowledge-based industries were identified with the potential to enhance
Hong Kong’s competitiveness: (i) education; (ii) medical services; (iii) testing and
certification; (iv) environmental industry; (v) innovation and technology; (vi) and cultural
and creative industries. Developing these six industries would require at a minimum: (i)
nurturing local talent while attracting global talent; (ii) expanding Hong Kong’s market into
the Pearl River Delta, mainland China, the Asian region, and globally; (iii) making the best
use of Hong Kong’s brand name to the outside world by embodying professionalism,
integrity, judicial independence, efficiency, and a free and clean society; and (iv) the free
flow of information.164
(1) The international response to the crisis

2.136 The international response to the financial crisis sought to remedy numerous
underlying weaknesses in the global financial system. In addressing the regulatory
reactions to the crisis, the Financial Stability Forum (FSF) (now renamed and reconstituted
as the Financial Stability Board (FSB)—of which Hong Kong is a founding member) and the
Group of Twenty (‘G20’) (of which China is a founding member) have been at the forefront
internationally.165 During the initial (p. 77) stages of the crisis in April 2008, the FSF
detailed major regulatory reforms to be undertaken.166 Following the structure outlined by
the Group of Seven (‘G7’) in October 2008,167 Hong Kong focused its efforts in three areas:
liquidity (expanding the HKMA’s liquidity mechanisms, and more recently a currency swap
arrangement with the People’s Bank of China (‘PBOC’), a short-term RMB repurchase
facility and designating seven Primary Liquidity Provider banks168 to expand RMB market-
maker activities), depositor protection (blanket guarantee of deposits with Authorized
Institutions via the Exchange Fund), and capital injections.
2.137 Since 2008 at the international level the G20 has assumed the leading role in
coordinating post-crisis responses and financial regulatory reforms, and thus its responses
over the past seven years logically provide the starting point for analysis of global financial
reforms.169 While the G20 is not a traditional treaty-based international organization and its
pronouncements have no international legal character, it has become the main policy-
directing body for discussions relating to international financial and economic policy.170 The
impact of the G20 on international financial regulation therefore results mainly from
domestic implementation of internationally agreed approaches as well as through voting
control of the more formal international organizations, such as the IMF and World Bank.171
Unlike trade and currency issues, the G20 has arguably been quite effective in both
agreeing and implementing its international financial regulatory agenda.
(p. 78) 2.138 In relation to improving financial infrastructure and prudential regulation,
the G20 and FSB have focused on seven areas: (i) capital, leverage, liquidity, and
procyclicality (Basel III); (ii) OTC derivatives markets; (iii) accounting standards; (iv)
compensation arrangements; (v) expanding the regulatory perimeter to address credit
ratings and credit rating agencies, securitization, and hedge funds; (vi) systemically
important financial institutions (SIFIs); and (vii) financial institution resolution.172 In each
of these areas, Hong Kong as an FSB founding member has been active in meeting or
bettering the timetable of related legal and regulatory reforms.
(2) Post-crisis reforms in Hong Kong

Banking and Basel III
2.139 To better improve the banking sector’s ability to absorb shocks arising from
financial or economic stress following the weaknesses exposed during the financial crisis,
the FSB appointed the Basel Committee for Banking Supervision (BCBS) which in turn
formulated Basel III—a global regulatory framework for more resilient banks and banking
systems.173 The main aims of Basel III are to strengthen global capital frameworks, reduce
procyclicality, supplement risk-based capital requirements, enhance risk coverage, and
introduce global liquidity standards and monitoring metrics. As a member of the BCBS, the
HKMA is compliant with Basel III and adhering to the BCBS implementation timetable. The
HKMA has introduced, or is in the process of introducing new buffers—capital (a capital
conversation buffer, countercyclical capital buffer, and higher loss absorbency requirements
for systemically important Authorized Institutions) leverage, liquidity, and disclosure
standards.
OTC derivatives
2.140 A key source of financial instability during the crisis arose from the extensive use of
OTC financial derivatives across a diversely interconnected yet opaque network of market
participants. Weaknesses were exposed whereby certain classes of OTC derivatives
contributed to the build-up of systemic risks prior to the crisis and then acted as systemic
risk conduits as the crisis unfolded. The G20 leaders addressed this market weakness by
committing themselves to implementing measures to improve transparency and regulatory
oversight of OTC derivatives in an internationally consistent and non-discriminatory way.
Recommendations included: (i) the mandatory standardization of OTC derivative contracts;
(ii) centralized clearing; (iii) exchange or electronic platform trading; and (iv) reporting to
trade repositories. (p. 79) In December 2010, the HKMA and SFC jointly announced that a
regulatory framework for OTC derivatives would be developed in Hong Kong. A joint
consultation paper was released in October 2011 and conclusions released in conjunction
with a joint supplementary consultation in July 2012. The Legislative Council passed the
Securities and Futures (Amendment) Ordinance 2014 on 26 March 2014 which enabled the
HKMA to regulate authorized institutions and approved money brokers, and the SFC to
regulate licensed corporations and other prescribed persons including systemically
important participants. These amendments to the SFO empowered the HKMA and SFC inter
alia to impose mandatory clearing, reporting, and trading requirements, specify penalties,
and undertake investigative and disciplinary action. Further, new regulated activities, Type
11 (dealing in OTC derivative products or advising on OTC derivative products) and Type 12
(providing client clearing services for OTC derivative transactions) were introduced and
existing regulated activities expanded, namely Type 7 (providing automated trading
services) and Type 9 (asset management). All OTC derivative transactions are mandatorily
reported to the Hong Kong Trade Repository (HKTR), an electronic database of records,
which was launched in July 2013. OTC Clearing Hong Kong Limited (OTC Clear), a
subsidiary of HKEx, began operations in November 2013 as Hong Kong’s central
counterparty to clear standardized OTC derivatives, and is linked to the HKTR. Only certain
interest rate or foreign exchange derivatives are subject to mandatory clearing and
settlement by OTC Clear. The SFC is responsible for OTC Clear and the HKMA for HKTR.
Accounting standards
2.141 The financial crisis also highlighted some serious deficiencies in the International
Accounting Standards Board’s (IASB) International Financial Reporting Standards174
(IFRS). In response, the G20 requested the IASB and its United States’ counterpart, the
Financial Accounting Standards Board, to converge and improve the standards of fair value
measurement, recognize off-balance sheet items, reform financial instruments accounting,
and determine loan-loss provisioning. Although this request has largely been met, the
convergence has nonetheless resulted in two different models for financial instruments and
insurance contracts. Hong Kong’s accounting standards are deemed the Hong Kong
Financial Reporting Standards (HKFRS) and fully align with the IFRS. The HKFRS are
statutorily set by the Hong Kong Institute of Certified Public Accountants (HKICPA). Listed
entities which do not, or possibly do not, comply with the accounting requirements may be
investigated by the Financial Reporting Council and, if any irregularities are detected,
referred to the HKICPA for follow-up action.
(p. 80) Compensation practices
2.142 Compensation practices were viewed by the FSF as another factor that contributed
to the financial crisis. In 2009 the FSB released the Principles for Sound Compensation
Practices (‘FSB principles’) and their Implementation Standards. The FSB principles
require compensation practices in the financial industry to align employees’ incentives with
prudent risk taking to ensure the long-term profitability of financial institutions. In 2010 the
HKMA issued a Guideline on Sound Remuneration Systems that reflects the FSB principles
by focusing on remuneration systems’ governance and control arrangements. The HKMA’s
remuneration policy aligns with those adopted in other international financial centres.
International insurer remuneration standards and guidance were issued by the
International Association of Insurance Supervisors (IAIS) based on the FSB Principles.
Following the promulgation of the IAIS Standard, guidance was issued by the OCI to Hong
Kong insurers through amending to the Guidance Note on the Corporate Governance of
Authorized Insurers. The SFC called for all internationally active investment banks to
review their remuneration practices by reference to the FSB recommendations.175
Credit rating agencies
2.143 Prior to the financial crisis, credit rating agencies (CRAs) were virtually
unregulated. It became apparent during the financial crisis that the mechanistic reliance on
CRAs’ risk assessments was flawed as they did not adequately function during periods of
sudden market downswings, amplifying procyclicality and causing systemic disruption. To
reduce the cliff effects from CRA ratings, the G20 agreed in 2008 that all CRAs should be
subject to regulatory oversight consistent with IOSCO’s revised Code of Conduct
Fundamentals for Credit Rating Agencies. These events prompted the introduction of
limited CRA regulations in jurisdictions including the European Union, United States, and
Japan. In July 2010, the Legislative Council and the SFC announced that a CRA oversight
regime would be introduced in Hong Kong to ‘enhance investor protection and enable
credit ratings prepared by Hong Kong-based credit agencies to continue to be serviceable
in other jurisdictions’.176 A Consultation Paper Concerning the Regulatory Oversight of
Credit Rating Agencies was issued by the SFC at that time. The Securities and Futures
Ordinance (Amendment of Schedule 5) Notice 2011 and Securities and Futures (Financial
Resources) Amendment Rules 2011 were gazetted on 18 February 2011. As a result of these
events, the SFC announced that the licensing and regulation of CRAs and their analysts
through amendments to schedule 5 of (p. 81) the SFO would take effect from 1 June 2011.
The amendments to the SFO created a new Type 10 regulated activity: providing credit
rating services. Type 10 regulated activities are concerned with the preparation of opinions,
expressed using a defined rating system, primarily regarding the creditworthiness of
persons (other than individuals), debt securities, preferred securities, or an agreement to
provide credit that is distinct from Type 4 regulated activities: advising on securities.177 A
Code of Conduct for Persons Providing Credit Rating Services was also issued, based on
IOSCO’s 2008 Code of Conduct, to ensure that credit ratings would be independent,
objective, and of appropriate quality.178 However, Hong Kong has not specifically provided
for civil liability of credit rating agencies to investors and issuers as has been done in the
European Union.
Securitization
2.144 Hong Kong fared better than some jurisdictions in the financial crisis because most
local banks were only marginal investors in those complex transactions that suffered the
greatest falls in value after 2007. In contrast to many foreign counterparts, the risk of
disruption from flawed credit risk transfers was inconsequential. Nonetheless, the HKMA
embraced the Banking (Capital) Rules and Banking (Disclosure) Rules issued by the BCBS
in the Basel 2.5 Enhancements. Consultations were issued in August 2011 and the relevant
rules amended in October of that year. Basel III revised the securitization framework in
December 2014 to reduce mechanistic reliance on external credit ratings, recalibrate risk
weights, reduce cliff effects, and enhance risk sensitivity. The HKMA intends to implement
the Basel III securitization framework in accordance with the BCBS timetable, which is
scheduled to take full effect from January 2018.
Hedge funds
2.145 The regulation of hedge funds was another area of reform endorsed by the G20 in
the wake of the financial crisis. It was agreed at the G20’s London Summit that hedge funds
would be registered and required to disclose appropriate information on an on-going basis
for the assessment of possible systemic risks. IOSCO issued the final report, Hedge Fund
Oversight, in June 2009, that recommended six high profile regulatory principles. The
purpose of IOSCO’s recommendations was to establish a comprehensive and effective
regulatory framework as hedge funds were viewed as being a class of unregulated financial
entities. This was not the case in Hong Kong where hedge funds had been regulated by the
SFC since 2002, when a guideline was released after conducting public consultations.
Hedge funds are generally required to be licensed by the SFC, with the type of licence
determined by the activity performed, and are subject to reporting and disclosure
requirements. As hedge funds did not cause any financial instability to Hong Kong during
the crisis (p. 82) and were already regulated broadly in line with the FSB and IOSCO’s
recommendations, reform by the SFC has been minimal, confined to monitoring
international developments and considering implementations as appropriate.
Deposit protection and insurance compensation
2.146 In the context of financial stability provided through prudential supervision and
mechanisms to address systemic risk, Hong Kong’s financial regulatory system has been
acknowledged as having performed better than most during the financial crisis.179 Yet,
weaknesses in relation to the resolution of SIFIs, deposit insurance, and lack of
compensation mechanisms for customers of failed insurance companies were evident. In the
wake of the financial crisis, the Deposit Protection Scheme’s scope and limit were increased
(discussed in paragraph 2.46) and a policyholders’ protection fund has been proposed to
maintain market stability in the event of insurer insolvency.
SIFIs: Resolution regime
2.147 Another reason why Hong Kong’s systemic financial stability performed well during
the crisis was that it did not have to cope with the failure of a SIFI. Nonetheless it was
recognized that, if such a situation arose, Hong Kong’s regulatory and supervisory
arrangements might not have been adequate. The HKMA has actively endorsed the FSB’s
international standard: Key Attributes of Effective Resolution Regimes for Financial
Institutions180 (key attributes); which led to the publication of the first-stage consultation
paper: An Effective Resolution Regime for Financial Institutions in Hong Kong181; by the
FSTB, HKMA, SFC, and OCI in January 2014. Additional guidance in relation to client asset
protection in resolution, financial market infrastructures, and insurers was adopted by the
FSB on 15 October 2014.182 A second-stage consultation paper,183 published in January
2015 by the FSTB, HKMA, SFC, and IA recommended that the resolution regime
supervision be expanded to include the HKMA, the SFC, and the IA, and that a cross-
sectoral resolution regime should be adopted. The FSTB et al. released the final
consultation response on 9 October 2015. A sectoral approach is being adopted for the
oversight and implementation of the resolution regime with the HKMA, SFC, and OCI each
being designated as a lead resolution authority for their respected regulatory perimeters by
the Financial Secretary. For example, the HKMA will oversee authorized institutions and
prescribed clearing and settlement (p. 83) systems; the SFC will supervise licensed
corporations and prescribed clearing houses; and the OCI will be responsible for authorized
insurance companies. The Legislative Council has indicated that it will introduce legislation
to back the resolution regime before the end of 2015.
(3) Lehman Minibonds

2.148 Financial stability, including prudential regulation, is not the only objective of
financial regulation; market conduct (including disclosure and consumer protection),
competition, and anti-money laundering are also essential objectives. Of these, market
conduct weaknesses in Hong Kong’s regulatory system were particularly apparent during
the financial crisis. The most significant aspect of this was the performance of the
regulatory system in the context of Lehman Brothers Minibond retail structured note
programme. In response, the Financial Secretary requested the SFC and HKMA to produce
reports addressing the regulatory issues.184 Subsequently the Financial Secretary
announced that Hong Kong would undertake a comprehensive review of the financial
regulatory system to address existing weaknesses while supporting long-term
competitiveness.
Investor education
2.149 The SFC’s December 2008 report, Issues Raised by the Lehman Minibonds Crisis,
recommended the establishment of an Investor Education Council (IEC) and an independent
dispute resolution scheme. In February 2010 the FSTB released a consultation paper titled:
Proposed Establishment of an Investor Education Council and a Financial Dispute
Resolution Centre. Following the FSTB consultation and after amendments were made to
the SFO in May 2012 to establish the IEC as a subsidiary of the SFC, the IEC commenced
operations in November 2012. The mission of the IEC is to take a holistic approach to
improving financial literacy in Hong Kong. From a structural perspective, the IEC’s
independent Executive Committee consists of representatives from the HKMA, SFC, OCI,
and MPFA as well as a representative from the finance industry and the Education Bureau.
This structure enables the IEC to take a cross-sectoral perspective to cover Hong Kong’s
entire regulated financial system. The fundamental aim of the IEC is to better equip the
general public, adults, and children, with the skills and knowledge to make informed
decisions and manage their money wisely through the provision of comprehensive, credible,
and impartial financial information, tools, and education resources.185
(p. 84) Investor protection: FSTB action plan
2.150 On 2 February 2009 the FSTB submitted an action plan to the Legislative Council
based on the recommendations made in the SFC and HKMA’s Lehman Minibond reports.186
In accordance with the action plan, the SFC published the Consultation Paper on Proposals
to Enhance Protection for the Investing Public on 30 September 2009. The consultation
paper dealt with proposals in respect of pre-sale documentation, disclosure, and other
matters during the sales process, on-going disclosure post-sale, and a post-sale cooling-off
period.
Unlisted structured investment products
2.151 A regulatory issue that stemmed from the design of the Lehman Minibond
instrument was how to enhance investor protection involving unlisted structured
investment products. The SFC issued the Consultation Paper on Possible Reforms to the
Prospectus Regime in the Companies Ordinance and the Offers of Investments Regime in
the Securities and Futures Ordinance on 30 October 2009. Consultation conclusions were
released on 22 April 2010 that proposed to transfer the regulation of public offers of
structured financial products, in the form of shares and debentures, from the Company
Ordinance (Cap. 32) prospectus regime to the offers of investments regime under part IV of
the SFO. Amendments were made to the SFO through the legislation of the Securities and
Futures and Companies Legislation (Structured Products Amendment) Bill 2010 which
came into effect on 13 May 2011. Conclusions from the SFC’s parallel consultation paper,
Proposals to Enhance Protection for the Investing Public, were published in May 2010.
From these conclusions a new Code of Unlisted Structured Investment Products was
incorporated into the SFC Products Handbook which enhanced product transparency and
disclosure by establishing guidelines for the authorization of such financial products. A raft
of intermediary market conduct measures were introduced to strengthen consumer
protection that included: a Key Facts Statement; on-going disclosure requirements
pertaining to material information for the life of certain products; a post-sale cooling off
period; products offered to be deemed ‘fair’ for investor needs; and new requirements to
deter unconscionable sales conduct (see Chapter 7). Amendments were also made to the
SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and
Futures Commission to enhance the regulation of intermediaries’ conduct and selling
practices.187 There have been numerous additional amendments since that fundamentally
raise the threshold for intermediaries to satisfy the SFC’s ‘fit and proper’ licensing
requirements.(p. 85)
Financial Dispute Resolution Centre
2.152 Following the Lehman incident, the HKMA and SFC advocated for the establishment
of a financial ombudsman to mediate disputes between financial institutions and their
customers. The proposal was supported by the Legislative Council which prompted its
Research Office to seek guidance from the United Kingdom’s financial ombudsman system.
However, the Research Office’s February 2010 Information Note: Financial Ombudsman
System in the United Kingdom; recommended the establishment of a financial dispute
resolution centre (FDRC) rather than a financial ombudsman. This recommendation led to
the FSTB holding a public consultation on this issue and the proposed establishment of the
IEC (discussed in paragraph 2.149). The public consultation concluded that an FDRC should
be established as an independent body through non-legislative means. On 18 November
2011, the FDRC was incorporated as a non-profit company limited by guarantee under the
Companies Ordinance (Cap. 32). The FDRC began operations, providing mediation and
arbitration services to financial institutions and their customers, and administering the
Financial Dispute Resolution Scheme (FDRS) on 19 June 2012. The scheme is able to hear
monetary claims of up to HK$500,000 (US$64,500). Financial institutions regulated by the
HKMA and the SFC are obliged to be members of the FDRS. The Legislative Council opted
from the outset to carve out insurance and mandatory province funds from the FDRS with
the view to expanding the scope of the scheme in the future. However, the FDRC has not
been generally viewed as a success, concerns being expressed about, inter alia, the non-
public nature of and consistency of its decisions as well as its ability to handle a large scale
problem such as was seen in the Lehman Minibonds crisis.
Lehman Minibonds: SFC and HKMA recommendations
2.153 As noted above, both the SFC188 and HKMA189 produced reports identifying and
addressing issues raised by the Lehman Brothers Minibonds incident. The
recommendations made by the SFC and the HKMA may broadly be divided into six
categories: (i) the regulatory regime; (ii) conduct of business; (iii) information and
disclosure; (iv) risk assessment in the context of both customer suitability and products; (v)
dispute resolution and compensation; and (vi) financial education and literacy of the
general public. These recommendations were the basis of a range of public consultations by
the SFC and HKMA, which led to the abovementioned reforms addressing the identifiable
weaknesses of Hong Kong’s financial laws and regulations. However, there has yet to be a
comprehensive analysis under (p. 86) article109 of the Basic Law,190 although as a related
matter the government established the Financial Services Development Council in 2013 as
an advisory body on related issues.
(4) Other international best practice reforms

2.154 Recognition of article 109 of the Basic Law—to provide an appropriate economic
and legal environment for the maintenance and status of Hong Kong as an international
financial centre—has been affirmed, to a certain extent, beyond the reforms implemented in
response to the financial crisis. This is evident by the adoption of international best practice
in the areas of: (i) competition policy and regulation; (ii) modernizing and rewriting the
Company Ordinance (Cap. 32); (iii) promulgating anti-money laundering and counter-
terrorist financing legislation; and (iv) the reconfiguration of the insurance sector regulator
and regulatory regime to expand its scope and capacity.
Competition framework
2.155 Prior to the financial crisis, competition policy and related issues were handled by
the Competition Policy Advisory Group (COMPAG), chaired by the Financial Secretary.
COMPAG promulgated a Statement of Competition Policy and supplementary guidelines to
establish a competition framework that would provide certainty to the development of Hong
Kong’s competitive environment. In June 2005 a competition review committee was
appointed by the government to review the composition and functions of COMPAG and to
make recommendations for future competition policy. The committee’s report was
presented to the government in June 2006 and recommended, among other things, that a
new ordinance be established. This was followed by a public consultation from 6 November
2006 to 5 February 2007 which revealed widespread support for the introduction of a cross-
sectoral competition law and a competition commission.191 The first Competition Ordinance
(Cap. 619) came into force on 14 June 2012 which facilitated the establishment of the
Competition Commission in May 2013 as an independent statutory body. Its key objective is
to prohibit conduct that prevents, restricts, or distorts competition, or mergers that
substantially lessen competition in Hong Kong. The Competition Ordinance (Cap. 619) is
not fully operational at the time of publication.(p. 87)
Companies law
2.156 Building on the discussion in paragraph 2.65, a comprehensive rewrite of the
existing Companies Ordinance (Cap. 32) began in 2006, which took six years and five
rounds of public consultations, to better align the law with international best practice and
thereby enhance Hong Kong’s status as an international financial centre. This process led to
the promulgation of the Companies Ordinance (Cap. 622) in 2012 which modernized Hong
Kong’s company incorporation and operational legal frameworks. The new Companies
Ordinance, which took effect in 2014, is built around four objectives: (i) enhancing
corporate governance; (ii) better regulation; (iii) facilitating business; and (iv) modernizing
the law. Enhancing corporate governance is achieved through strengthening the
accountability of directors, enhancing shareholder engagement in the decision-making
process, improving disclosure of company information, fostering shareholder protection,
and strengthening auditors’ rights. To ensure the better regulation of Hong Kong
companies, information on the public register is now more accurate, the registration of
charges improved, the scheme for deregistration of companies improved, and the
enforcement regime enhanced. Business is better facilitated by streamlining procedures,
simplifying reporting requirements, and by making business operations more efficient. The
law has been modernized by rewriting the law in simple and plain language, abolishing par
value for shares, abolishing memorandums of association, removing the power to issue
share warrants, and clarifying the rules on indemnification of directors against liabilities to
third parties.192
Anti-money laundering
2.157 Hong Kong’s anti-money laundering (AML) regime was reviewed in 2008 by the
FATF, the inter-governmental body that sets international AML standards. A number of
deficiencies were identified in the review which led to a proposal for new legislation
underpinned by a two-stage consultation process. In February 2012, FATF released the
International Standards on Combating Money Laundering and the Financing of Terrorism
Proliferation. As a member of the FATF, Hong Kong was obliged to implement the FATF’s
recommendations. This resulted in the promulgation of the Anti-Money Laundering and
Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) (AMLO) on 1
April 2012 (see paragraph 2.104). The AMLO sets out uniform requirements for banking,
securities, insurance, remittance, and money changing institutions. Four regulators are
responsible for enforcing the AMLO, namely the HKMA, SFC, OCI, and the Customs and
Excise Department.
(p. 88) Independent Insurance Authority
2.158 In 2010 a public consultation was launched for the proposed establishment of a new
insurance authority, the IA, to replace the existing OCI. The policy objectives are to
modernize regulatory infrastructure to facilitate the stable development of the insurance
industry, provide better protection for policy holders, and align with international best
practice so that the regulator is financially and operationally independent of government.193
A public consultation was launched in July 2010 and concluded in June 2011. The
Legislative Council Panel on Financial Affairs issued a second public consultation on key
legislative amendments for the establishment of IA in October 2012 and reported its
conclusions to the Legislative Council in July 2013. This led to the establishment of a
working group to ensure the smooth transition to a statutory licensing regime in October
2013. The Legislative Council issued a brief on 16 April 2014, then deliberated on the
Insurance Companies (Amendment) Bill 2014 before passing it into legislation on 10 July
2015. The move to the IA will be phased in by establishing a Provisional Insurance
Authority, without regulatory functions to co-exist with the OCI, then move to a second
stage whereby the IA takes over the OCI’s existing functions, before moving to the final
stage when the IA will implement a new statutory licensing regime and takeover the
regulation of licensing intermediaries from the three existing self-regulatory organizations.
This process is expected to take two to three years beginning at the end of 2015 (see
discussion in paragraph 2.55).
(5) An international financial centre for China

2.159 An appropriate economic and legal environment for the maintenance and status of
Hong Kong as an international financial centre requires both domestic and cross-border
regulatory perspectives. The FSF noted in 2009 that the growing interactions between
financial systems require international or cross-border cooperation.194 More recently the
FSB has been encouraging all jurisdictions to adhere to regulatory and supervisory
standards on cooperation and information exchange.195 As an international financial centre,
this is particularly pertinent to Hong Kong and the evolution of its financial relationship
with mainland China. Mainland China’s remarkable growth has seen it become the second
largest economy in the world and largest trading nation over the past two decades. Hong
Kong is the largest source of foreign direct investment for mainland China, accounting for
approximately 60 per cent.196 The development and growth of Hong Kong’s offshore RMB
market has been fundamental in expanding the use of (p. 89) RMB in global trade and
investment while bolstering its position as the premier offshore global RMB hub and as an
international financial centre. Close and intensive cross-border regulatory cooperation has
been instrumental in establishing the recent connection between Hong Kong and
Shanghai’s stock exchanges. The mutual recognition of funds scheme is another example of
the financial and regulatory integration between these jurisdictions. Cross-border
regulatory cooperation is critical to the success of this evolutionary financial connectivity,
the internationalization of the RMB, and the consolidation of Hong Kong and mainland
China’s financial centres.
RMB business in Hong Kong
2.160 Hong Kong was the first offshore market to offer RMB business trials in 2004 after
the Bank of China (Hong Kong) was appointed as the RMB clearing bank in the preceding
year. With the deepest and most liquid RMB market outside of mainland China,
collaboration between each jurisdiction’s regulator (HKMA, PBOC) has and will be vital to
development and growth of the offshore RMB market. To better understand the role that
the regulators have played to internationalize the use of RMB, a brief historical background
shall be canvassed. Major developments prior to the financial crisis include the introduction
of an RMB settlement system, RMB swap offer rate, and the first issue of ‘Dim Sum’ bonds
in 2007. By 2009 the HKMA and PBOC had signed a currency swap agreement to provide
RMB short-term liquidity support, an expansion of the RMB trade settlement scheme, and
the signing of a Memorandum of Co-operation on RMB business between the HKMA and
PBOC in 2010. Around this time participating Hong Kong banks were allowed to trade in
mainland China’s interbank bond market, subject to PBOC approval. To better manage
participating banks’ credit exposure to the clearing bank, a fiduciary account under the
custody of the PBOC was launched in 2011. By 2012, Hong Kong banks were permitted to
offer RMB services to non-Hong Kong residents. Refinements to the RMB liquidity facilities
were made by expanding the terms, adjusting the calculations, and offering a new intraday
RMB repurchase agreement. The HKMA and PBOC have both been instrumental in pushing
through the necessary reforms to provide the infrastructure and regulatory environment
that has enabled Hong Kong’s offshore RMB market to prosper while facilitating the RMB
to become a globally recognized currency.
Shanghai–Hong Kong Stock Connect
2.161 In November 2014, the Shanghai–Hong Kong Stock Connect Pilot Scheme was
launched to enable the mutual access between the HKSE and the Shanghai Stock Exchange
(SSE). Regulatory cooperation between each stock exchange’s regulator, the SFC and the
China Securities Regulatory Commission (CSRC), is guided by the: Memorandum of
Understanding between the CSRC and the SFC on (p. 90) Strengthening of Regulatory and
Enforcement Cooperation under the Shanghai–Hong Kong Stock Connect (‘Stock Connect
MOU’). The intention of the Stock Connect MOU is to enhance investor protection while
facilitating the sound development and effective operation of both stock markets.
Regulatory surveillance is undertaken by HKEx and the SSE to provide information to the
counterpart jurisdiction’s regulator. Existing rules and regulations govern trading and
clearing in each exchange, in addition to a number of specialized rules and policies.
Clearing functions are executed by the Hong Kong Securities Clearing Company Limited for
SEHK trades and the China Securities Depository and Clearing Corporation Limited for SSE
trades.
Mutual recognition of funds
2.162 The SFC and CSRC signed the: Memorandum of Regulatory Cooperation on
Mainland-Hong Kong Mutual Recognition of Funds; on 22 May 2015, to establish a
regulatory framework for qualified funds in Hong Kong and the mainland to be sold directly
in the other’s market. On 1 July 2015 the fund initiative was launched with a quota ceiling
of RMB300 million per day. The SFC issued a Circular on Mutual Recognition of Funds
between the Mainland and Hong Kong; and the CSRC the Provisional Rules for Recognised
Hong Kong Funds; to outline the regulatory requirements of cross-border fund offerings.
Apart from complying with their domestic regulatory obligations, the regulatory provisions
in the reciprocal jurisdiction must be satisfied. Mainland funds offered in Hong Kong must
comply with inter alia specified provisions in the SFO, and Hong Kong funds offered in the
mainland must comply with certain provisions in the Securities Investment Fund Law
(China) – see Chapter 7 for a more detailed discussion.
F. Conclusion
2.163 The Hong Kong financial regulators have some common objectives:
• They help to maintain Hong Kong’s position as a leading financial centre by
ensuring that the regulations they apply are necessary for the proper supervision of
the financial markets.
• They aim to achieve this goal through financial regulations of an acceptable
international standard.
• They strive to be market friendly, open, and approachable, but also fair and
effective.
• To the extent of their powers, they seek to ensure that the legal framework of
financial regulation is certain, adequate, and fairly enforced (e.g. the SFO was drafted
with these objectives in mind).
(p. 91) • They encourage the installation of a sound technical infrastructure for the
functioning of the financial markets and for interlinking with settlement and clearing
systems globally.
• Their actions are designed to help promote confidence in the financial markets,
internationally and locally.
2.164 The philosophy and systems of regulation are sometimes described as being either
‘merit-based’ or ‘disclosure-based’. These terms are often used in considering share offers
and listing matters. The systems in the United Kingdom and the United States are said to be
disclosure-based. That is to say, the focus is on maximizing disclosure and provision of
information regarding public offerings of securities. In Hong Kong, the prospectus
provisions of the CWUMPO is disclosure-based and has legal force. The HKEx’s Listing
Rules are also primarily disclosure-based but have limited statutory backing. The idea is
simply that maximum disclosure is required to protect investors, but there is an obligation
on the part of the participants to take responsibility for using the full information to make
their own independent investment decisions.
2.165 Merit regulation is based on the objective of screening out undesirable players and
undesirable offerings. So, the investor will not have the freedom to invest in a merit-
regulated market in so-called undesirable offerings which may be promoted by undesirable
persons, as the system bars them. The ‘Blue Sky’ laws in the United States often include
aspects of merit regulation, in that registration of a securities offering may be refused if it
does not ensure a fair balance between promoters and investors or provide the investing
public with a fair balance between risk and returns. It has been claimed that elements of
the SEHK’s listing process are merit-based, as they are designed to achieve the same
objective. Nonetheless, the Listing Rules are primarily a system of disclosure. By contrast,
the regulation of investment products to be offered to the public is a clear mix of merit-
based regulation, requiring products to be fair and to comply with minimum prescribed
operational arrangements, and disclosure-based regulation.
2.166 Another expression used by the regulators to explain their approach to regulation is
that it is ‘risk-based’. This basically means that regulation is weighted towards the areas
that pose the greatest risk to the markets and the participants.
2.167 A second IMF FSAP197 was published in 2014. The review concluded that Hong
Kong’s financial sector was well regulated with the capacity to absorb a diversity of shocks.
Major risks to Hong Kong’s financial stability included capital market volatility and reduced
system-wide liquidity from the United States’ anticipated exit from unconventional
monetary policy; a correction in property prices and increasing economic integration with
the mainland could generate spillover (p. 92) effects. Large banks were viewed has having
sufficient liquidity to manage sizeable deposit and interbank funding withdrawals, as
opposed to smaller banks that were deemed more vulnerable to these risks. In the wake of
the global financial crisis the financial regulatory and supervisory framework displayed a
high level of compliance with international standards such as Basel III. The IMF also
welcomed the creation of a comprehensive bank resolution framework. A notable weakness
was the supervision of the insurance sector, with the IMF recommending the need to
establish the planned independent insurance authority, enhancing the legal framework for
associated groups, implement a risk-based capital regime, and bolster the supervision of
intermediaries. The IMF failed to raise the significance of the relationship between the
insurance and banking sectors, and how systemic risks could be transmitted between these
two financial markets, especially from the insurance activities that banks engage in. In the
securities sector, regulation of markets, external auditors, and enforcement of securities
regulation all needed to be strengthened.
Footnotes:
1
For a description of a similar system in the United Kingdom prior to 1979, see C
Hadjiemmanuil, Banking Regulation and the Bank of England (London: LLP, 1996) .
2
YC Jao, Hong Kong as an International Financial Centre: Evolution, Prospects and Policies
(Hong Kong: City University of Hong Kong, 1997), p 26.
3
See generally I Tokley, Hong Kong Banking Law and Practice (Hong Kong, Singapore:
Butterworths Asia, 1996); R Ho, R Scott, and K Wong (eds), The Hong Kong Financial
System (Hong Kong: Oxford University Press, 1991); TK Ghose, The Banking System of
Hong Kong (Hong Kong: Butterworths, 1995) .
4
Cap. 571.
5
BAK Rider and HL French, The Regulation of Insider Trading (London: Macmillan, 1979),
pp 329–31.
6
Cap. 32.
7
Cap. 117.
8
Securities Review Committee, The Operation and Regulation of the Hong Kong Securities
Industry: Report of the Securities Review Committee (Hong Kong: Securities Review
Committee, May 1988), p 399.
9
WD Hartley, ‘Where the action is’, The Wall Street Journal, 29 March 1973, 34.
10
T Ujejski, ‘Securities Regulation’, in R Wacks (ed.), The Law in Hong Kong 1969–1989
(Hong Kong: Oxford University Press, 1989), p 283.
11
MF Higgins, Securities Regulation in Hong Kong 1972–1977 (The Netherlands: Sijthoff
& Noordhoff, 1978), pp 1–16.
12
Ibid, p 3.
13
Ibid, p 31.
14
Securities Review Committee, above n 8, p 429.
15
Ujejski, above n 10, pp 285–8.
16
Cap. 333.
17
Cap. 335.
18
Securities Review Committee, above n 8, pp 429–30.
19
20
Cap. 361.
21
22
Hong Kong Legislative Council, ‘Proceedings of the Council’, (21 October 1987) Hong
Kong, 138.
23
24
Ibid, 3 (para 1.6).
25
Ibid, 5 (para 1.7(c)).
26
Cap. 24.
27
28
Cap. 571.
29
Cap. 32.
30
Cap. 395.
31
Cap. 396.
32
The Securities and Futures Commission (Hong Kong: Securities and Futures
Commission, 1986), p 15.
33
SFC, A Consultation Paper on a Draft for a Composite Securities and Futures Bill (Hong
Kong: Securities and Futures Commission, 1996).
34
E Yiu, ‘Securities Law Still In Grip Of Bitter Bickering’, South China Morning Post, 9
December 2000; E Yiu, ‘SFC calls for reform to battle coming challenges’, South China
Morning Post, 28 December 2000.
35
See D Arner, Law, Financial Stability and Economic Development (New York: Cambridge
University Press, 2007).
36
See generally Tokley, above n 3; Ho, Scott, and Wong (eds), above n 3; Ghose, above n 3.
37
Group of Twenty and Organisation for Economic Cooperation and Development,
‘Principles of Corporate Governance’, (September 2015).
38
World Bank, ‘Principles and Guidelines for Insolvency and Creditor Rights System’,
(April 2001); UNCITRAL, ‘Legislative Guide on Insolvency Law’, (forthcoming). At present,
the IMF, World Bank, and UNCITRAL are cooperating to produce a single standard but no
agreement has yet been reached.
39
International Accounting Standards Board, ‘International Financial Reporting
Standards’, (January 2015).
40
International Federation of Accountants, ‘International Standards on Auditing’, (October
2014).
41
Financial Action Task Force, ‘FATF IX Special Recommendations’, (2010).
42
Basel Committee on Banking Supervision, ‘Core Principles of Effective Banking
Supervision’, (September 2012).
43
Committee on Payment and Settlement Systems, ‘Core Principles for Systemically
Important Payment Systems’, Bank for International Settlements, No. 43 (January 2001);
Committee on Payment and Settlement Systems and Technical Committee of the
International Organization of Securities Commissions, ‘Recommendations for Securities
Settlement Systems’, (November 2001) No. 46.
44
International Organization of Securities Commissions, ‘Objectives and Principles for
Securities Regulation’, (June 2010).
45
International Association of Insurance Supervisors, ‘Insurance Core Principles,
Standards, Guidance and Assessment Methodology’, (October 2011).
46
See, the Preamble to the Basic Law.
47
Its Formal Title Being: ‘Joint Declaration of the Government of the United Kingdom of
Great Britain and Northern Ireland and the Government of the People’s Republic of China
on the Question of Hong Kong’, (19 December 1984) Beijing, Hong Kong Instrument A301.
48
As required by art 3(12) of the Sino-British Joint Declaration and implied by art 5 of the
Basic Law.
49
See: Bahadur v Secretary for Security [2002] 2 HKC 486, 495B–D; and A Solicitor v The
Law Society of Hong Kong FACV No. 24 of 2007: <http://legalref.judiciary.gov.hk/lrs/
common/ju/ju_body.jsp?DIS=60404&currpage=T> accessed 17 November 2015.
50
D Tsang (former Financial Secretary), ‘Hong Kong––The Next Century’, in HKMA, Hong
Kong—Pacific Powerhouse (Hong Kong: HKMA, 1997), p 13.
51
Basic Law, art 106.
52
Basic Law, ch IV and art 3.
53
Ordinances in Hong Kong are typically referred to by their respective chapter number of
the Laws of Hong Kong: <http://www.legislation.gov.hk> accessed 17 November 2015; e.g.
Companies Ordinance, ch 32, Laws of Hong Kong. This is typically shortened to ‘Cap.’ e.g.
Companies Ordinance (Cap. 32). Subsidiary legislation—essentially regulations—typically is
numbered with the primary number, followed by a letter, e.g. Companies (Requirements for
Documents) Regulation (Cap. 32A). Subsidiary legislation requires a simpler legislative
approval process than primary legislation.
54
Basic Law, art 74.
55
Basic Law, arts 48 and 62.
56
57
Basic Law, arts 48, 62, 72, 73, and 80.
58
Most of the litigation involving separation of powers in British Commonwealth countries
arises from the interpretation of the Australian Commonwealth Constitution, because the
Australian Constitution expressly provides for the separation of judicial powers from the
two other branches of government (Commonwealth of Australia Constitution Act 1900, s
71).
59
(1995) 183 CLR 245, 267.
60
Lim v Minister for Immigration (1992) 176 CLR 1, 36–7.
61
Basic Law, art 5.
62
Basic Law, art 111. The HKSAR government may authorize designated banks to issue or
continue to issue Hong Kong currency under statutory authority, after satisfying itself that
any issue of currency will be soundly based and that the arrangements for such issue are
consistent with the object of maintaining the stability of the currency.
63
Basic Law, art 112.
64
65
For a discussion of financial regulatory structure, see D Arner and J Lin (eds), Financial
Regulation—A Guide to Structural Reform (Hong Kong: Sweet & Maxwell, 2003).
66
Financial Reporting Council Ordinance (Cap. 588).
67
The new Companies Ordinance came into effect on 3 March 2014. The old Companies
(Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) is now used for winding up
of the companies.
68
Deposit Protection Scheme Ordinance (Cap. 581).
69
Prevention of Bribery Ordinance (Cap. 201).
70
Consumer Council Ordinance (Cap. 216).
71
HKSAR Chief Executive, ‘Responsibilities of the Financial Secretary and the Secretary
for Financial Services and the Treasury’, (27 June 2003); Financial Secretary, ‘Policy
Objectives in Financial Affairs and Public Finance’, (27 June 2003).
72
Hong Kong Association of Banks Ordinance (Cap. 364).
73
See HKSAR Chief Executive, above n 71.
74
Banking Ordinance s 7(1).
75
Exchange Fund Ordinance s 3(1) and 3(1A).
76
The Exchange Fund was created by the Currency Ordinance 1935, later renamed as the
Exchange Fund Ordinance.
77
Banking Ordinance s 2.
78
Available online: <http://www.hkab.org.hk/PDF/rules_guidelines/code_e_2008.doc>
accessed 17 November 2015.
79
Available online: <http://www.hkma.gov.hk/eng/key-functions/monetary-stability/
liquidity-support-to-banks.shtml> accessed 17 November 2015.
80
HKMA, above n [79].
81
See generally, Securities Review Committee, ‘The Operation and Regulation of the Hong
Kong Securities Industry: Report of the Securities Review Committee’, (1988) Hong Kong
Government (Hay Davison Report).
82
SFO s 5(1).
83
SFO s 4.
84
SFO s 6.
85
Available online: <http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/
stockconnect.htm> accessed 17 November 2015.
86
SFO s 5(1)(b).
87
Insurance Companies Ordinance s 4A.
88
See SFC and IA, ‘Memorandum of Understanding between Securities and Futures
Commission and Insurance Authority’, (20 December 2005).
89
Available online: <http://www.hkfi.org.hk/en_tips_customer_conduct.htm> accessed 17
November 2015.
90
FSTB, ‘Press Release: Bill to establish independent Insurance Authority to be gazetted
on 25 April 2014’, (16 April 2014).
91
FSTB, ‘Legislative Council Brief: Insurance Companies (Amendment) Bill 2014’, Annex C
(1).
92
Ibid, Annex E.
93
MPFSO s 6E.
94
CFR, ‘Terms of Reference’, (2006).
95
FSC, ‘Terms of Reference’, (2006).
96
Financial Secretary, ‘Letter from the Financial Secretary to the Monetary Authority,
Functions and Responsibilities in Monetary and Financial Affairs and Monetary Policy
Objective’, (27 June 2003); HKMA and SFC, ‘Memorandum of Understanding on
Cooperation in respect of Supervision of Entities in Financial Groups’, (23 October 1995);
SFC and HKMA, ‘Memorandum of Understanding between the Securities and Futures
Commission and the Hong Kong Monetary Authority’, (12 December 2002); SFC and HKMA,
‘Memorandum of Understanding between the Securities and Futures Commission and the
Hong Kong Monetary Authority’, (4 November 2005) (concerning the new oversight regime
under the Clearing and Settlement Systems Ordinance); HKMA and OCI, ‘Memorandum of
Understanding between the Monetary Authority and the Insurance Authority’, (19
September 2003); HKMA and FRC, ‘Memorandum of Understanding between Hong Kong
Monetary Authority and Financial Reporting Council’, (19 November 2007); HKDPB, SFC,
and ICC, ‘Memorandum of Understanding between the Hong Kong Deposit Protection
Board, Securities and Futures Commission and Investor Compensation Company Limited’,
(8 July 2008); SFC and Insurance Authority, ‘Memorandum of Understanding between
Securities and Futures Commission and Insurance Authority’, (20 December 2005); SFC
and MPFA, Memorandum of Understanding concerning the Regulation of Mandatory
Provident Fund Products’, (23 April 2003) (replacing an earlier MOU from June 1999); SFC
and FRC, ‘Memorandum of Understanding between the Securities and Futures Commission
and the Financial Reporting Council’, (12 November 2007); SFC and HKEx, ‘Memorandum
of Understanding on matters relating to: SFC Oversight, Supervision of Exchange
Participants, Market Surveillance’, (20 February 2001); SFC, HKEx and SEHK,
‘Memorandum of Understanding for the Listing of Hong Kong Exchanges and Clearing
Limited on the Stock Exchange of Hong Kong between Securities and Futures Commission,
Hong Kong Exchanges and Clearing Limited and the Stock Exchange of Hong Kong’, (22
August 2001); SFC and SEHK, ‘Memorandum of Understanding Governing Listing Matters’,
(28 January 2003); SFC and HKEx, ‘Agreed Interpretation of Terms in the MoU [22 August
2001] for the Purposes of the Commencement of the SFO’, (11 April 2003); MPFA and
Insurance Authority, ‘Memorandum of Understanding between the Mandatory Provident
Fund Schemes Authority and the Insurance Authority’, (20 April 2004); Insurance Authority
and FRC, ‘Memorandum of Understanding between the Insurance Authority and the
Financial Reporting Council’, (19 December 2007); Monetary Authority, Insurance
Authority, SFC and MPFA, ‘Memorandum of Understanding concerning the Regulation of
MPF Intermediaries’, (1 January 2004) (replacing an earlier MOU from Oct 1999); SEHK
and FRC, ‘Memorandum of Understanding between the Stock Exchange of Hong Kong and
the Financial Reporting Council’, (27 December 2007); HKICPA and FRC, ‘Memorandum of
Understanding between the Hong Kong Institute of Certified Public Accountants and the
Financial Reporting Council’, (20 February 2008).
97
First Report of the Companies Law Revision Committee—The Protection of Investors
(Hong Kong: Government Printer, 24 June 1971); Second Report of the Companies Law
Revision Committee —Company Law (Hong Kong: Government Printer, 12 April 1973).
98
Standing Committee on Company Law Reform, Consultancy Report on the Review of the
Hong Kong Companies Ordinance (Hong Kong: Government Printer, March 1997).
99
Ibid, pp 99–105.
100
Ibid, pp 121–3.
101
Ibid, p 129.
102
Ibid, p 82.
103
Ibid, pp 88–98.
104
Ibid, pp 100–1.
105
Ibid, p 100.
106
See A Tam, ‘Company Law in Hong Kong: Charting a New Course?’, in R Wacks (ed.),
The New Legal Order in Hong Kong (Hong Kong: Hong Kong University Press, 1999), ch 11
.
107
Division 3 is further subdivided into two subdivisions: (i) limited company and unlimited
company; and (ii) private company and public company.
108
Division 4 is further subdivided into two subdivisions: (i) preliminary; and (ii)
Registrar’s powers to refuse to accept or register documents.
109
Division 7 is further subdivided into three subdivisions: (i) general protection; (ii)
protection of residential address and identification number contained in certain documents;
and (iii) supplementary.
110
Division 1 comprises two subdivisions: (i) general requirements for formation; and (ii)
incorporation of company.
111
Division 2 comprises five subdivisions: (i) general; (ii) model articles; (iii) content and
effect of articles; (iv) alteration of articles; and (v) miscellaneous.
112
Division 3 comprises four subdivisions: (i) restriction on company name; (ii) limited
company name with ‘limited’ as last word etc.; (iii) change of company name; and (iv)
supplementary provision.
113
Division 7 comprises two subdivisions: (i) company seal; and (ii) execution
requirements.
114
Division 4 comprises three subdivisions: (i) transfer of shares; (ii) transmission of
shares by operation of law; and (iii) general.
115
Division 7 comprises three subdivisions: (i) companies having a share capital; (ii)
companies without a share capital; and (iii) general.
116
Division 8 comprises two subdivisions: (i) relief from share capital requirements; and
(ii) miscellaneous.
117
Division 3 comprises three subdivisions: (i) general provisions; (ii) reduction of share
capital by special resolution supported by solvency statement; and (iii) reduction of share
capital confirmed by court.
118
Division 4 comprises seven subdivisions: (i) preliminary; (ii) redeemable shares; (iii)
share buy-backs; (iv) share buy-backs: listed companies, (v) share buy-backs: unlisted
companies; (vi) payment for share redemptions and buy-backs; and (vii) general provisions.
119
Division 5 comprises four subdivisions: (i) preliminary; (ii) general prohibition on
financial assistance for acquisition of own shares; (iii) exceptions from prohibition; and (iv)
authorization for giving financial assistance.
120
Division 4 comprises four subdivisions: (i) preliminary; (ii) accounting records; (iii)
financial statements; and (iv) directors’ report.
121
Division 5 comprises eight subdivisions: (i) preliminary; (ii) appointment of auditor; (iii)
auditor’s report; (iv) auditor’s rights and privileges, etc.; (v) auditor’s liability; (vi)
termination of auditor’s appointment; (vii) outgoing auditor’s right to requisition meeting of
company and make representation; and (viii) outgoing auditor’s statement of
circumstances.
122
Division 1 comprises three subdivisions: (i) requirement to have directors; (ii)
appointment of directors; and (iii) removal and resignation of directors.
123
Divisions 2 and 3 each comprise four subdivisions: (i) preliminary; (ii) prohibitions; (iii)
exceptions to Subdivision 2; and (iv) consequences of contravention.
124
Part 12 Division 1 comprises twelve subdivisions: (i) preliminary; (ii) written resolution;
(iii) resolutions at meetings; (iv) calling meetings; (v) notice of meetings; (vi) members’
statements; (vii) procedure at meetings; (viii) voting at meetings; (ix) proxies and corporate
representatives; (x) annual general meetings; (xi) records of resolutions and meetings; and
(xii) application to class meetings. Division 2 comprises four subdivisions: (i) preliminary;
(ii) register of members; (iii) register of directors; and (iv) register of company secretaries.
125
Division 2 comprises four subdivisions: (i) preliminary; (ii) register of members; (iii)
register of directors; and (iv) register of companies secretaries.
126
Divisions 4 and 5 each comprise three subdivisions: (i) preliminary; (ii) ‘squeeze-out’;
and (iii) ‘sell-out’.
127
Division 1 includes two subdivisions: (i) Registrar’s power to strike off name of
company not in operation or carrying on business; and (ii) striking off under other
circumstances.
128
Division 4 includes three subdivisions: (i) administrative restoration by Registrar; (ii)
restoration by order of court; and (iii) supplementary provisions.
129
Division 2 includes seven subdivisions: (i) preliminary; (ii) appointment by Financial
Secretary of inspectors to investigate company’s affairs; (iii) Financial Secretary’s powers
to give directions to company; (iv) inspectors’ powers; (v) resignation, removal, and
replacement of inspectors; (vi) reports by inspectors; and (vii) miscellaneous.
130
Division 5 includes two subdivisions: (i) supplementary provisions applicable to
Divisions 2 and 3; (ii) supplementary provisions applicable to Divisions 2, 3, and 4.
131
C Booth, ‘Hong Kong Insolvency Law Reform: Preparing for the Next Millennium’,
(2001) Journal of Business Law 126–56.
132
They are more commonly used in the takeovers context (see Chapter 9) and in
corporate reorganizations.
133
Basic Law, art 108.
134
Basic Law, art 106.
135
Based on information available at the time of completion of the report: 15 April 2003.
136
IMF, ‘Peoples Republic of China Hong Kong Special Administrative Region: Financial
System Stability Assessment’, (27 June 2003), p 2.
137
Basel Core Principles for Effective Banking Supervision.
138
IMF, above n 136, pp 38–42.
139
Ibid, pp 42–50.
140
Banking Ordinance s 10(1).
141
IOSCO, Objectives and Principles of Securities Regulation.
142
IMF, above n 136.
143
IMF, above n 136.
144
SFO, s 216.
145
IMF, above n 136.
146
For a detailed discussion, see D Arner, Financial Stability, Economic Growth and the
Role of Law (Cambridge: Cambridge University Press, 2007), ch 2.
147
SFO s 23.
148
The Securities and Futures (Stock Market Listing) Rules came into effect on 1 April
2003, the same time as the SFO.
149
See Securities and Futures (Stock Market Listing) Rules ss 3 and 5, concerning listing
applications and other disclosures to the public.
150
Report by the Expert Group to Review the Operation of the Securities and Futures
Market Regulatory Structure (March 2003).
151
Ibid, pp 13, 45, 55.
152
SFC, ‘A Consultation Paper on Proposed Amendments to the Securities and Futures
(Stock Market Listing) Rules’, (January 2005); FSTB, ‘Consultation Paper on Proposed
Amendments to the Securities and Futures Ordinance to Give Statutory Backing to Major
Listing Requirements’, (January 2005).
153
D Carse, ‘Review of the Hong Kong Monetary Authority’s Work on Banking Stability’,
(July 2008).
154
Ibid, pp iv–v.
155
Ibid, p 51.
156
Ibid, p 15.
157
Ibid, p 2.
158
For detailed discussion, see D Arner, ‘The Global Credit Crisis of 2008: Causes and
Consequences’, (2009) 43 The International Lawyer 91; D Arner, P Lejot, and L Schou-
Zibell, ‘The Global Credit Crisis and Securitisation in East Asia’, (2008) 3 Capital Markets
Law Journal 291.
159
The commencement of the SFC’s action under the provisions of part XIII of the SFO
rather than under the corresponding criminal provision in section 298 in part XIV was
subject to some criticism.
160
SFC, ‘Issues Raised by the Lehman Minibonds Crisis: Report to the Financial
Secretary’, (December 2008).
161
HKMA, ‘Report of the Hong Kong Monetary Authority on Issues Concerning the
Distribution of Structured Products Connected to Lehman Group Companies’, (December
2008).
162
15 October 2008.
163
See <http://www.fso.gov.hk/tfec/eng/index.html> accessed 17 November 2015.
164
See <http://www.info.gov.hk/gia/general/200906/22/P200906220250.htm> accessed 17
November 2015.
165
For detailed discussion, see D Arner, Financial Stability, Economic Growth and the Role
of Law (New York, NY: Cambridge University Press, 2007).
166
FSF, ‘Report of the Financial Stability Forum on Enhancing Market and Institutional
Resilience’, (7 April 2008).
167
G7 Finance Ministers and Central Bank Governors, ‘Plan of Action’, (10 October 2008)
Washington, DC.
168
Bank of China (Hong Kong) Limited; BNP Paribus; China Construction Bank (Asia)
Corporation Limited; Citibank N.A.; HSBC; The Industrial and Commercial Bank of China
(Asia) Limited; and Standard Chartered.
169
The G20 was established in 1999 in the wake of the 1997 Asian financial crisis. From
1999 to 2008, it comprised ministers of finance and central bank governors meeting
annually, supported by biannual meetings of deputy ministers of finance and deputy central
bank governors. In November 2008, it met for the first time at the heads of government
level, in Washington, DC. Since that time, it has met eight times at the heads of government
level: in London, United Kingdom, in April 2009; in Pittsburgh, United States, in September
2009; in Toronto, Canada, in June 2010; in Seoul, South Korea, in November 2010; in
Cannes, France, in November 2011; in Los Cabos, Mexico, in June 2012; in St Petersburg,
Russia, in September 2013; in Brisbane, Australia, in November 2014; and most recently in
Antalya, Turkey, in November 2015. In 2009 and 2010 at the height of the financial crisis
the G20 met biannually, and since 2011 annually (in advance of each leaders’ summit), at
the level of ministers of finance and central bank governors. Official communiqués are
typically released for each leaders’ summit and each meeting of ministers of finance and
central bank governors. Meetings also take place at the level of deputy ministers of finance
and deputy central bank governors but these normally do not result in officially released
communiqués. See generally: <www.g20.org> accessed 17 November 2015.
170
For comprehensive discussion of the Washington and London summits, see Arner,
above n 165. For discussion of the G20 agenda for reform of the international financial
architecture, see Douglas Arner and Ross Buckley, ‘Redesigning the Architecture of the
Global Financial System’, (2010) 11 Melbourne Journal of International Law 1.
171
Control of the IMF and World Bank is exerted through a system of voting based on
shareholding, with the G20 holding together over 80 per cent of the votes of both
institutions. For discussion, see Arner and Buckley, above n 170; John Head, Losing the
Global Development War: A Contemporary Critique of the IMF, the World Bank, and the
WTO (Leiden: Brill, 2008).
172
See <http://www.financialstabilityboard.org> accessed 17 November 2015.
173
See, FSB, ‘Basel III: A global regulatory framework for more resilient banks and
banking systems (revised version)’, (1 June 2011): <http://www.financialstabilityboard.org/
2011/06/cos_110601c/> accessed 17 November 2015.
174
IASB, above n 39.
175
SFC, ‘SFC supports international standards for sound compensation practices’, (19
March 2010) News: <http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-
announcements/news/doc??refNo=10PR29> accessed 17 November 2015.
176
Legislative Council, ‘Creation of a Regulatory Regime for Credit Rating Agencies’, (18
February 2011) Press Release: <http://www.info.gov.hk/gia/general/201102/18/
P201102180164.htm> accessed 17 November 2015.
177
SFO sch 5, part 2 Credit Ratings.
178
Legislative Council, above n 176.
179
FSTB, ‘IMF commends Government’s decisive actions to bolster financial stability’, (9
December 2008) Press Release.
180
FSB, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’,
(October 2011).
181
FSTB, HKMA, SFC, and IA, ‘An Effective Resolution Regime for Financial Institutions in
Hong Kong’, (January 2014) Consultation Paper.
182
FSB, above n 180.
183
FSTB, HKMA, SFC, and the IA, ‘An Effective Resolution Regime for Financial
Institutions in Hong Kong’, (January 2015) Second Consultation Paper: Conclusions from
First Consultation and Further Policy Development.
184
See also BFC Hsu et al, ‘The Global Financial Crisis and the Future of Financial
Regulation in Hong Kong’, AIIFL Working Paper No. 4, 2009: <http://www.law.hku.hk/aiifl/
aiifl-working-papers/> accessed 17 November 2015; P Lejot, ‘Deum non meum pactum:
Lehman's Minibond transactions’, (2008) 38 Hong Kong Law Journal 3, 585.
185
See <http://www.hkiec.hk/web/en/about-iec/about-iec.html> accessed 17 November
2015.
186
FSTB, ‘Action Plan on Recommendations in the Reports Prepared by the Hong Kong
Monetary Authority and the Securities and Futures Commission on the Lehman Brothers
Minibonds Incident’, (2 February 2009) CB(1)678/08-09(03).
187
Legislative Council, ‘Legislative amendments effective from 13 May 2011 relating to
the regulation of public offers of structured products’, (2011), appendix 4(b) para 4.14:
<http://www.legco.gov.hk/yr08-09/english/hc/sub_com/hs01/report/app_4b-e.pdf> accessed
17 November 2015.
188
SFC, above n 160.
189
HKMA, above n 161.
190
Article 109: The Government of Hong Kong Special Administrative Region shall provide
an appropriate economic and legal environment for the maintenance and status of Hong
Kong as an international financial centre.
191
Commerce, Industry, and Tourism Branch–Commerce and Economic Development
Bureau, ‘Promotion of Competition’, (2010): <http://www.cedb.gov.hk/citb/en/
Policy_Responsibilities/promotion_of_competition.html> accessed 17 November 2015.
192
Companies Registry, ‘The New Companies Ordinance (Cap. 622), Major Initiatives’
accessed 5 November 2015, <http://www.cr.gov.hk/en/companies_ordinance/overview.htm>
accessed 17 November 2015.
193
See <http://www.fstb.gov.hk/fsb/iia/eng/establishment/index.htm> accessed 17
November 2015.
194
FSF, ‘FSF Principles for Cross-border Cooperation on Crisis Management’, (April 2009),
2.
195
See, FSB, ‘Global adherence to regulatory and supervisory standards on international
cooperation and information exchange’, (December 2014).
196
HKMA, ‘Hong Kong: The Premier Offshore Renminbi Business Centre’, (April 2015), 20
.
197
IMF, ‘People’s Republic of China––Hong Kong Special Administrative Region: Financial
Stability Assessment’, (25 April 2014).

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Part I Finance in Hong Kong, 2 Financial

From: Financial Markets in Hong Kong (2nd Edition)

Content type: Book content

(1) Early development (1840–1948) 2.02

B. Foundations: Government and Legal System 2.18

C. Financial Regulatory System 2.36

(1) Financial regulatory framework 2.38

D. Pre-global Financial Crisis Weaknesses 2.108

(1) Pre-existing weaknesses 2.108

E. Post-crisis Evolution and Reforms 2.135

(1) The international response to the crisis 2.136

(1) Early development (1840–1948)

(2) Emerging market (1949–87)

(3) Developed markets (1987–2008)

B. Foundations: Government and Legal System

(1) Basic Law and common law: The legal framework

Article 18 of the Basic Law provides that:

(2) Legislative process and the Executive

Difficulty arises in attempting to formulate a comprehensive definition of judicial

(4) Basic Law: Monetary and financial systems

C. Financial Regulatory System

(1) Financial regulatory framework

(p. 53) (2) Role of the Hong Kong government

(3) Financial supervisory agencies

2.99 The Companies (Winding-Up and Miscellaneous Provisions) Ordinance (CWUMPO)

As such, it contains amended prospectus requirements (discussed in Chapter 6) in addition

D. Pre-global Financial Crisis Weaknesses

(2) International Monetary Fund review 2003

The financial system in Hong Kong is resilient, sound and overseen by a

2.114 In relation to securities, according to the FSSA:

(p. 74) (3) Other issues: Review of banking stability

No fundamental deficiencies in the regulatory and supervisory framework have

(4) The global financial crisis

E. Post-crisis Evolution and Reforms

(1) The international response to the crisis

(2) Post-crisis reforms in Hong Kong

(3) Lehman Minibonds

(4) Other international best practice reforms

(5) An international financial centre for China

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