Banking Sector

Main Features

Hong Kong maintains a three-tier system of deposit-taking institutions, namely, licensed banks, restricted licence banks and deposit-taking companies. They are collectively known as authorised institutions (AIs) under the Banking Ordinance. The Hong Kong Monetary Authority (HKMA) is the licensing authority for all three types of AIs.

    Only licensed banks may conduct full banking services, including in particular the provision of current and savings accounts and acceptance of deposits of any size and maturity. Restricted licence banks may take deposits of any maturity of $500,000 or above. Many deposit-taking companies are owned by, or otherwise associated with, licensed banks. Deposit-taking companies may take deposits of $100,000 or above with an original maturity of at least three months.

    Hong Kong has one of the highest concentrations of banking institutions in the world. At year-end, 133 licensed banks, 46 restricted licence banks and 45 deposit-taking companies, which were beneficially owned by interests from 31 countries around the world, were in business in Hong Kong. These 224 AIs operated a comprehensive network of 1 409 local branches. In addition, there were 94 representative offices of overseas banks in Hong Kong. A local representative office is not allowed to engage in any banking business. Its role is confined to liaison work between the bank and its customers in Hong Kong.

    The total deposit liabilities of all AIs to customers and the total loans and advances extended by these institutions at year-end were $3,318 billion and $2,077 billion, respectively. The total assets of all AIs amounted to $6,000 billion.

    Hong Kong has a robust interbank payment system, which operates through the Real Time Gross Settlement (RTGS) system. The Hong Kong Dollar RTGS system has a single-tier settlement structure with all banks maintaining settlement accounts with the HKMA. All RTGS payment transactions are settled in real time across the books of the HKMA. Intraday liquidity can be obtained by the banks through the use of their Exchange Fund Bills and Notes for intraday repurchase (repo) agreements with the HKMA.

    Leveraging on the experience with the Hong Kong Dollar RTGS system, the HKMA introduced the US Dollar RTGS system in August 2000. The system allows participants to settle US dollar transactions real-time in the Asian time zone and thereby to reduce or eliminate foreign exchange settlement risk caused by the time gap. Since its full implementation, the system has been operating smoothly and has attracted an increasing number of participants. As of December, there were 64 direct participants and 149 indirect participants. Among the indirect participants, 102 were from overseas. Turnover of the system grew to 3 300 transactions per day with a total value of over US$5.3 billion.

    With a view to further enhancing the financial infrastructure in Hong Kong, the HKMA aims to introduce the Euro RTGS system in April 2003. Similar to the technology used for the Hong Kong dollar and US dollar RTGS systems, the Euro RTGS system is built on the same infrastructure and offers a range of advanced and sophisticated clearing functions. The key functions include the real-time gross settlement for Euro payments and for payment versus payment (PvP) between Euro and US dollar or Euro and Hong Kong dollar foreign exchange transactions. The system also maintains a seamless interface with the Central Moneymarkets Unit (CMU) to cater for the delivery versus payment (DvP) of Euro denominated debt securities and repo facilities.

    The CMU Service, established in 1990, is operated by the HKMA to provide a clearing and custodian system for Exchange Fund Bills and Notes, as well as private sector debt issues. There are 176 CMU members, most of which are financial institutions in Hong Kong. At year-end, there were 1 115 issues with a total value of $216.6 billion equivalent lodged with the CMU. The CMU system accepts both Hong Kong dollar and foreign currency denominated debt instruments. It has been fully integrated with the interbank payment systems, and is linked up with the international central securities depositories like Euroclear and Clearstream to enable overseas investors to trade CMU securities. It also has established links with the central securities depositories in Australia, New Zealand and the Republic of Korea.

    Through a seamless interface with the US Dollar RTGS system, the CMU enables members to settle US dollar securities on a DvP basis. As such, the outstanding amount of US dollar securities lodged with the CMU has increased twofold to US$1.67 billion from the previous year.

    To enhance the debt clearing and settlement infrastructure in Hong Kong, the CMU started to provide clearing, settlement and custodian facilities on US Treasuries to its members in December. This facility enables CMU members to clear and settle US Treasuries on a real-time DvP basis during business hours of Hong Kong.

Hong Kong Monetary Authority

The HKMA was established in April 1993. The Exchange Fund (Amendment) Ordinance 1992 provides for its establishment.

    The HKMA's policy objectives are to maintain currency stability, within the framework of the Linked Exchange Rate System, through sound management of the Exchange Fund, monetary policy operations and other means deemed necessary; to ensure safety and stability of the banking system through the regulation of banking business and the business of taking deposits, and the supervision of AIs; and to promote efficiency, integrity and development of the financial system, particularly payment and settlement arrangements.

    The HKMA is an integral part of the Government, but can employ staff on terms different from those of the Civil Service to attract personnel of the appropriate experience and expertise. Its staff and operating costs are charged directly to the Exchange Fund instead of the general revenue. The HKMA is accountable to the Financial Secretary, who is advised by the Exchange Fund Advisory Committee on matters relating to the control of the Exchange Fund.

    The HKMA seeks advice on policy matters routinely from the Banking Advisory Committee and Deposit-Taking Companies Advisory Committee. Both committees are established under the Banking Ordinance. They are chaired by the Financial Secretary and comprise members from the banking industry and other relevant professions. Members of the committees are appointed by the Financial Secretary under the authority delegated by the Chief Executive.

    The Banking Ordinance provides the legal framework for banking supervision in Hong Kong. Under the ordinance, the HKMA is the licensing authority responsible for the authorisation and revocation of all AIs, as well as the approval and revocation of money broker licences. The HKMA seeks to maintain a regulatory framework that is fully in line with international standards, primarily those recommended by the Basel Committee on Banking Supervision. The objective is to devise a prudential supervisory system to help preserve the general stability and effective working of the banking system while at the same time providing sufficient flexibility for AIs to make commercial decisions. Hong Kong's framework of banking supervision is in line with the Core Principles for Effective Banking Supervision promulgated by the Basel Committee.

    The HKMA's supervisory approach is based on a policy of 'continuous supervision' through a combination of on-site examinations, off-site reviews, prudential meetings, cooperation with external auditors and meetings with boards of directors. Since 2000, the HKMA has been using a risk-based supervisory framework for all AIs. This approach puts emphasis on evaluation of the quality of risk management practices and internal controls in respect of various types of risks faced by AIs. On-site examinations are typically limited to areas of highest risk at AIs.

    On the international front, the HKMA continues to promote cooperation among central banks in the region, principally through the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP), whose activities cover supervisory liaison and cooperation, development of financial markets and infrastructure, and various areas of central bank operations. The HKMA currently chairs the EMEAP Working Group on Financial Markets, and also the South-East Asia, New Zealand and Australia Group of Central Bank Governors' Forum of Banking Supervisors. To facilitate supervisory training in the region, the HKMA is active in organising seminars for regional banking supervisors in collaboration with the BIS Financial Stability Institute. In addition, Hong Kong is a member of the Financial Action Task Force (FATF), an inter-governmental body with the objective of developing and promoting legal, law enforcement and financial regulation policies to combat money laundering. Hong Kong served as President of the FATF for the period from July 2001 to June 2002.

Recent Developments

The Banking (Amendment) Ordinance 2002, together with the Securities and Futures Ordinance, was enacted in March 2002. Scheduled to commence operation on April 1, 2003, the new ordinances lay down the legal framework for, inter alia, upholding a level playing field between banks and non-bank intermediaries in the securities market. Banks will no longer enjoy 'exempt' status as in the current regime. While the HKMA will remain their front-line supervisor, banks will have to be registered with the SFC in respect of their securities related activities and subject to regulatory standards as well as disciplinary actions equivalent to those applicable to other securities intermediaries.

    The HKMA continued to implement the policy initiatives contained in the reform programme announced in 1999 in response to the Banking Sector Consultancy Study. Having secured the approval in principle of the Executive Council on the establishment of a Deposit Protection Scheme in Hong Kong, the HKMA released a consultation paper on the detailed design features of the proposed scheme in April. The Administration is drafting a new piece of legislation to put the scheme into effect. It is envisaged that a bill will be introduced into the Legislative Council in 2003.

    The Working Group convened by the HKMA to study the implementation of a Commercial Credit Reference Agency (CCRA) recommended a CCRA scheme targeting at small and medium enterprises (SMEs) based on voluntary participation by AIs. The CCRA would help enhance banks' credit risk management and improve SMEs' access to bank funding as more credit information about them would become available. Good progress was made on the design features of the CCRA during the year.

    The HKMA has also been promoting consumer data sharing arrangements among banks. At present, data sharing is limited to mainly negative data (i.e. default data) under the privacy legislation. Recent market developments, especially the surge in personal bankruptcies, have highlighted the importance of data sharing for credit assessment by banks. The HKMA presented the banking industry's proposal on sharing positive consumer credit data to the Legislative Council in April 2002. Having assessed the proposal, the Privacy Commissioner (PC) issued a consultation paper on proposals to revise the privacy legislation to permit greater sharing of consumer credit data by credit providers through a credit reference agency. The PC is reviewing public opinions received, and will issue a consultation report in January 2003.

    As regards electronic banking (e-banking), the HKMA continued to implement its e-banking and technology risk management supervisory framework. In particular, the HKMA carried out a series of specialist on-site examinations to evaluate the e-banking and general technology risk management measures adopted by selected strategically important banks and other selected AIs. In May, the HKMA issued a statutory guideline related to advertising material for deposits issued over the Internet. In response to the HKMA's proposal, the Hong Kong Association of Banks (HKAB) formed an e-banking working group in November to promote industry-level cooperation such as consumer education on Internet security. The group comprises representatives of banks, the Hong Kong Police Force and the HKMA.

    In view of the incidents in the United States on September 11, 2001, the HKMA issued a circular in January offering some preliminary lessons learned from them. During the year, the HKMA reviewed the business continuity plans of selected major banks and other selected AIs during its on-site examinations. After further research and consultation with the banking industry, the HKMA issued a guideline in December setting out more comprehensive and detailed guidance on business continuity planning.

    One of the functions of the HKMA is to promote and encourage high standards of conduct and sound and prudent business practices amongst AIs. This is important to maintain public confidence and trust in the banking system. In 2001, after a comprehensive review, the HKMA revised the Code of Banking Practice which sets out the minimum standards to be followed by AIs in their dealings with personal customers. The review covered areas such as credit cards, account and loan services, use of debt collection agencies, e-banking and stored value cards. The revised code was promulgated in November 2001. The industry-based Code of Banking Practice Committee was subsequently formed in 2002 to provide guidance on the interpretation of the code and to keep it under constant review.

    On developing financial infrastructure, the existing one-way link between Euroclear and CMU was extended to a two-way link in November. This fully automated real-time link enables Asian investors to hold and settle Euroclear-eligible securities directly via their CMU accounts, thus significantly improving settlement efficiency. The existing one-way link between Clearstream and CMU will also be extended to two-way in January 2003.

Securities and Futures Sector

Main Features

The securities market and the futures market in Hong Kong are operated by the SEHK and the HKFE, respectively. Both the SEHK and the HKFE are wholly-owned subsidiaries of the HKEx. At year-end, there were 487 corporate and individual exchange participants trading on the SEHK and 131 exchange participants trading on the HKFE.

    Securities transactions on the SEHK are executed by the Automatic Order Matching and Execution System (AMS). The launch of the third generation of the system, AMS/3, in 2000 introduced new trading facilities and investors access channels that made possible more sophisticated securities trading. Straight-through online trading has also become possible.

    The HKEx has developed a new market structure for Exchange Traded Funds (ETF), which are open-ended mutual funds or unit trusts listed or traded on stock exchanges.

    The SEHK introduced new Main Board Listing Rules in July to allow a wider range of derivative products, including Equity Linked Instruments (ELI), to be listed on the SEHK. The ELI combines the features of a fixed income instrument and a stock option. Its performance is linked, in whole or in part, to the market performance of the underlying equity security. The first ELI was listed on the exchange on August 5.

    At year-end, there were 812 companies listed on the Main Board with a total market capitalisation of $3,559.1 billion, raising an aggregate of $101.4 billion within the year. Moreover, the 166 companies listed on the Growth Enterprise Market had a total market capitalisation of $52.2 billion, and raised altogether $9.1 billion within the year.

    Derivative trading is executed by the Hong Kong Futures Automated Trading System (HKATS). The HKEx is now working on the integration of futures and options clearing on the new Derivatives Clearing and Settlement System (DCASS).

    New products continued to come into place in 2002. The HKEx introduced Dow Jones Industrial Average (DJIA) Futures for trading on the HKFE in May. It enables investors to respond quickly to corporate announcements or other market events before or after regular US trading hours.

    In addition, the HKEx launched Mini-Hang Seng Index (Mini-HSI) Options for trading in November. The contract multiplier for Mini-HSI Options is one-fifth the contract multiplier for the Hang Seng Index (HSI). Mini-HSI Options provide an opportunity for more retail investors to participate in the stock index options market.

    The Hong Kong Securities Clearing Company (HKSCC), a wholly-owned subsidiary of the HKEx, operates the Central Clearing and Settlement System (CCASS) for securities trading at the SEHK. The CCASS is an automated book-entry system that handles the settlement of securities. In addition to brokers and custodians, CCASS services are also available to retail investors.

    The HKEx has begun introducing CCASS/3, the new generation of the system in phases since May. The CCASS/3 network connection has been designed to provide an integrated access to the FinNet currently operated by the SFC, which was built to connect financial institutions in Hong Kong to effect straight-through-processing and ultimately real-time financial transactions.

    Upon full implementation, the open-interface architecture of the CCASS/3 will enable HKEx to respond quickly to changing market demands. The CCASS/3 will also be able to support more regional and global products with different features and settlement periods. It will improve the operational efficiency of the market and market participants.

Securities and Futures Commission

The Securities and Futures Commission (SFC) was established in May 1989 following enactment of the Securities and Futures Commission Ordinance (SFCO). This represented the first important phase in the overhaul of the regulation of securities and futures markets in Hong Kong, and the implementation of one of the most important recommendations made by the Securities Review Committee in May 1988. The regulatory objectives of the SFC, as set out in the Securities and Futures Ordinance (SFO) enacted in March, include:—

• to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry;
• to promote the understanding by the public of the operation and functioning of the securities and futures industry;
• to provide protection for members of the public investing in or holding financial products;
• to minimise crime and misconduct in the securities and futures industry;
• to reduce systemic risks in the securities and futures industry; and
• to assist the Financial Secretary in maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the securities and futures industry.

    Established as an autonomous statutory body outside the Civil Service, the SFC is responsible for regulating the securities and futures markets in Hong Kong. The SFC at present has 11 directors (five of them executive) appointed by the Chief Executive. It is required by law to present its annual report, budget and an audited statement of its accounts to the Financial Secretary who will then lay these before the legislature. The Government is not involved in the day-to-day regulation of the securities and futures industry.

    The SFC is funded largely by the market and partly by the Government, although no funding has been sought from the latter since 1993. The revised estimate of its operating expenditure budget for 2002–03 was $383 million.

    The SFC seeks advice on policy matters from its Advisory Committee, which comprises three executive directors of the SFC and 12 independent members. The independent members are appointed by the Chief Executive and are broadly based and representative of market participants and relevant professions.

    Exercise of powers by the SFC is subject to a range of checks and balances. For instance, decisions relating to matters concerning the registration of persons and intervention in their business are subject to appeal to the Securities and Futures Appeals Panel (SFAP), the members of which are independently appointed by the Chief Executive. Upon the commencement of the newly enacted SFO, the SFAP will be replaced by an independent full-time Securities and Futures Appeals Tribunal (SFAT). A much wider range of the SFC's decisions will be subject to appeal to the tribunal. In November 2000, a Process Review Panel (PRP) was established to undertake an ongoing review of the fairness and consistency of the SFC's internal operational procedures. Members of the PRP are appointed by the Chief Executive.

    Broadly speaking, the SFC's work involves licensing, supervision and monitoring of intermediaries, regulation of the public marketing of unit trusts, mutual funds and other collective investment products, regulation of takeovers, mergers and other corporate activities, supervision of markets including the exchanges and clearing houses, and enforcement of securities laws and rules.

    Following the merger and demutualisation of the SEHK, the HKFE and their associated clearing houses and the establishment of the HKEx on March 6, 2000, the SFC has assumed responsibility for front-line supervision of exchange participants and taken over the disciplinary matters involving these intermediaries. A Memorandum of Understanding was signed in February 2001 by the SFC and the HKEx to formalise the SFC's oversight of the HKEx and its subsidiaries, supervision of Exchange Participants and market surveillance.

    As at year-end, the SFC had registered 26 925 persons, of whom 639 were corporate securities dealers, 152 were corporate commodities dealers, 681 were corporate investment advisers and eight were securities margin financiers. As regards the regulation of leveraged foreign exchange trading, the SFC had issued 10 foreign exchange trader licences as at year-end.

    Over the years, the SFC has developed a framework of securities and futures regulation that is on a par with internationally accepted standards.

    The SFC considers investor education the first important step to investor protection. It maintains an Electronic Investor Resources Centre (eIRC), which is a web-based collection of investor education materials and links. It aims to assist investors in making informed investment decisions.

    During the year, the SFC broadcast educational video dramas on public transport and partnered with the University of Hong Kong to launch a General Education course on personal financial management for university students. It also worked with Radio Television Hong Kong to produce a popular investor knowledge radio quiz. Investor education leaflets covering subjects like hedge funds and ELI were published.

    In the meantime, the SFC continued to participate in external relations and international activities, including its work with the International Organisation of Securities Commissions (IOSCO). It hosted the IOSCO Technical Committee meeting and Executive Committee meeting in January and February, respectively and the Asian Roundtable for Internet Project Team in June. On September 30, the SFC participated in the annual Internet Surf Day organised by the Asia-Pacific Regional Committee of IOSCO and identified five websites suspected of offering unregistered dealing or investment services to investors in Hong Kong.

Insider Dealing Tribunal

The Insider Dealing Tribunal is an important feature of the regulatory framework for the securities market in Hong Kong. Established under the Securities (Insider Dealing) Ordinance, the tribunal looks into cases involving suspected insider dealing referred to it by the Financial Secretary. Since the commencement of its operation in 1994, the tribunal has concluded 14 cases.

    Upon the commencement of the newly enacted SFO, the Insider Dealing Tribunal will be replaced by a Market Misconduct Tribunal (MMT), which will cover five other types of market misconduct (including false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false or misleading information inducing transactions and stock market manipulation) in addition to insider dealing.

Recent Developments

To enhance the risk management of intermediaries engaging in margin financing business, the SFC amended the Financial Resources Rules (FRR): raising the 'haircut' ratio (discount ratio to market value) on illiquid collateral stocks and warrants, and implementing a borrowing-to-margin loan ratio. The amendments became effective on October 1. The SFC also formed a Working Group on Review of Financial Regulatory Framework for Intermediaries. The Working Group aims to develop a robust risk-based financial and capital regulatory framework for Hong Kong's intermediaries. It will analyse intermediaries' major risk areas under the current regulatory framework, in particular risk inherent in securities margin financing.

    On product development, Hong Kong is one of the first jurisdictions in the world to introduce hedge funds to the investing public. The SFC introduced the Hedge Funds Guidelines for authorisation in May and released the Guidelines on Hedge Funds Reporting Requirements in November. Several hedge funds have already been authorised.

    On July 25, the HKEx issued a consultation paper on the proposed amendments to Listing Rules relating to initial listing and continuing listing criteria and cancellation of listing procedures. In response to strong market reaction, the Financial Secretary appointed an independent Panel of Inquiry to look into the circumstances relating to the preparation and release of the consultation paper.

    On September 10, the Financial Secretary released the report of the Panel of Inquiry, which made various recommendations on the consultation process. The Financial Secretary also announced in September the appointment of a three-man Expert Group to review the operation of the three-tier regulatory structure, particularly in relation to listing-related matters. The Expert Group is expected to complete its review by March 2003.

Insurance Sector

Main Features

Hong Kong is one of the most open insurance centres in the world. At year-end, there were 195 authorised insurers, 96 of which were incorporated in Hong Kong and the remaining 99 were incorporated in 25 overseas countries or the Mainland, with the United States taking the lead to be followed by the United Kingdom.

    Notwithstanding the economic slowdown, the total gross premiums of the insurance industry reached $76.3 billion in 2001, representing an 18.5 per cent growth over 2000. Gross premiums of the general insurance sector increased by 8.8 per cent to $19.4 billion in 2001. Accident and Health, Motor Vehicle and General Liability have attained significant premium growth. Underwriting performance continued to be unfavourable but has improved with overall loss narrowed from $872 million in 2000 to $473 million in 2001.

    The long-term insurance business continued to attain a double-digit annual growth from 1991 to 2001, with office premiums increasing by 22.2 per cent to $56.9 billion in 2001. The office premiums in force of Individual Life business amounted to $41.9 billion, accounting for 73.8 per cent of the total office premiums. The number of Individual Life policies in force grew by 7.1 per cent to 4.9 million in 2001 when Hong Kong's population was approximately 6.8 million.

    At year-end, there were 31 920 insurance intermediaries, including 31 484 agents (of whom 1 957 are agency firms) and 436 brokers.

Insurance Authority

The Commissioner of Insurance, appointed by the Chief Executive as the Insurance Authority (IA), has the principal function (under the Insurance Companies Ordinance (ICO)) to regulate and supervise the insurance industry for the promotion of the general stability of the insurance industry and for the protection of existing and potential policy holders.

    The ICO, which prescribes a comprehensive regulatory framework for all classes of insurance business, has the two main objectives of ensuring the financial stability of all insurers authorised in Hong Kong and the fitness and propriety of their management. These objectives are achieved through the prescription of, inter alia, the minimum share capital and the solvency margin requirements, and the requirement for directors and controllers of insurers to be fit and proper persons.

    A general business insurer is also required to maintain assets in Hong Kong to meet the claims of Hong Kong policy holders. For life insurance business, a fully-fledged appointed actuary system has been implemented to ensure that the insurer would be able to meet its obligations.

    Prudential supervision of insurers is carried out mainly through examination of the financial statements, reports of actuaries and other returns submitted by insurers and regular on-site visits. The IA may take interventionary action against an insurer, if considered appropriate, to safeguard the interests of policy holders. These measures include the limitation of premium income, placing of assets in the IA's custody, assumption of control by a manager appointed by the IA or petitioning for the winding-up of the insurer.

    Insurance intermediaries have been brought under the regulation of the ICO since 1995. An insurance agent must be properly appointed by an insurer and an insurer is required to comply with the Code of Practice for the Administration of Insurance Agents in appointing and controlling its agents. An insurance broker must meet certain minimum requirements before he can be authorised.

    Self-regulatory measures are in place to strengthen the market discipline in the insurance industry. These measures, formulated by the insurance industry in consultation with the IA, include the adoption of a Code of Conduct for Insurers governing the writing of insurance contracts and insurance benefit illustration standards for life insurance policies.

    As a member of the International Association of Insurance Supervisors, Hong Kong endeavours to ensure that its supervisory standards are in line with the principles and standards developed by the association.

Recent Developments

The IA reviews from time to time the regulatory regime of the insurance sector, in the light of operational experience, market development and the international trends to ensure its effectiveness. In the process, it maintains close liaison with industry bodies and overseas regulators. In 2002, the IA issued a number of formal and draft guidelines with a view to further enhancement of the different aspects of the regulatory regime. For instance, the IA issued a Guidance Note on the Corporate Governance of Authorised Insurers in August 2002 (which will become effective in September 2003). The IA also issued a draft Guidance Note on Reinsurance with Related Companies in July 2002, to set out how such reinsurance will be considered as adequate by the IA and how the IA will assess the impact if such reinsurance is not considered adequate. The IA is revising the draft with a view to issuing the Guidance Note in 2003.

    To enhance the professionalism of insurance intermediaries, the Insurance Intermediaries Quality Assurance Scheme (IIQAS) was introduced in 2000. Under the scheme, all insurance intermediaries, their chief executives or responsible officers and technical representatives, unless otherwise exempted, are required to pass a qualifying examination before they can be registered or authorised. From January 1, they are also required to attend continuing professional development (CPD) programmes to ensure that the required standard of professionalism is maintained. The CPD requirements were refined by the IA in November, having regard to the operational experience since implementation and industry feedback. Moreover, in view of the increasing popularity of investment-linked insurance products in recent years, the examination requirement for investment-linked long-term insurance under the IIQAS was introduced in January.

    The existing self-regulatory system for insurance intermediaries has been in operation since 1995. In recent years, there have been rapid developments in the industry such as the growing numbers of insurance intermediaries and the increasing sophistication of insurance products. There is also a rising public expectation for better protection for the insured. The IA considers that there is a need to enhance the existing system. In 2002, the relevant self-regulatory organisations were consulted on possible improvements to the existing regulatory regime. The IA will discuss with the relevant bodies the specific improvement measures in this regard.

    In January, the Finance Committee of the Legislative Council approved the provision of a facility up to an amount of $10 billion in aggregate to cover direct insurers' liability arising from employees' compensation (EC) for death or injury caused by terrorist activities. The facility ensures that employers and employees will continue to enjoy EC insurance cover, despite the unavailability of the necessary reinsurance support in the market after the September 11, 2001, incidents. On June 24, the Motor Insurers' Bureau of Hong Kong set up a similar $200 million facility to cover third-party bodily injury or death claims, arising from an act of terrorism, under a motor insurance policy.

    The IA has launched an educational initiative since 2000 by publishing two educational booklets to enhance the public's understanding of the role of insurance intermediaries. I-lens, a quarterly publication to enhance the public knowledge and awareness of insurance matters, has been issued and a 24-hour enquiry hotline has also been set up. In addition, the IA published two pamphlets entitling Buying Insurance — What you need to know and Life Insurance Policy Replacement — What you need to know in 2001 and 2002, respectively.

    In December, the IA appointed a consultant to carry out a study on the feasibility of establishing an insurance policy holders' protection fund in Hong Kong. The first stage of the study is expected to be completed in 2003 and will be followed by public consultation on the findings.

Retirement Protection Schemes: Mandatory Provident Fund Schemes and
Occupational Retirement Schemes

Main Features

On December 1, 2000, the Mandatory Provident Fund (MPF) System was implemented to encourage the workforce to save and invest for their retirement protection. The system, which was formulated after extensive consultation, is a privately managed, employment-related mandatory system of provident fund schemes. Unless exempted, employees and self-employed persons aged between 18 and 65 are required to participate in MPF schemes.

    The MPF System provides for joint contributions by the employer and employee, each contributing 5 per cent of the employee's relevant income to a registered MPF trust scheme, subject to the maximum and minimum levels of income for contribution purposes. The accrued benefits are fully vested in the scheme members and can be transferred from scheme to scheme when employees change employment or cease to be employed. A self-employed person has to contribute 5 per cent of his or her relevant income. In normal circumstances, benefits must be preserved until the scheme member attains the retirement age of 65.

    By year-end, about 94 per cent of the employers, 96 per cent of the relevant employees and 81 per cent of the self-employed persons have enrolled in MPF schemes. The total MPF assets amounted to about $55 billion, with monthly MPF contributions amounting to some $2 billion.

    Unlike the compulsory MPF Schemes, occupational retirement schemes (ORSO schemes) registered under the Occupational Retirement Schemes Ordinance (ORSO) are voluntary schemes established by employers. The objective of the ORSO is to regulate such schemes through a registration system to ensure that they are properly administered and funded. All registered schemes must meet certain requirements, including asset separation, independent trusteeship, restricted investments, funding, independent audit, actuarial reviews, information disclosure and the submission of audited financial statements to the Registrar of Occupational Retirement Schemes.

    To tie in with the implementation of the MPF Schemes, ORSO schemes that fulfilled certain conditions were exempted from MPF requirements. Members of such schemes may choose to remain in the existing scheme or join a MPF scheme. At year-end, there were 5 782 MPF-exempted ORSO schemes covering over 500 000 employees.

Mandatory Provident Fund Schemes Authority

The Mandatory Provident Fund Schemes Authority (MPFA), which was set up in September 1998 under the Mandatory Provident Fund Schemes Ordinance (MPFSO), is tasked with the responsibility of regulating and supervising the MPF System and ensuring compliance with the MPFSO. Two statutory committees, the MPF Schemes Advisory Committee and the MPF Industry Schemes Committee, have been established to advise the MPFA on the overall operation of the MPFSO and the Industry Schemes, respectively. The MPF Schemes Appeal Board has also been set up under the MPFSO to hear appeals against the decisions of the MPFA.

    To ensure that the interests of MPF scheme members are protected, the MPFA closely monitors the operation of MPF trustees and other service providers, investigates complaints about non-compliance and takes enforcement actions accordingly. Proactive inspections are carried out at business premises to ensure compliance of employers in enrolling their employees in MPF schemes and making contributions. The MPFA also educates the public on the need for retirement protection and on the MPF System, with an emphasis on investor education. Some of the educational activities were held in conjunction with other bodies (e.g. the Hong Kong Investment Funds Association and labour unions).

    The MPFA also acts as the Registrar of Occupational Retirement Schemes.

Recent Developments

In order to further enhance the effectiveness and efficiency of the MPF System, the MPFA continues to review the MPF legislation in the light of operational experience. The Mandatory Provident Fund Schemes (Amendment) Ordinance 2002, containing amendments related to certain operational and technical issues of MPF schemes, was enacted in February 2002.

    As a new system affecting over two million employers, employees and service providers, the MPFA considers it necessary to review regularly the operational aspects of the MPF System to ensure that the system is efficient, effective and user-friendly. Towards this end, the MPFA established the MPF Schemes Operation Review Committee in August 2001. The Review Committee comprises representatives of employer and employee bodies, service providers, professional organisations, the Government and the MPFA. It completed the first phase of its work in end-2001 and proposed a number of legislative amendments, including setting up a mechanism to review the minimum and maximum levels of relevant income for the purpose of making MPF contributions and the adjustment of the minimum level of monthly income from $4,000 to $5,000. These proposals were incorporated into the Mandatory Provident Fund Schemes (Amendment) (No. 2) Ordinance 2002, enacted in July. The Review Committee has started the second phase of its work in 2002 and will continue to review the operation of the MPF System, including the investment regulation, in 2003.

    During the year, the MPFA also completed a review of the ORSO legislation. The proposed legislative amendments were being considered by the Government.