HONG KONG 2005

Hong Kong maintains a three-tier system of deposit-taking institutions — licensed banks, restricted licence banks and deposit-taking companies. They are collectively known as 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. Deposit-taking companies may take deposits of $100,000 or above with an original maturity of at least three months. Many deposit-taking companies are owned by, or otherwise associated with, licensed banks.

Hong Kong has one of the highest concentrations of banking institutions in the world. In December 2005, there were 133 licensed banks, 33 restricted licence banks and 33 deposit-taking companies, which included the operations of banks from 30 countries around the world. These 199 AIs maintained an extensive network of 1 298 local branches. In addition, there were 86 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 $4,068 billion and $2,313 billion respectively. The total assets of all AIs amounted to $7,248 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, which was launched in 1996, 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.

The US dollar RTGS system and euro RTGS system have also been operating since 2000 and 2003 respectively, allowing real-time settlement of transactions in these currencies, thereby reducing or eliminating settlement risk caused by any time gap. Thanks to the interface between the three RTGS systems, Hong Kong dollar/US dollar/euro foreign exchange transactions can be settled on a payment-versus-payment (PvP) basis.

The Central Moneymarkets Unit (CMU) Service, established in 1990, is operated by the HKMA to provide a clearing and custodian system for Exchange Fund Bills and Notes (EFBNs) and other private debt securities. The CMU system accepts both Hong Kong dollar and foreign currency denominated debt instruments. It has been fully integrated with interbank payment systems, and is linked up with international central securities depositories like Euroclear and Clearstream to enable overseas investors to trade CMU securities. It also has established links with the regional central securities depositories on the Mainland China and in Australia, New Zealand and the Republic of Korea.

Through its integration with the three RTGS systems in Hong Kong, the CMU enables members to settle Hong Kong dollar, US dollar and euro securities on a delivery-versus-payment (DvP) basis, thereby enhancing settlement efficiency and eliminating settlement risk. The interface also enables automatic intraday repo to provide intraday liquidity to participants in the RTGS systems.

The HKMA was established in April 1993 under the Exchange Fund (Amendment) Ordinance 1992.

Its 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; promote safety and stability of the banking system through the regulation of banking business, the business of taking deposits and the supervision of AIs and 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 that differ 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 authority seeks advice on policy matters routinely from the Banking Advisory Committee and the 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.

The Banking Ordinance provides the legal framework for banking supervision in Hong Kong. Under the ordinance, the HKMA is the licensing authority responsible for granting and revoking the authorisation 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. 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 on Banking Supervision.

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 focused on areas of higher risk at AIs.

On the international front, the authority continues to promote cooperation among central banks in the region, principally through the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP)⁴, whose activities cover supervisory liaison and cooperation, development of financial markets and infrastructure, and various areas of central bank operations. The HKMA continues to participate in various regional and international forums for banking supervisors.

In line with its policy of adhering closely to international regulatory standards, the HKMA is committed to adopting the new capital adequacy framework promulgated by the Basel Committee on Banking Supervision (commonly referred to as Basel II) from January 2007 in accordance with the committee timetable. In view of the complexity of Basel II, the HKMA has been working closely with the industry to ensure that the implementation approach is both practicable and appropriate for Hong Kong. To this end, it has been issuing detailed implementation proposals since August 2004 for public consultation. The proposals were well received by the banking industry and the policy setting stage was largely completed in 2005. The Banking (Amendment) Ordinance 2005 was enacted on July 6, 2005 to provide for the implementation of Basel II requirements in Hong Kong through capital and disclosure rules to be issued by the Monetary Authority under the Ordinance. Recognising the importance of cross-border supervisory cooperation to the implementation of Basel II, the HKMA will continue to interact with overseas supervisors through the exchange of views and experience on relevant practical issues.

The HKMA continued with its efforts to enhance the supervisory framework for the prevention of money laundering and terrorist financing. The revised Supplement to the existing guideline on Prevention of Money Laundering, together with a set of Interpretative Notes, issued in June 2004 have fully incorporated the international standards in the area.

The HKMA continued to work closely with the SFC on the implementation of the new securities regulatory framework, which aims, among other things, to uphold a level playing field between banks and non-bank financial intermediaries in the securities market. In 2005, the two regulators held two meetings in accordance with the arrangements set out in the Memorandum of Understanding (MOU) between them. During the year, the HKMA continued to perform its enforcement function under the securities regulatory regime. In 2005, the Banking Ordinance was amended to empower the HKMA to disclose relevant details of any disciplinary action taken. The HKMA's enforcement approach remains consistent with that of the SFC, which ensures that action taken against individuals and executive officers of registered institutions uses the same yardstick as that for licensed individuals who are supervised by the SFC.

The HKMA continued to improve the banking sector infrastructure to further strengthen the stability of the banking system. Following the enactment of the Deposit Protection Scheme Ordinance in 2004, the Hong Kong Deposit Protection Board is preparing for the launch of the scheme. It is expected that the scheme will start providing deposit protection in the second half of 2006.

The launch of two-factor authentication for Internet banking in Hong Kong was officially announced in a press conference jointly held by the HKMA, the Hong Kong Association of Banks (HKAB) and the Hong Kong Police Force on May 30. Hong Kong is one of the first jurisdictions among the developed financial markets to establish such a regulatory requirement, which contributes to the safety of Internet banking. By end of the year, 21 AIs had introduced two-factor authentication and around 940 000 customers had registered for the service. A multi-channel consumer education programme was also launched by the HKMA, HKAB and the Police Force in late May to promote public awareness of two-factor authentication. To cater for visually impaired customers, alternative solutions (including security tokens with voice output and a one-time password delivered through a dedicated phone-banking hotline) have been identified by AIs. The AIs concerned plan to test and roll out services for the visually impaired in the first half of 2006.

The HKMA issued a circular to AIs in November setting out recommended measures should there be an influenza pandemic. An industry task force has been established by the authority and HKAB to monitor developments in the event of an outbreak and review and recommend appropriate business continuity planning practices for the banking sector.

One of the functions of the HKMA is to promote and encourage high standards of conduct and sound and prudent business practices among AIs, primarily by way of the Code of Banking Practice. The code is issued by the industry associations and endorsed by the HKMA. It sets out the minimum standards to be followed by AIs in their dealings with personal customers. The code is reviewed from time to time by the Code of Banking Practice Committee, which is convened by the industry associations.

The Clearing and Settlement Systems Ordinance, which became effective in November 2004, empowers the HKMA to designate and oversee clearing and settlement systems that are material to the monetary or financial stability of Hong Kong or to the functioning of Hong Kong as an international financial centre. Five clearing and settlement systems, including the CMU and Hong Kong dollar Clearing House Automated Transfer System (CHATS), Continuous Linked Settlement System, US dollar CHATS and euro CHATS, have been designated. Each system was issued a certificate of finality, which provides statutory backing to the finality of settlement for transactions made through the system. The HKMA completed its first-year oversight activities for the designated systems in 2005 and found they were all in compliance with the ordinance.

The securities market in Hong Kong is operated by the SEHK and futures market, the Hong Kong Futures Exchange Limited (HKFE), both being wholly owned subsidiaries of the Hong Kong Exchanges and Clearing Limited (HKEx). At year-end, there were 468 exchange participants on the SEHK and 137 exchange participants on the HKFE.

By the end of 2005, there were 1 135 companies listed on the main board and the Growth Enterprises Market (GEM) of the SEHK with a total market capitalisation of about $8,180 billion, raising an aggregate of $301 billion within the year.

New products continued to be launched during the year. The FTSE/Xinhua China 25 Index Futures and Options were introduced in May 2005. Two exchange-traded funds (ETFs) under the Asian Bond Fund 2 (ABF2) — the ABF Hong Kong Bond Index Fund and the ABF Pan Asia Bond Index Fund were listed on SEHK in June and July respectively. Six additional classes of stock options and futures based on individual stocks were launched during the year. In addition, the first REIT, the Link REIT, was listed on the SEHK in November, followed by two other REITs. Meanwhile, the SFC approved HKEx's proposal to introduce callable bull/bear contracts in late 2005. HKEx is preparing for their launch in 2006.

The SEHK operates the Third Generation Automatic Order Matching and Execution System (AMS/3) for securities trading. AMS/3 provides an electronic platform for trading equities, debt securities, exchange-traded funds, unit trusts/mutual funds, derivative warrants and equity linked instruments. It also provides facilities and investor access channels that make securities trading more accessible. The system has maintained a 100 per cent uptime record for five consecutive years since its launch in October 2000.

The Hong Kong Securities Clearing Company Limited (HKSCC), a wholly owned subsidiary of the HKEx, operates the third generation of the Central Clearing and Settlement System (CCASS/3) for clearing and settlement of securities transactions concluded at the SEHK. The CCASS/3 is an automated book-entry system that operates on an open architecture. In addition to brokers and custodians, certain CCASS services are also available to retail investors. For example, investors may open Investor Participant Accounts with the clearing company to keep their securities in CCASS. The CCASS/3 network is connected to FinNet, which is built to provide a single connection to access major financial services in Hong Kong and improve straight-through processing of financial transactions.

The HKFE operates the Hong Kong Futures Automated Trading System for the trading of futures and options contracts and the Derivatives Clearing and Settlement System (DCASS) for the clearing and settlement of such contracts. DCASS shares the same common database and system infrastructure as the trading system. The implementation of DCASS has not only harmonised clearing arrangements for the derivatives market, but also improved the operational efficiency from trading to settlement.

At year-end, there were eight automated trading services providers authorised by the SFC under section 95 of the Securities and Futures Ordinance (SFO) to provide automated trading services in Hong Kong. Automated trading services are services provided by means of electronic facilities, not being facilities provided by a recognised exchange company or a recognised clearing house, to transact or settle transactions in securities or futures contracts.

The SFC was established in May 1989 following the enactment of the Securities and Futures Commission Ordinance (SFCO). The regulatory objectives of the SFC, as set out in the SFO that came into effect on April 1, 2003, are:

Established as an autonomous statutory body, the SFC is responsible for regulating the securities and futures markets in Hong Kong. At year-end, the SFC had a governing body of 11 directors (four of them executive and seven non-executive) appointed by the Chief Executive. The Government is not involved in the day-to-day regulation of the securities and futures industry.

The SFC is funded by the market. No government funding has been sought since 1993. The revised estimate of its operating expenditure budget for 2005-06 (including depreciation) was $509 million.

The SFC seeks advice on policy matters from its advisory committee, which is made up of three executive directors of the SFC and 12 independent members. The independent members are appointed by the Chief Executive and are broad-based and representative of market users.

The exercise of powers by the SFC is subject to a range of checks and balances. For instance, a wide range of SFC decisions are subject to appeal and appeals are made to the independent Securities and Futures Appeals Tribunal chaired by a High Court judge. In November 2000, the Process Review Panel for the SFC (PRP) was established by the Chief Executive to review and advise the SFC on the adequacy of the its internal procedures and operational guidelines governing the actions and operational decisions it takes in the performance of its regulatory functions. Members of the PRP are appointed by the Chief Executive. In June 2005, the Government published the PRP's fourth annual report, which concluded that the SFC had generally followed its internal procedures in handling cases under review.

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; listing regulation under the dual filing system for IPO applicants and issuers; supervision of markets including the exchanges and clearing houses; enforcement of securities laws and rules and investor education.

As at year-end, there were 25 210 licensed persons, including securities brokerage firms, futures dealers, and securities margin financiers, as well as their representatives, and 82 registered institutions, such as banks, engaging in regulated activities like dealing and advising on securities and futures.

The SFC considers investor education the first important step to investor protection. In 2005, the SFC launched various focused educational campaigns. To raise investors' awareness of analysts' potential conflicts of interest, the SFC produced a 10-episode radio programme, The Star Analysts' Fans Family. It also issued new brochures to help investors to protect themselves from the mis-selling of financial products. The SFC also stepped up its educational efforts for derivative warrants by enhancing its online educational resources and publishing a series of articles in newspapers. It also organised a story competition in which investors could share their experience of trading derivative warrants.

The SFC continued to organise outreach activities targeting different audiences. It held a series of workshops for vocational teachers and secondary school teachers of economics, commerce and related subjects as well as talks for secondary students. The SFC also expanded its collaboration with universities. The response to these activities was overwhelming — 8 300 people attended the 72 sessions.

During 2005, the SFC distributed about a quarter of a million investor brochures written in plain language and VCDs through various channels. Topics featured included REITs, fees and charges on securities-related services and questions to ask about investment advisory services. It also contributed articles to newspapers to disseminate educational messages.

Following the revamp in 2004, the content of the SFC's investor portal — now renamed InvestEd with a new URL: www.invested.hk — was further strengthened in 2005 with new online games on derivative warrants, hedge funds and IPO investing. The Alert List, which warns investors against boiler rooms, scam websites and phishing scams, was also enhanced with new user-friendly layout and search function. The monthly Dr Wise column continues to discuss key investment and regulatory issues.

In the meantime, the SFC remained active in external relations and international activities. In 2005, it signed Letters of Intent (LOIs) with the Securities and Exchange Commission of Sri Lanka, the Securities and Exchange Board of India, and the Financial Services Commission of Guernsey, Malaysia's Securities Commission and Jersey's Financial Services Commission. The LOIs aimed to enhance cooperation with a view to working towards the mutual recognition of investment products authorised in the signatories' jurisdictions for cross-border distribution.

In addition, the SFC signed a Statement of Intent with the Financial Services Agency of Japan on cooperation, consultation and the exchange of information. It also exchanged Side Letters with the Monetary Authority of Macao under an existing MOU on mutual assistance and exchange of information.

The SFC continued to actively participate in the work of the International Organisation of Securities Commissions (IOSCO). In April 2005, it participated in the 30th Annual Conference of the IOSCO in Colombo, Sri Lanka. The Colombo Annual Conference was a landmark meeting during which the IOSCO adopted a timetable to be complied by all member regulators. By the benchmark date on 1 January 2010, all member regulators should have been accepted as signatories under the IOSCO MOU, or have expressed a commitment to seek legal authority in enabling them to become signatories.

The Insider Dealing Tribunal was an important feature of the regulatory framework for the securities market in Hong Kong. Established under the repealed Securities (Insider Dealing) Ordinance, the tribunal looked into cases involving suspected insider dealing referred to it by the Financial Secretary. By year-end, it had concluded a total of 20 cases since it was launched in 1994.

When the SFO came into force on April 1, 2003, the Insider Dealing Tribunal was replaced by the Market Misconduct Tribunal (MMT), which covers five other types of market misconduct (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. The MMT decides cases on the civil standard of proof and can impose a range of civil sanctions, such as ordering the disgorgement of profits, banning a person from trading in SFC regulated financial products and disqualifying a person from directorship or management of a company.

The MMT inquires into market misconduct that occurred on or after April 1, 2003. The Insider Dealing Tribunal continues in existence to inquire into cases of insider dealing that occurred before April 1, 2003.

As an alternative to civil proceedings, market misconduct is subject to criminal prosecution, which, if successful, may result in more severe penalties on conviction, including up to 10 years' imprisonment or a fine of up to $10 million.

Following market consultation, the Code on Unit Trusts and Mutual Funds was amended in April 2005 to allow SFC-authorised schemes to invest in REITs listed on a stock exchange anywhere in the world. This helps broaden the investment choice of SFC-authorised schemes.

In June 2005, the SFC amended the Code on REITs to allow investment of SFC-authorised REITs in real estates outside Hong Kong. The Practice Note on Overseas Investments by SFC-authorised REITs was published to provide guidance in this respect.

In December 2005, the SFC announced the requirement to adopt relevant disclosure provisions substantially equivalent to those in Part XV of the SFO, which are applicable to listed corporations, in trust deeds of SFC-authorised REITs. The policy would enhance transparency and the accessibility of information regarding interests in REITs. With effect from February 16, 2006, holders of REIT units will be required to submit to the REIT manager and HKEx notification of interests upon the attainment of the 5 per cent disclosure threshold, and other changes in accordance with the provisions of relevant trust deeds.

In September 2005, the SFC released the consultation conclusions on the Review of the Hedge Fund Guidelines and the revised guidelines came into effect at the end of the month.

The SFC continued to monitor the latest developments in the Undertakings for Collective Investment in Transferable Securities (UCITS) III, the regulations issued by the European Union Commission governing funds domiciled in the EU states, and maintained its dialogue with overseas regulators and market practitioners. On March 31, 2005, the SFC issued interim measures to facilitate the processing of UCITS III fund applications in Hong Kong. By the end of the year it had authorised 1 016 UCITS III funds, or over 88 per cent of the applications received.

The Office of Commissioner of Insurance and the SFC concluded a MOU to promote mutual assistance and the exchange of information between the two regulators, including the fostering of closer cooperation on regulatory effort in the regulation of insurance-related investment products.

The SFC worked closely with the HKMA and HKEx to facilitate the launch of two ETFs, namely the ABF Hong Kong Bond Index Fund and the ABF Pan Asia Bond Index Fund, under the ABF2 project. The ABF2 framework envisages eight single market bond index tracking funds and a pan-Asia bond index tracking fund investing in sovereign and quasi-sovereign local currency bonds. The two ETFs, being the first bond ETFs launched in Asia, were authorised by the SFC and listed on SEHK in June and July 2005.

In May, the SFC approved HKEx's rule amendments on the reduction of minimum spreads for shares trading above $30. The amendments sought to enhance the competitiveness, efficiency and liquidity of the market. The new trading spreads came into effect on July 4. In November, the SFC approved HKEx's proposal to launch callable bull/bear contracts. HKEx started to brief market participants and introduce the product details to issuers the following month, in preparation for a product launch later in 2006.

In light of the concerns of the public and the industry about the derivative warrants market, the SFC started a review of the regulatory framework of derivative warrants and released a report in November. The report reviewed market characteristics and practices, assessed the impact of derivative warrant activities on stock market stability and investor education needs. It also identified areas of regulation that could be strengthened and proposed a six-point plan to improve market operations.

The SFC carried out a consultation on possible reforms to the prospectus regime in the Companies Ordinance (CO) in August. The consultation was the final phase of a three-phase exercise to review the existing regulatory framework for offers of shares and debentures. The SFC's consultation paper contained 21 wide-ranging proposals such as unifying the offering regimes for all investments currently regulated under the CO and the SFO, extending prospectus liability to sponsors of a public offering and shortening prospectuses by allowing information to be incorporated by reference. The consultation ended in December and the SFC is analysing the submissions received.

In August, the SFC issued a consultation conclusions paper on the review of the Codes on Takeovers and Mergers and Share Repurchases. The main revisions that took effect on October 1, 2005 included new provisions barring 'low-ball' offers, new restrictions to prevent an existing board from taking frustrating action against a successful offeror, a broad framework for dealing with telecom mergers and changes to shorten the document-vetting process. The remaining revisions under Notes 1 and 2 to Rule 8 provide that a copy of each document required to be displayed under Note 1 also be provided in electronic form for display on the SFC website. These revisions were to become effective on January 1, 2006 and apply to transactions announced on or after that date.

As part of its efforts to raise the standards of intermediaries, the SFC consulted the public in June on a proposed set of specific entry criteria for sponsors and ongoing compliance obligations on sponsors. It is the second part of a two-stage initiative adopted by the SFC and HKEx to raise the overall sponsor standards. HKEx concluded the first stage with Listing Rules amendments and the introduction of the Practice Notes on Due Diligence which came into effect on January 1, 2005. On completion of the second stage, the SFC will administer and enforce a specific regulatory regime on sponsors. The consultation ended in August 2005.

In April, the SFC consulted the public on proposed revisions to the Prevention of Money Laundering and Terrorist Financing Guidance Note in order to bring Hong Kong's regulatory requirements in line with international standards set by the Financial Action Task Force on Money Laundering and the IOSCO and to give guidance on areas of practical application. The consultation conclusions were published in October. The Revised Guidance Note is to become effective on April 30, 2006.

The guidelines to address analyst conflicts of interest came into effect in April 2005. The guidelines aimed to remove, reduce and manage conflicts of interest faced by analysts and their firms. The SFC monitors licensees' compliance with the requirements.

In 2005, the SFC continued to focus its enforcement resources on fighting corporate misgovernance, market misconduct and intermediaries who are dishonest or put clients at risk. By the end of the year, the number of outstanding investigations of listed company had increased to 16 from 14 at the end of 2004. During the year, the SFC successfully prosecuted five entities for market manipulation and false or misleading disclosure and summonses were issued to an additional 14 entities but those cases were not concluded by year-end. In the previous year, there were 10 successful prosecutions and four outstanding cases. There were 29 referrals to the Police and the Independent Commission Against Corruption (ICAC).

At year-end, there were 175 authorised insurers, 89 of which were incorporated in Hong Kong while the remaining 86 were incorporated on the Mainland and in 20 overseas countries, with the United States taking the lead.

The total gross premiums of the insurance industry reached $122 billion in 2004, representing 19.5 per cent growth over 2003. However, gross premiums of the general insurance sector decreased by 5.2 per cent to $23.5 billion in 2004, with the major business lines of general liability, property damage and motor vehicles registering premium decline. Underwriting performance still improved from a profit of $1.34 billion in 2003 to $1.95 billion in 2004.

The long-term insurance business continued to attain double-digit annual growth from 1991 to 2004, with office premiums increasing by 27.4 per cent to $98.4 billion in 2004. The individual life business remained dominant with the office premiums in force of $82.2 billion, accounting for 83.6 per cent of the total office premiums. The number of individual life policies in force grew by 7.9 per cent to 6 million in 2004.

At year-end, there were 29 163 insurance intermediaries, including 27 519 agents (of whom 1 644 were agency firms) and 471 brokers.

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 to promote its general stability and protect 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 policyholders. For life insurance business, a fully fledged appointed actuary system has been implemented to ensure that the insurer is 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 appropriate action against an insurer, under the ICO, to safeguard the interests of policyholders. 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 regulated under 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 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 (IAIS), Hong Kong endeavours to ensure that its supervisory standards are in line with the principles and standards developed by the association. It has also established an Insurance Advisory Committee, as directed by the ICO, with representatives from the industry as members.

The IA reviews the regulatory regime of the insurance sector from time to time to check operational experience, market development and international trends. In the process, it maintains a close liaison with industry bodies and overseas regulators. The IA also issued a Revised Guidance Note on Prevention of Money Laundering and Terrorist Financing (GN3) in July and a Revised Guidance Note on Actuarial Review of Insurance Liabilities in respect of Employees' Compensation and Motor Insurance Businesses (GN9) in September to tighten up the control requirements.

The IA oversees the self-regulatory system for insurance intermediaries and carries out regular reviews to ensure its effectiveness. In 2005, the relevant self-regulatory organisations introduced measures to strengthen on-site inspection of insurance intermediaries and a revised Customer Protection Declaration Form to better inform life policyholders of the implications of a policy replacement. The IA will continue to liaise with the industry and parties concerned to enhance the regulatory system for insurance intermediaries and further protect the interests of the insuring public.

The IA, Tourism Commission, the Hong Kong Federation of Insurers and the Travel Industry Council of Hong Kong launched a joint publicity campaign in March to encourage members of the public to take out travel insurance. The IA also published an educational pamphlet 'Travel Insurance — What You Need to Know' to provide useful tips to travel insurance policyholders.

In the light of international regulatory trends and developments in the insurance industry, the Government is reviewing the institutional set-up of the IA. The review entails a study on turning the IA into a regulatory agency independent of the Government.

The IA has commissioned a consultancy study on the need and feasibility of establishing Policyholders' Protection Funds (PPFs) in Hong Kong. Stage 1 of the study comprises a review of the existing regulatory regime and a feasibility study on establishing PPFs. The appointed consultant is working on the final report for Stage 1 for consideration by the Government, which keeps an open mind on the matter.

The IA commissioned another consultancy study in September 2003 to examine the need for enhancing the supervisory framework of the assets of long-term business insurers. The study focuses on the appropriate framework for asset valuation and the need for a mechanism that better safeguards the interest of Hong Kong policyholders in the event of failures of long-term insurers. The first stage of the study includes a review of the existing regulatory framework as well as international practice. Stakeholders will be consulted in the process.

The IA and the China Insurance Regulatory Commission entered into a cooperative agreement on insurance supervision in 2004 to promote mutual assistance and the exchange of information. The IA also regularly attends joint meetings of the insurance regulators of Guangzhou, Hong Kong, Macao and Shenzhen to discuss issues of common interest.

On December 1, 2000, the MPF System was implemented to help encourage the workforce to save and invest for their retirement. It is a privately managed, employment-related mandatory system of provident fund schemes. Unless exempted, employees and self-employed people aged between 18 and 65 are required to join MPF schemes.

The employer and employee are each required to contribute 5 per cent of the employee's relevant income to a registered MPF 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 five 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, 98.2 per cent of employers (about 226 500), 97.4 per cent of relevant employees (1 974 400) and 77.6 per cent of self-employed persons (288 000) had enrolled in MPF schemes. Total MPF assets amounted to about $151.36 billion, with monthly MPF contributions amounting to around $2.1 billion.

Unlike the compulsory MPF schemes, occupational retirement schemes registered under the Occupational Retirement Schemes Ordinance are voluntary schemes established by employers. The objective of the ordinance 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 system, schemes registered under the ordinance that fulfilled certain conditions were exempted from MPF requirements. Members of such schemes may choose to remain in the existing scheme or join an MPF scheme. At year-end, there were 5 132 MPF-exempted occupational retirement schemes covering over 500 000 employees.

Established in September 1998 under the Mandatory Provident Fund Schemes Ordinance, the Mandatory Provident Fund Schemes Authority (MPFA) is responsible for regulating and supervising the MPF system and ensuring compliance with the ordinance. 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 the MPF system, with an emphasis on investor education.

The MPFA is also the Registrar of Occupational Retirement Schemes.

To enhance the effectiveness and efficiency of the MPF system, the MPFA reviews the MPF legislation constantly in the light of operational experience. A number of amendments to the legislation have been introduced since the implementation of the MPF system. The Administration will introduce proposed amendments related to investment regulations into the Legislative Council in 2005-06.

The MPFA issued a Code on Disclosure for MPF Investment Funds to improve the disclosure of information on fees and charges and performance of MPF funds in June 2004. The objective is to enhance transparency and to enable scheme members to make informed investment decisions. The MPFA also published a set of Compliance Standards in July 2005 to assist approved MPF trustees to establish a framework for the rigorous monitoring of their compliance with statutory duties and responsibilities.


⁴	The EMEAP Group comprises 11 central banks and monetary authorities in the East Asia and Pacific region: Reserve Bank of Australia, People掇 Bank of China, Hong Kong Monetary Authority, Bank Indonesia, Bank of Japan, Bank of Korea, Bank Negara Malaysia, Reserve Bank of New Zealand, Bangko Sentral ng Pilipinas, Monetary Authority of Singapore and Bank of Thailand.