HKMA Outlines Three Levels of Enforcement

Hong Kong's banking regulator has outlined three levels of severity for supervisory actions on regulated entities, as part of an effort to enhance transparency around its risk-based approach to supervising the market. The Hong Kong Monetary ("HKMA") also made it clear that it holds banks' boards of directors and senior management responsible for having adequate systems and controls in place to avoid misconduct. 

The regulator recently revised its supervisory policy manual for banks that are also registered with the territory's securities regulator, the Securities and Futures Commission ("SFC"), to carry out activities regulated by the SFC. The two regulators cooperate on policing the market in Hong Kong and often refer cases to each other. While the ultimate responsibility for the regulation of intermediaries in the securities market rests with the SFC, the HKMA is the frontline supervisor for banks authorised to carry out regulated securities activities by the SFC, and is responsible for the day-to-day supervision of them. 

The revised module features a new section on the HKMA's enforcement approach for cases of misconduct by such entities, in which it outlines its risk-based supervisory approach and three levels of enforcement measures that it would consider. 

The first level of supervisory action is encouraging adoption of good practices, in which the HKMA would share good practices with the industry, and encourage banks which have not yet adopted such good practices to do so to strengthen their practices and controls. 

However, in cases where the HKMA identifies management, or systems and control deficiencies at banks, it would consider the second and the third level of supervisory action. 

The second level of supervisory action would be deployed where deficiencies in controls or practices are identified, the HKMA said. 

"Such deficiencies may include [banks'] controls or practices that do not meet the regulators' expected standards," it said. "To address such deficiencies, the HKMA would consider various supervisory actions according to the specific circumstances of each case."

Usually the bank concerned would have to take corrective action to rectify the problem. In cases where the deficiencies suggest systemic issues, the bank may be required to take more rigorous actions, such as to commission an independent review of the relevant functions and address the review findings, including addressing complaint handling procedures. The bank may also have to cease the business practices that have caused serious supervisory concerns. 

The third level of supervisory action is reserved for cases where the HKMA has found evidence of misconduct by a bank or its staff. 

"In this situation, the HKMA would consider referring the case to its enforcement department for possible enforcement, or other appropriate follow-up actions, including referring the case to the SFC for investigation or recommending the SFC to take appropriate disciplinary actions," the HKMA said.

The HKMA said its enforcement standards mirror those adopted by the SFC, with the overriding principles of its enforcement process aimed at ensuring fairness, integrity and legal compliance, and to observe due process. 

Ultimately, the HKMA said, a bank's board of directors and senior management bear the primary responsibility for putting in place sound controls and systems that are commensurate with its risk profile for properly managing the risks. They have the responsibility of protecting their customer interests, and are expected to play a proactive role in ensuring effective risk management and instilling customer-centric culture at the bank, the regulator said. 

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North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.