LegCo Paper No. CB(1) 2035/95-96(01)
Paper for the Bills Committee
on the Banking (Amendment) Bill 1996
Further Information and
Revised Committee Stage Amendments
This paper provides further information on multi-purpose stored value cards and money brokers and sets out the revised Committee Stage Amendments (CSAs) to the Banking (Amendment) Bill 1996 (the Bill).
2. At the Bills Committee meetings held on 17 and 18 July 1996, Members requested for further details on the following areas -
- the nature of multi-purpose cards, their analogy with banknotes or deposits, the regulatory concerns on such cards, and the maximum limits on the amount stored on such cards in other countries;
- the businesses being undertaken by deposit-taking companies (DTCs) and the regulatory requirements;
- the long term implications of electronic money on the monetary system; and
- the role of money brokers, the effect of the proposed regulation and the reason why some requirements are set out in authorization conditions rather than subsidiary legislation.
3. We have compiled at Annexes 1-4 four notes which set out detailed explanation on the above areas for Members information.
Revised Committee Stage Amendments
4. Taking account of the comments made by Members and further comments from the electronic brokers, we have proposed further CSAs to the Bill. A copy of the revised CSAs is at Annex 5.
5. The further revisions made to the CSAs are as follows -
- Clause 6 - Section 15(3) - it was agreed at the last Bills Committee meeting that a special purpose vehicle for issuing or facilitating the issue of multi-purpose cards should only be authorized as a DTC. Section 15(3)(a) has been amended to this effect;
- Clause 23 - Second Schedule - The fee for approval and renewal of approval for money brokers is proposed at the level of $44,800. This reflects the likely reality that the amount of work in approving and supervising a money broker would be more than that applicable to a local representative office but substantially less than that for a DTC; and
- Clause 24 - Eleventh Schedule - Under paragraph 1(4) of the Seventh Schedule, in relation to an institution incorporated outside Hong Kong applying to be an authorized institution, the MA may regard himself as satisfied with respect to any matter relating to the criteria where the relevant banking supervisory authority informs the MA that it is satisfied in relation to that matter. It is proposed that a similar provision should be included in the Eleventh Schedule so that the MA may rely on the opinion of a relevant overseas supervisor of a money broker in determining whether the money broker has satisfied any of the criteria set out in that Schedule.
Hong Kong Monetary Authority
Nature of Multi-Purpose Cards and the Rationale for Regulation
In response to comments made by Members, this note explains -
- the analogy of multi-purpose stored value card (multi-purpose cards) with banknotes in some cases, and with deposits in others;
- the rationale for the imposition of a regulatory regime for the issue of multi-purpose cards; and
- the maximum limits on the amount stored on stored value cards in other countries.
Analogy of multi-purpose cards with bank notes or deposits
2. Briefly, a stored value card is an instrument which contains prepaid monetary value stored in a magnetic strip or an electronic device embedded onto the card. A multi-purpose card allows consumers to use a single card for an unlimited range of purchases at unlimited locations. Accordingly, it represents "generally accepted purchasing power" and thus an alternative payment instrument to paper currency or to current accounts. There are, however, some variants of multi-purpose cards whose usage is more limited in scope.
3. When making purchases, customers pass their cards through a merchant's point of sale terminal. No credit check or signature is needed. Funds are deducted directly from the cards and transferred to the merchant's terminal or card. Merchants can transfer the value of accumulated transactions to their bank accounts by specially equipped telephone as frequently as they choose. When the value on the card is spent, consumers may be able to load additional funds from their accounts to the card at an ATM or a specially equipped telephone.
4. There are two major multi-purpose card schemes being developed or launched: the Mondex and VisaCash systems. These two systems are based on two different concepts: the Mondex system is akin to bank notes while the VisaCash system is similar to electronic cheques. Both however involve the same principle of the "issue" of electronic value stored in cards in return for an undertaking by the issuer to make good claims on the issuer by those who have accepted the electronic value as payment for goods and services.
5. Under the Mondex system, Mondex value is originated by an "originator" in the same way as conventional bank notes are issued by the note issuing bank. The issue of Mondex value creates new liabilities on the part of the originator (in the same way as the issuing of banknotes creates new liabilities on the part of the note-issuing bank). Member banks participating in the Mondex scheme may "purchase" Mondex value from the originator (in the same way as they would draw bank notes from the note-issuing bank). Customers of member banks may in turn draw Mondex value via a debit to their deposit account similar to cash withdrawals. Mondex value, like bank notes, may be freely transferred between cardholders and between cardholder and merchant without going through a clearing system. (Appendix 1 illustrates graphically the analogy of Mondex value with banknotes.) Although the security of the Mondex system depends partly on the various member banks following proper risk management procedures, it rests ultimately on the credit worthiness of the institution which "originates" the Mondex value (i.e. the equivalent of the note-issuing bank).
6. On the other hand, the VisaCash system is similar to electronic cheques (except that it does not depend on a link to a chequing account). There is no central originator and the member banks themselves originate the value and sell it to customers. Payments made by the VisaCash system are cleared between the participating banks through the VisaCash clearing and administration system (in the same way as the cheque clearing system). There is no cardholder to cardholder transfer in the VisaCash system (which is a major distinction from Mondex). The issue of electronic value under the VisaCash system simply involves a change from deposit liability to stored value liability in the balance sheet of the issuing bank (in the same way as a transfer from saving account to cheque account) which does not affect its level of overall liability (Appendix 2 illustrates graphically the analogy of VisaCash with cheques).
Rationale for regulating the issue of multi-purpose cards now
7. The HKMA has reviewed the implications of multi-purpose cards and concluded that the issue of such instruments should be regulated for the following reasons -
- the money received by the issuer of multi-purpose cards is akin to the taking of a deposit (as illustrated above in the case of VisaCash), thus the reasons which justify limiting deposit-taking to authorized institutions, i.e. protection of depositors, also apply to the issue of multi-purpose cards;
- alternatively, the creation of value to be stored in certain types of multi-purpose cards is very similar to the issue of bank notes (as illustrated above in the case of Mondex). The issue of conventional bank notes, and the backing for these, are subject to careful controls and it is logical that similar safeguards should apply to the creation of "electronic" bank notes;
- multi-purpose cards represent a new payment system and the default of an issuer could disrupt financial system stability if the cards are very widely used. A reduction in confidence in the functionality and integrity of a widely used multi-purpose card system caused by, for example, default of the issuer or massive forgery, could have contagion effects on other prepaid card systems resulting in a threat to the stability of the payment system. There could be a run on card-issuers in the same way as there can be a run on banks. Accordingly, regulations should be introduced to ensure the soundness of the issuer and the card. In particular, it is necessary to ensure that there is sufficient backing for the value stored on cards to ensure that the issuer can always meet its liabilities to merchants and consumers; and
- the importance of security for the multi-purpose card systems (for example, to prevent forgery) and the potential of multi-purpose cards being exploited for money laundering purposes support restricting the issue of multi-purpose cards to regulated entities. The advent of multi-purpose cards may create a convenient vehicle for money launderers to transport and transfer money without having to carry a huge bulk of cash. It is therefore important that there are regulations requiring card issuers to put in place adequate anti-money laundering procedures, for example, by having an audit trail, a limit on the amount that can be transferred to and from the card, linking the card to specific bank accounts for the purpose of downloading and off-loading of value and monitoring the behaviour of card transactions and reporting any suspicious activities.
- the regulatory inclination of other overseas countries including Singapore and UK, and the recommendation of the European Monetary Institute (EMI) is that the issue of multi-purpose cards should be restricted to authorized financial institutions. The European countries generally subscribe to the EMI recommendation. Some rely on existing banking legislation (on the basis that the issue of multi-purpose cards amounts to deposit-taking or is part of "banking business") to restrict the issue of multi-purpose cards to credit institutions. Several countries are actively considering the introduction of legislation to regulate the issue of multi-purpose cards. This includes Germany which plans to submit draft legislation to their Parliament shortly, proposing that issuers of multi-purpose cards should be covered by the banking laws to reduce the risk of fraud and maintain the integrity of the payment systems. (The German system is very similar to that proposed for Hong Kong, although the two schemes have been devised entirely separately.)
8. The HKMA has considered whether it might be possible to rely on existing restrictions in the Banking Ordinance to limit the issue of multi-purpose cards to authorized institutions. However, our legal advice is that it is not clear that the storing of value on a card would in all cases amount to the "taking of deposits" as defined in the Banking Ordinance. It is considered therefore that amendments to the Ordinance are required to bring the issue of multi-purpose cards clearly within its scope. However, this does not mean that full-scale regulation is required for every type of multi-purpose card. The legislation is intended to give the HKMA the opportunity to deal with the various types of scheme in a flexible manner.
9. As to whether it is appropriate to regulate now or later when the technology is more mature and the market is more developed, the HKMA has taken the view that the new legislation should be introduced now because -
- the potential impact of multi-purpose cards on the payment system may be greater in Hong Kong than in other major financial centres, such as the US or UK, which have a much larger economy than Hong Kong. It is considered therefore that a more proactive approach in regulation is needed to ensure that the integrity and stability of our payment system would not be affected by uncontrolled proliferation of multi-purpose cards;
- the issue of, and backing for banknotes, is tightly controlled in Hong Kong, and it would be inconsistent with this if the electronic equivalent of banknotes was not subject to some form of regulation;
- as argued by the 1994 EMI Report, we should not wait-and-see because heavy investments are likely to be made in this field, and it would be very difficult in future to modify developments which are later found to be inappropriate; and
- if a wait-and-see approach is adopted, there would be no mechanism for the time being to prevent persons who are not fit and proper (such as those who do not have high quality in terms of financial soundness, integrity and risk management) from issuing multi-purpose stored value cards.
Maximum limit of amount stored on stored value cards in other countries
10. As far as we are aware, the only country which has proposed a maximum limit of amount on stored value cards for the purpose of exemption from certain regulatory requirements is the US. The Federal Reserve is seeking public comments on the proposal for applying part of Regulation E (which implements the Electronic Fund Transfer Act), such as appropriate disclosure, to multi-purpose cards. In this context, the Federal Reserve also proposes that there should be a complete exemption from Regulation E for stored value cards which can store a maximum value of up to US$100. It should however be noted that Regulation E is only concerned with consumer issues such as limitation on consumer's liability for unauthorized electronic withdrawals, procedures for resolving errors, disclosures, and provision of terminal receipts and account statements.
11. In other jurisdictions (such as UK, Singapore, Australia and Japan), we are not aware that any such limits have been set. However, the principle that the amount of value to be stored in the card might be one of the factors to be taken into account in deciding how it should be regulated seems to be clearly established (e.g. in the work undertaken by the G10 central banks on the subject). In particular, it appears that in Germany it has been proposed that the provider of a "smaller card system" in which there are upper limits on the stored value would be exempted from a number of supervisory requirements (but would have to comply with disclosure requirements and audit and inspection). But we do not yet know what the upper limit(s) will be.
Hong Kong Monetary Authority
Authorization of a Special Purpose Vehicle as a Deposit-taking Company for the Issue of Multi-purpose Cards
At the Bills Committee meetings on 17 and 18 July 1996, Members suggested that the authorization of a special purpose vehicle, which only issues multi-purpose cards and does not take deposits, as a deposit-taking company (DTC) might confuse the public on the role of DTCs. This note explains why such confusion should not arise and the regulatory requirements for such DTCs.
Business Nature of DTCs
2. Under the three-tier authorization system introduced in 1981, DTCs are restricted to taking deposits over $100,000 and with maturity of over three months. Under this deposit-taking restriction, DTCs are not able to take "retail deposits" from the public.
3. According to a survey recently undertaken for the purpose of the review of the three-tier system, the source of funding of most DTCs comes mainly from interbank market, deposits from related companies or parent bank, or their own capital base. Indeed, the deposits taken by DTCs comprise only 0.58% of all HK dollar deposits. A number of DTCs do not take any customers' deposits on a regular basis (although they may find it useful to have the ability to do so at times). Having regard to this, there should be no confusion if the special purpose vehicle set up principally for the issue of multi-purpose cards is authorized as a DTC, but does not take public deposits (except as an incident to its role as a card issuer).
4. The business activities of DTCs are very diverse. Over the years, they have developed a niche for businesses that cater for special market needs. According to the above mentioned survey, the main businesses conducted by DTCs include loans and advances (mainly commercial loans, trade finance and consumer finance), asset based financing (mainly hire purchase, leasing, vehicle financing), securities investment, money market dealing and merchant banking. One DTC (and one restricted licence bank) are also specialist issuers of credit cards. They are therefore already engaged in a very broad range of different activities, among which deposit-taking does not figure prominently, and it should not cause confusion for certain DTCs (the special purpose vehicles) to be involved principally in a new business - issue of multi-purpose cards.
Regulatory requirements for special purpose vehicles authorized as DTCs
5. Once authorized as a DTC, the special purpose vehicle will be subject to the supervision of the MA under the Banking Ordinance. This has the benefit of allowing flexibility for non-bank entities to issue multi-purpose cards while providing the MA with the necessary supervisory powers to ensure that such entities are operated in a competent and prudent manner.
6. To apply for authorization, the special purpose vehicle will have to satisfy the authorization criteria set out in the Seventh Schedule to the Banking Ordinance, including those relating to the fitness and propriety of controllers (although the non-statutory criterion of 50% ownership by a bank will be waived). The minimum paid up capital for a DTC is HK$25 million.
7. The special purpose vehicle, once authorized as a DTC, will be subject to the same regulatory regime as other types of authorized institutions. These include, among other things, a statutory minimum capital adequacy ratio of 8%, a statutory minimum liquidity ratio of 25%, fitness and propriety of controllers and directors, and limitation on exposures and concentration of risks. The statutory guidelines issued by the MA will apply to them as to other authorized institutions. The MA will also conduct regular on-site examinations and off-site reviews of such special purpose vehicle. On top of these "regular" requirements, the special purpose vehicle will also have to follow the regulatory requirements in relation to the operation of the multi-purpose card scheme, including the way in which the funds received from the public should be administered and used, security requirements, etc.
8. Although, as noted above, there should be no confusion about the role of specialist card-issuing DTCs, the HKMA will have the power to identify such institutions as having that function in the public register which is kept of all authorized institutions.
Hong Kong Monetary Authority
Long-Term Implications of Electronic Money for the Monetary System
This note provides an assessment of the long-term implications of electronic money for the monetary system.
2. Our analysis suggests that:
- the emergence of electronic money will not affect the conduct of monetary policy operations (paragraphs 3 - 6);
- it is, however, in the spirit of the currency board arrangements (the linked exchange rate system being a form of such arrangements) that appropriate backing be provided for the issue of electronic money which is a near-perfect substitute of banknotes (paragraph 7);
- to the extent that electronic money replaces banknotes, the profits derived by the Exchange Fund on banknotes issue will be reduced (paragraphs 8 - 9);
- from a statistical point of view, the definition of money supply may need to be reviewed and modified as appropriate (paragraph 10); and
- for the purpose of ensuring the soundness and integrity of the retail payment system, an appropriate framework should be put in place to regulate the issue of electronic money (paragraph 11).
Implications for monetary policy operations
3. The use of electronic technology in retail payment is not new. The "Easy Pay System" (EPS), for instance, was introduced in the mid 1980s. With the advent of technology, electronic products which embody a higher degree of "moneyness", such as multi-purpose prepaid cards, are being developed. The analyses conducted by the US Federal Reserve and the European Community suggest that the emergence of electronic money, or more precisely "electronic cash", does not pose major problems for the conduct of monetary policy operations.
4. In the case of Hong Kong, the overriding objective of monetary policy is the maintenance of exchange rate stability under the linked exchange rate system. As and when necessary, foreign exchange and money market operations (which involve the injection or withdrawal of interbank liquidity to affect interbank interest rates) are carried out to ensure a stable exchange rate. The introduction of electronic cash does not in any way affect such kinds of operations.
5. Some people have raised a concern as to whether the popularity of electronic cash will affect the ability of central banks/monetary authorities to control money supply. It will be useful to clarify at the outset that the Hong Kong Monetary Authority (HKMA) does not control or target money supply in its monetary policy operations, as in the case of other fixed exchange rate regimes. (Technically, under a fixed exchange rate system, money supply is influenced largely by balance of payments situation) .
6. Specifically relating to banknotes, of which electronic cash is a near-perfect substitute, the amount of banknotes issued by the three note-issuing banks in Hong Kong is primarily determined by public demand for such notes. While US dollar backing is required for banknote issue (see paragraph 7), the HKMA does not control the amount of banknotes issued. As a matter of fact, in most other developed economies, even if money supply is used as a target in monetary policy operations, the practice of the central banks/monetary authorities is also to supply currency notes passively in accordance with public demand. Where necessary, the conduct of monetary operations will take this factor into consideration so as to achieve the target growth rate in money supply (which includes currency as well as bank deposits, however defined.)
Backing for currency issue
7. While electronic cash is unlikely to affect the conduct of monetary operations, there are a few other aspects which need to be carefully considered. One of them is the question of "backing" for currency issue. The linked exchange rate system implemented in Hong Kong is a form of currency board arrangements. A core feature of such arrangements is that the issue of currency notes is fully backed by a reserve currency at a fixed exchange rate (this provides a strong discipline to the note-issue mechanism and thus enhances the credibility of the fixed exchange rate regime). In Hong Kong, the three note-issuing banks are legally required under the Exchange Fund Ordinance to hold Certificates of Indebtedness (CIs) issued by the Exchange Fund as cover for their banknote issue. The CIs are issued and redeemed against US dollar at a fixed rate of HK$7.80 to US$1. In short, under the linked exchange rate system, banknotes assume a special, additional macro-monetary function. As electronic cash is a near-perfect substitute for banknotes and coins, it is in the spirit of the currency board arrangements that some appropriate form of backing be provided to electronic cash. The HKMA is in discussion with the prospective issuers of multi-purpose cards on this matter.
8. While the CIs issued by the Exchange Fund to the note-issuing banks are non-interest bearing, the US dollars received by the Exchange Fund are invested prudently to yield an investment return. In other words, the Exchange Fund, as in the case of other central banks/monetary authorities, earns a profit on currency note issue (which is technically termed as "seignorage"). To the extent that electronic cash reduces the use of banknotes, the seignorage earned by the HKMA will corresponding be reduced. It is not easy to tell whether the lost "seignorage" will be enjoyed by the issuers of electronic cash. If competitive pressure in the market induces the issuers to pay interest or provide some form of service on electronic cash, the holders of electronic cash will share part of the "seignorage".
9. We believe that the concern over a possible loss of "seignorage" should not stand in the way of financial innovations, if they promise a more efficient retail payment system. It is also expected that the substitution of currency notes and coins by electronic cash will be a gradual process. Nevertheless, this development will need to be monitored and its implications for "seignorage" to the Exchange Fund will, in due course, need to be carefully assessed. If the loss in "seignorage" becomes substantial, we may need to raise the issue with the issuers of electronic cash.
Compilation of monetary statistics
10. Although the HKMA does not target or control money supply in the conduct of monetary policy, statistics on money supply are important in economic analysis, as they may bear some relationship with other economic variables such as the inflation rate and the level of economic activities. As electronic cash shares many of the characteristics of banknotes and coins, we will need to consider whether and how it should be captured in the definition of money supply. So far there has not been a commonly agreed international practice on the statistical treatment of electronic cash.
Implications for retail payment system
11. One of the HKMAs policy objectives is to ensure the efficiency, integrity and development of the financial system, particularly payment and settlement arrangements. Towards this end, the HKMA has been pursuing a major reform to move Hong Kongs interbank payment system to a more robust system (based on real-time gross settlement principles) which is in full compliance with international standards. By facilitating fund transfers between individuals and business as well as among individuals, electronic cash will potentially play an important role in the retail payment system, the integrity of which has an important bearing on public confidence in the monetary system. To safeguard the integrity of the retail payment system, an appropriate regulatory framework has to be put in place to ensure the soundness of the issuers as well as the instrument. This is one of the rationale behind the proposed amendments to the Banking Ordinance to regulate the issue of multi-purpose cards.
12. Electronic cash is a financial innovation which holds promise for a more efficient and convenient retail payment system. While the introduction of such product is unlikely to affect monetary policy operations, there are issues relating to currency backing, seignorage, definition of money supply as well as the integrity of the payment system. Many of these issues can largely be dealt with through putting in place a suitable regulatory framework to ensure the soundness of issuers and products and where appropriate, to require some form of backing for the electronic cash issued.
Hong Kong Monetary Authority
Role of Money Brokers and the Proposed Regulatory Framework
In response to comments made by Members, this note -
- elaborates further on the role of money brokers and the proposed legal framework for their approval and regulation;
- explains the effect of the proposed legal framework for money brokers, particularly on whether it will stifle competition; and
- explains why the regulatory requirements for money brokers are set out in authorization conditions and not as subsidiary legislation.
Role of money brokers
2. Money brokers provide broking services mainly for interbank foreign exchange and deposit transactions. The role of money brokers is primarily that of a matchmaker and a name-passer. They match deals, pass the names of the principal counterparties to each other, and settlement is effected directly between the two principals involved.
3. There are two types of money brokers, voice (or human) brokers and electronic brokers -
- Voice brokers
There are at present 10 voice brokers incorporated in Hong Kong. They are all members of the Hong Kong Foreign Exchange and Deposit Brokers' Association ("HKFEDBA"). Matching of principals is done through telephone lines connecting the broker and the principals. As voice brokers are constantly receiving and seeking out market information and trading opportunities, they are able to provide market intelligence and advice to their principals. The voice broker who has successfully brought the deal together is entitled to a brokerage fee in proportion to the size of the transaction.
- Electronic brokers
An electronic broker operates a computerized interactive data system to facilitate forex transactions and interbank deposits between its subscribers. Dealing information is dispatched through its worldwide network and displayed on the screen of a computer monitor installed at the premises of its subscribers. Subscribers to the dealing service may input instructions into the system via the computer terminals installed at their premises to take up a buy/sell offer displayed in the system. Subject to pre-defined limits checks (such as credit and position limits), matched deals will be processed by the computer. In this sense, deals are done directly between the transacting parties. An electronic broker collects a flat service fee for each transaction concluded through its system independent of the transaction amount.
The proposed regulatory framework
4. The proposed legal framework for money brokers is introduced at the request of HKFEDBA and the Hong Kong Association of Banks (HKAB). They have found it difficult to supervise the money brokers due to a lack of legal power and legal immunity in the exercise of disciplinary actions. The Monetary Authority (MA) supports their proposal because an orderly and efficient interbank foreign exchange and money market is important to Hong Kong as an international financial centre.
5. In brief, the proposed regulatory framework empowers the MA to approve or refuse to approve an application for approval on the basis of a set of fit and proper criteria specified in the Eleventh Schedule. It empowers the MA to obtain such information as he may reasonably require for the exercise of his functions under the Banking Ordinance from the broker or its controllers, and where necessary, to conduct on-site examinations of the brokers. It also extends the statutory protection to auditors of money brokers to enable them to communicate in good faith to the MA any matters, such as internal control and proper conduct of business, which they become aware in his capacity as auditors of the money brokers. It is considered that these requirements are sufficient to enable the MA to monitor continuing compliance with the fit and proper criteria by money brokers. On the conduct of business, the MA will require the brokers to comply with the existing Code of Conduct and guidelines on market practices.
Effect of the proposed framework
6. The effect of the proposed framework on money brokers, existing or new, is that they will all have to apply for approval and will be subject to the regulatory requirements imposed under the Bill. The HKMA considers that the proposed framework provides a level playing field for all money brokers, whether they are existing or new, voice or electronic, or local or overseas. It will not impede competition or restrict the entry of new brokers because
- all existing money brokers (voice or electronic brokers) will be required to seek approval after the proposed legal framework comes into operation. They will be subject to the same approval criteria as set out in the new Eleventh Schedule;
- all money brokers will be subject to the same supervisory framework and guidelines (except insofar as certain rules and practices are clearly not applicable to electronic brokers or vice versa); and
- any persons who wish to set up a money broking business in Hong Kong or provide a money broking service to persons in Hong Kong may do so provided that they meet the approval criteria which apply also to existing money brokers. There is no pre-set number of money brokers.
7. Furthermore, Hong Kong is not the only international financial centre that has a regulatory framework for money brokers. In the U.K., money market institutions including money brokers are subject to the regulation of the Bank of England (the Bank). The Bank has the power to require entities listed under section 43 of the Financial Services Act to comply with the London Code of Conduct. The Bank also has the power to publicly reprimand the entity involved, restrict its activities or even to suspend or remove the offending entity from the list in case of breaches. In this respect, the U.K. requirements are similar to those proposed in the Bill.
8. The two electronic brokers are based in the UK and are subject to the Bank of England's supervision. They have argued that they do not therefore also need to be subject to the supervision of the HKMA, particularly since, technically, they are not carrying on the business of money broking in Hong Kong and do not have a physical presence here. They are however providing their service to authorized institutions in Hong Kong and we feel therefore that this justifies bringing them within the scope of our regulation. Due regard will however be taken of the home supervision exercised by the Bank of England (see the proposed addition to the Eleventh Schedule to give the HKMA the statutory power to do this).
9. The electronic brokers have also expressed concern about being required to join the HKFEDBA. They regard the latter as being dominated by the voice brokers and are concerned that this may work to their competitive disadvantage. We are presently considering whether the HKMA should insist on such a requirement.
Reasons for specifying regulatory requirements in authorization conditions rather than in subsidiary legislation
10. The use of authorization conditions to specify detailed regulatory requirements for money brokers is similar to the approach used in the other parts of the Banking Ordinance for the supervision of authorized institutions. This approach has the following advantages -
- it allows prompt regulatory actions to be taken to remedy a problem situation (such as restricting the institution from doing certain acts which may be detrimental to the wholesale money market; and
- it provides flexibility to modify the condition in the light of changes in trade practices or as a result of product or technological innovations - this is particularly important for the regulation of money brokers as they deal with very sophisticated financial products (such as derivatives).
11. There are adequate checks and balances in the system to ensure that the interests of money brokers would not be prejudiced -
- Section 134B(1) : prior consultation before imposing condition
This section requires the MA to consult the HKFEDBA before exercising his power to attach a condition to the certificate of approval of each approved money broker ; where the proposed condition only applies to a particular approved money broker, the broker concerned will be given the opportunity of being heard within a reasonable period.
- Section 132A(I) : appeal to Governor in Council
Persons aggrieved by the MA's decision to impose or vary conditions attached to approval may appeal to the Governor in Council under section 132A(I).
Hong Kong Monetary Authority
Last Updated on 15 December 1998