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BANKING BILL
10. Part X extends the Commissioner's and Governor in Council's existing powers over banks at Part IV of the Banking Ordinance to deposit-taking companies.
11. Part XI reproduces the audit requirements presently applicable to banks and extends them to deposit-taking companies. The Commissioner will therefore have the power to appoint a second auditor for deposit-taking companies. Clauses 61 and 62 are new. Clause 61 provides for tripartite meetings between the governing board of an authorized institution, any of the institution's auditors and the Commis- sioner, where the affairs of the institution warrant such a meeting. Clause 62 empowers the Commissioner to refer to the Disciplinary Committee of the Society of Accountants cases of negligence or serious misconduct by any auditor of an authorized institution.
12. Part XII reproduces (with modifications) the existing provisions on disclo- sure of information.
13. Part XIII reproduces (with modifications) the existing provisions on owner- ship and management of authorized institutions. Clauses 70, 71 and 72 are new. Clause 70(1) provides that any person who becomes, after the commencement of the Bill, and whether alone or in concert with others, entitled to exercise or control the exercise of 10 per cent or more of the voting power at any general meeting of an authorized institution incorporated in Hong Kong (or of another company of which the institution is a subsidiary) shall not exercise that acquired voting power unless he has the Commissioner's approval to do so, which approval may be given generally or in a particular case. If the Commissioner refuses to give his approval, there is a right of appeal to the Governor in Council. Clause 70(1) will not affect persons who have acquired 10 per cent or more of such voting power before the Bill comes into operation, or persons who do acquire such voting power after the Bill comes into operation but in pursuance of an agreement entered into before the Bill has come into operation. Clause 71(1) provides that any resolution of the governing board of an authorized institution which would not have been made and passed but for the exercise by a person of unapproved voting power is void except in the circumstances specified in clause 71(2). Clause 71(2) provides that a person may enforce a contract against the institution if the contract would otherwise be unenforceable because it was entered into in pursuance of such a void resolution, but only where the contract was entered into in the ordinary course of the business of the institution and the person had no knowledge of the relevant contravention of clause 70(1).
14. Clause 72(1) provides that, after the Bill comes into operation, no controller of an authorized institution shall, as such controller, give any directions or instruc- tions to the directors of the institution unless he has the Commissioner's approval to do so, which approval, similarly to clause 70(1), may be given generally or in a particular case. If the Commissioner refuses to give his approval, there is a right of appeal to the Governor in Council. Clause 72(1) will apply to all controllers, irrespective of whether a person became a controller before, on or after the coming into operation of the Bill. Clause 72(2) provides that, after the Bill comes into operation, no person shall become a director or secretary of an authorized institution except with the consent in writing of the Commissioner. If the Commissioner refuses to give his consent, there is a right of appeal to the Governor in Council.
15. Part XIV reproduces (with modifications) the existing provisions on main- tenance of reserve, provision for bad and doubtful debts, minimum paid-up share capital and payment of dividends restrictions on authorized institutions.
16. Part XV reproduces (with modifications) the existing limitations on loans that can be made by, and "non-banking" interests that can be held by, authorized institutions. Clauses 80(2), 82 and 86(3) are new. Clause 80(2) provides that an authorized institution shall not, except with the approval of the Commissioner, grant any advance, loan or credit facility against the security of the shares of its holding company (if any) or any subsidiary of the institution or such holding company. Clause 82 provides that the Commissioner may, by notice in the Gazette, issue directions to authorized institutions not to engage in business practices specified in the notice which, in the opinion of the Commissioner, will or may cause the soundness of the financial position of authorized institutions to be dependent upon the sound-
BANKING BILL
ness of the financial position of a single party. Clause 86(3) provides that an authorized institution may, with the Commissioner's approval, have a direct interest in a commercial undertaking.
17. Part XVI reproduces the existing provisions on advertising, representations and restrictions on the use of the word "bank". Clause 99 is new. It empowers the Commissioner to require an authorized institution to withdraw any advertisement which is, in the opinion of the Commissioner, false, misleading or deceptive.
18. Part XVII is new. It provides for a capital to risk assets ratio to apply to all authorized institutions incorporated in Hong Kong. Although the existing legislation prescribes minimum capital requirements for banks and deposit-taking companies, such requirements bear no relationship to the amount and riskiness of the assets they support. This Part is designed to remedy that deficiency. The ratio has been set at 5 per cent, although the Commissioner has the power to increase the ratio for particular institutions to a "ceiling" of not more than 8 per cent in the case of banks and to not more than 10 per cent in the case of deposit-taking companies. Any institution required to comply with such a higher ratio may appeal to the Financial Secretary against the imposition of the higher ratio. The method of calculation of the ratio, together with the capital base and the risk assets to be taken into account for the purposes of that calculation, are contained in the Third Schedule to the Bill. The Financial Secretary may, by notice in the Gazette, vary any of the percentages specified in this Part or any of the matters contained in the Third Schedule. A contravention of the ratio is not in itself an offence (since an institution may inadvertently fall below the ratio, or be placed in a position where it is beyond its power to comply with the ratio), but it is an offence to fail to report the contravention to the Commissioner, or to take remedial action required by the Commissioner for the institution to comply with the ratio. An institution may appeal to the Financial Secretary against any such remedial action required by the Commissioner. Since this Part places a substantial new requirement on institutions, it is not expected to be brought into operation until approximately 2 years after the other provisions of the Bill are brought into operation, thus providing authorized institutions with an interim period in which they can organize their affairs to ensure compliance with the provisions of this Part.
19. Part XVIII is new, although in effect replacing the minimum holding of specified liquid assets requirements contained in the existing legislation. It requires all authorized institutions to maintain a liquidity ratio of not less than 25 per cent in any calendar month. The method of calculation of the ratio, together with the liabilities and assets to be taken into account for the purposes of that calculation, are contained in the Fourth Schedule to the Bill. It is considered that the ratio is an improvement over existing liquidity requirements because those requirements take no account of cash inflows and outflows an institution reasonably expects over a period of time. The approach adopted in this Part and the Fourth Schedule is that of requiring liquid assets to be maintained for all liabilities maturing or callable within one month. The particular provisions of this Part largely parallel the provisions of Part XVII, in that a contravention of the ratio is not in itself an offence, but failure to report the contravention, or to carry out remedial action required by the Commissioner, is an offence. An authorized institution may appeal to the Financial Secretary against any such remedial action. The Commissioner may vary the ratio for particular authorized institutions but, unlike the capital to risk assets ratio, no upper limit is set. An authorized institution may appeal to the Financial Secretary against any such variation by the Commissioner. All authorized institutions will be required to comply with this Part when the Bill comes into operation since, unlike the capital to risk assets ratio, it is not a new requirement but a different approach adopted in respect of an existing requirement.
20. Clause 110 has been inserted in Part XVIII because, although it does not directly relate to the liquidity ratio, it relates to matters which may affect that ratio. It provides that an authorized institution shall not, except with the approval of the Commissioner, cause the sum total of all charges over its assets in Hong Kong to exceed 5 per cent of the sum total of the value of those assets, and also to notify the Commissioner of any civil proceedings which have been instituted against it which adversely affect, or could adversely affect, its financial position.
C207
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