Do senior bank staff, including non-executive directors, have to be registered with your national regulatory authority?
Chief executives, directors and executive officers
Under the BO, chief executives, executive officers and directors of AIs must obtain prior approval from the HKMA before they can take on such roles. Consent is required for the appointment of a chief executive and executive officers (being the executives in charge of a bank’s securities and futures business) of an AI whether it is incorporated in Hong Kong or elsewhere. In contrast, consent is only required for the appointment of a director if the AI is incorporated in Hong Kong. However, if the appointment of a director of an AI incorporated outside Hong Kong also creates an employment relationship, the HKMA’s consent may still be required if any of the circumstances set out below apply, though the HKMA has issued guidance to the effect that it does not expect non-executive directors and independent non-executive directors to be responsible for the day-to-day management of the business.
No other distinction is made between non-executive and executive directors in the banking context.
The BO also requires AIs to notify the HKMA within 14 days of the appointment of a manager, meaning an individual other than a director or chief executive appointed to be principally responsible for the conduct of certain affairs of the AI, e.g. corporate banking or retail baking. Such notification is also required where an individual ceases to be a manager, or where a manager becomes principally responsible for further activities conducted by the bank. This applies whether the AI is incorporated in or outside Hong Kong and is merely a requirement to notify the HKMA after the appointment, as opposed to obtaining the HKMA’s prior consent.
The HKMA is required to give notice in writing of its consent to the appointment of a chief executive, director or executive officer, and any conditions attached to the consent, or its refusal to give consent as soon as reasonably practicable. Similarly, where the HKMA refuses to grant consent in respect of a person, it is required to notify the person concerned as soon as reasonably practicable.
The HKMA published new guidance on management accountability at registered institutions (RIs, being AIs that carry on securities and futures business and are registered with the SFC) on October 17, 2017 with the aim of increasing personal accountability for the management of RIs. Under the new guidance, the term ‘management’ refers to: (1) chief executives, (2) alternate chief executives, (3) directors approved under section 71 of the BO1, (4) managers notified to the HKMA under section 72B of the BO, and (5) executive officers approved under section 71C of the BO.
Following the new guidance, RIs must identify at least one individual principally responsible for:
- overall management of the whole business of the RI; and
- managing each of the businesses or functions listed in paragraphs 2 to 8 of the Fourteenth Schedule to the BO (e.g. corporate banking or retail banking),
to the extent that these individuals are involved in the management of the business constituting any regulated activity for which the RI is registered.
The HKMA’s consent must also be obtained in respect of certain employees. Where an individual (i) has been bankrupt, (ii) has been convicted of an offence involving fraud or dishonesty, (iii) is (or was) a director of an institution which is being (or has been) wound up, or (iv) has had its registration or licence revoked, the HKMA must consent to the individual becoming an employee of the AI. Similarly, if any of the above circumstances arise whilst an individual is an employee of an AI, the HKMA must grant its approval for the individual to continue to act as an employee.
If your national regulatory authority requires registration of senior bank staff what are the requirements?
Chief executives, directors and executive officers
In deciding whether to grant consent in respect of a director, chief executive or executive officer, the HKMA will consider whether the individual concerned is “fit and proper” to hold such position. The HKMA may attach conditions to its consent when granting it, or at a later stage, for the purpose of ensuring that the individual continues to be “fit and proper”. The HKMA may from time to time also amend any conditions imposed at the time of granting its approval.
The HKMA may, if it considers it appropriate, conduct a face-to-face meeting with a proposed chief executive, director or executive officer in order to assist its assessment of whether the candidate is fit and proper to carry out their duties. The meeting is designed to enable the HKMA to assess first-hand the candidate’s personal qualities, skills, knowledge and understanding of the AI’s business and key regulatory and supervisory requirements (such as requirements relating to risk management practices, capital adequacy and liquidity) and whether the person will be able to fulfil the role he or she is being considered for.
An offence is committed if the HKMA’s approval is not sought and any person who fails to do so is liable to a fine and imprisonment for up to 2 years. In the case of a continuing offence, a further fine may be applied for each day the offence continues. It is not necessary for further consent to be sought in the event that a director or chief executive is reappointed to their role on the expiry of their previous term.
Unlike the requirement to obtain the HKMA’s consent for the appointment of a director, chief executive, executive officer, or in respect of certain employees, AIs are only required to notify the HKMA within 14 days of the appointment of a manager. The notification takes the form of a letter signed by the chief executive which contains particulars of the appointment e.g. the name of the manager, their position/title and the date of their appointment, cessation of appointment or change in existing responsibility (as the case may be).
The HKMA Supervisory Policy Manual includes a module on “Systems of Control for the Appointment of Managers”. This publication explains that AIs should have regard to a number of factors when assessing the fitness and propriety of an individual that they wish to appoint as a manger, the key considerations being:
- probity, reputation and character;
- knowledge, experience and competence; and
- financial soundness and independence.
The module also sets out a number of “adverse events” which could affect the AI’s assessment of a proposed manager, e.g. whether the candidate has been convicted of a criminal offence.
Directors, chief executives and managers (including any executive officers) commit an offence and are each liable to a fine and imprisonment for up to 2 years if they fail to make such notification to the HKMA regarding managers. Also, a further fine may be applied for each day the offence continues.
Is there legislation specific to the banking sector that provides for penalties to be levied against senior staff for mis-managing a bank?
Once approved by the HKMA, the senior management of an AI must comply with and meet on an on-going basis the requirements set out in the HKMA Supervisory Policy Manual which reflects the provisions of the BO. This manual provides for appropriate corporate governance practices, such as the need for the AI’s board to set performance objectives and professional standards and values that promote ethical and responsible behaviour amongst the AI’s staff.
Under the BO, the HKMA is authorized to make its own investigations into the books, accounts and transactions of an AI.
In addition, if the HKMA considers that it is in the interests of an AI’s depositors or the public interest, it may suggest to the Financial Secretary that an inquiry should be made into the affairs of the AI. The Financial Secretary can then appoint a competent person to conduct such an inquiry and refer the report to the Secretary of Justice, which could in turn prosecute an AI’s directors, chief executive, or managers (including any executive officers), as appropriate.
In terms of specific offences under the BO, it is an offence for a director, chief executive, manager (including executive officers), trustee, employee, or agent of an AI to willfully make a false entry in any document, alter an entry in a document or omit to make an entry in a document with an intent to deceive. Any individual found guilty of any of the above is liable to a fine and imprisonment for up to 5 years.
This provision in the BO supplements wider offences spread across a number of other ordinances, such as the Crimes Ordinance which makes it an offence to:
- make a false statement or declaration
- obtain registration on any register by making a false statement
- make a false entry in a bank book or in relation to a bank account.
In addition, the Theft Ordinance (which specifically relates to the records of a bank or deposit-taking company) also makes it an offence to dishonestly make, alter or omit an entry in a record of a bank or deposit-taking company.
Separately, under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, employees and management of an AI (including its chief executive, directors, executive officers and managers) would commit an offence by knowingly causing or knowingly breaching relevant requirements imposed on the AI under the Ordinance (including the requirement to take all reasonable measures to (i) prevent a contravention of the relevant requirements of the Ordinance or (ii) mitigate money laundering and terrorist financing risks).
The BO also cross refers to a provision in the SFO which provides for the SFC to appoint persons to investigate any misconduct where the SFC has reasonable cause to believe that an offence has been committed or that any person may have engaged in defalcation, fraud, misfeasance or other misconduct. It is important to note, however, that misconduct under the SFO is separate to instances of mismanagement supervised by the HKMA. Examples of misconduct under the SFO include insider dealing, price rigging, false trading, disclosure of information about prohibited transactions and stock market manipulation.
What is the maximum amount the regulator can fine an individual?
Schedule 13 of the BO sets out the various tiers of fines for offences committed under the BO. The highest amount is HK$2,000,000 (tier 9).
Is there legislation in place that requires banks to have in place remuneration policies and practices that are consistent with effective risk management?
Whilst the BO does not address remuneration, the HKMA Supervisory Policy Manual includes a module titled “Guideline on a Sound Remuneration System”. This module is not intended to prescribe a particular remuneration system with specific levels or limits, but instead focuses on the overall governance and control arrangements for an AI’s remuneration system.
For example, it provides for AIs to establish a written remuneration policy for all employees which should have specific regard to:
- the remuneration of senior management who are responsible for the AI’s firm-wide strategy or material business lines;
- key personnel whose duties involve the assumption of material risk;
- groups of employees whose activities may expose the AI to risk; and
- employees within risk control functions.
Ultimately, the module requires AIs to adopt a remuneration policy which is designed to encourage behavior that supports the AI’s risk tolerance, risk management framework and long-term financial soundness.
Is there any legislation planned in your jurisdiction that will strengthen the accountability of senior bank staff?
None that we are aware of, but please refer to 01 above in relation to updated guidance on management accountability issued by the HKMA in October 2017.