HSBC 2006 Annual Report Download - page 168

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Regulation and supervision
166
regulations requiring a specified percentage of local
ownership; and restrictions on investment and other
financial flows entering or leaving the country. The
supervisory and regulatory regimes of the countries
where HSBC operates will determine to some degree
HSBC’s ability to expand into new markets, the
services and products that HSBC will be able to
offer in those markets and how HSBC structures
specific operations.
The FSA supervises HSBC on a consolidated
basis. In addition, each operating bank, finance
company or insurance operation within HSBC is
regulated by local supervisors. The primary
regulatory authorities are those in the UK, Hong
Kong and the US, the Group’s principal areas of
operation.
In June 2004, the Basel Committee on Banking
Supervision introduced a new capital adequacy
framework to replace the 1988 Basel Capital Accord
in the form of a final Accord (commonly known as
‘Basel II’). Details of the EU’s implementation of
Basel II and how this will affect HSBC are set out
on page 244.
UK regulation and supervision
UK banking and financial services institutions are
subject to multiple regulations. The primary UK
statute is the Financial Services and Markets Act
2000 (‘FSMA’). Other UK primary and secondary
banking legislation is derived from EU directives
relating to banking, securities, insurance investment
and sales of personal financial services.
The FSA is responsible for authorising and
supervising UK financial services institutions and
regulates all HSBC’s businesses in the UK which
require authorisation under the FSMA. These
include retail banking, life and general insurance,
pensions, mortgages, custody and branch share-
dealing businesses, and treasury and capital markets
activity. HSBC Bank is HSBC’s principal authorised
institution in the UK.
FSA rules establish the minimum criteria for
authorisation for banks and financial services
businesses in the UK. They also set out reporting
(and, as applicable, consent) requirements with
regard to large individual exposures and large
exposures to related borrowers. In its capacity as
supervisor of HSBC on a consolidated basis, the
FSA receives information on the capital adequacy of,
and sets requirements for, HSBC as a whole. Further
details on capital measurement are included in
‘Capital Management’ on pages 243 to 247. The
FSA’s approach to capital requirements for UK
insurers is to require minimum capital to be
calculated on two bases. First, firms must calculate
their liabilities on a prudent basis and add a statutory
solvency margin (Pillar 1). Secondly, firms must
calculate their liabilities on a realistic basis then add
to this their own calculation of risk-based capital.
The sum of realistic reserves and risk-based capital
(Pillar 2) is agreed with the FSA. Insurers are
required to maintain capital equal to the higher of
Pillars 1 and 2. The FSA has the right to object, on
prudential grounds, to persons who hold, or intend to
hold, 10 per cent or more of the voting power of a
financial institution.
The regulatory framework of the UK financial
services system has traditionally been based on
co-operation between the FSA and authorised
institutions. The FSA monitors authorised
institutions through ongoing supervision and the
review of routine and ad hoc reports relating to
financial and prudential matters. The FSA may
periodically obtain independent reports, usually from
the auditors of the authorised institution, as to the
adequacy of internal control procedures and systems
as well as procedures and systems governing records
and accounting. The FSA meets regularly with
HSBC’s senior executives to discuss HSBC’s
adherence to the FSA’s prudential guidelines. They
also regularly discuss fundamental matters relating
to HSBC’s business in the UK and internationally,
including areas such as strategic and operating plans,
risk control, loan portfolio composition and
organisational changes, including succession
planning.
UK depositors and investors are covered by the
Financial Services Compensation Scheme, which
deals with deposits with authorised institutions in the
UK, investment business and contracts of insurance.
Institutions authorised to accept deposits and
conduct investment business are required to
contribute to the funding of the scheme. In the event
of the insolvency of an authorised institution,
depositors are entitled to receive 100 per cent of the
first £2,000 (US$3,927) of a claim plus 90 per cent
of any further amount up to £33,000 (US$64,794)
(the maximum amount payable being £31,700
(US$62,241)). Payments under the scheme in respect
of investment business compensation are limited to
100 per cent of the first £30,000 (US$58,903) of a
claim plus 90 per cent of any further amount up to
£20,000 (US$39,269) (the maximum amount
payable being £48,000 (US$94,246)). In addition,
the Financial Services Compensation Scheme has
been extended to cover mortgage advice and
arranging, certain long term and general insurance
products, and the provision of general advice and