HSBC 2006 Annual Report Download - page 169

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arranging services. Differing levels of compensation
limits apply to each of these additional areas.
The EU Savings Directive took effect on 1 July
2005. Under the directive, each member state other
than Austria, Belgium, and Luxembourg is required
to provide the tax authorities of each other member
state with details of payments of interest or other
similar income paid by a person within its
jurisdiction to individuals resident in such other
member state. For a transitional period beginning on
the same date, Austria, Belgium, and Luxembourg
have imposed a withholding tax on such income.
The withholding tax rate is 15 per cent, increasing to
20 per cent from 2008 and 35 per cent from 2011.
Subject to future conditions being met, Austria,
Belgium, and Luxembourg may cease to apply the
withholding tax and instead comply with the
automatic exchange of information rules applicable
to the other member states. These future conditions
will depend on other key financial centres –
Switzerland, Liechtenstein, San Marino, Andorra and
the US – not exchanging information. These
financial centres and several other European
countries and related offshore territories have also
entered into similar agreements to the Savings
Directive with the EU states.
Hong Kong regulation and supervision
Banking in Hong Kong is subject to the provisions
of the Banking Ordinance (the ‘Banking
Ordinance’), and to the powers, functions and duties
ascribed by the Banking Ordinance to the Hong
Kong Monetary Authority (the ‘HKMA’). The
principal function of the HKMA is to promote the
general stability and effective working of the
banking system in Hong Kong. The HKMA is
responsible for supervising compliance with the
provisions of the Banking Ordinance. The Banking
Ordinance gives power to the Chief Executive of
Hong Kong to give directions to the HKMA and the
Financial Secretary with respect to the exercise of
their respective functions under the Banking
Ordinance.
The HKMA has responsibility for authorising
banks, and has discretion to attach conditions to its
authorisation. The HKMA requires that banks or
their holding companies file regular prudential
returns, and holds regular discussions with the
management of the banks to review their operations.
The HKMA may also conduct ‘on site’ examinations
of banks, and in the case of banks incorporated in
Hong Kong, of any local and overseas branches and
subsidiaries. The HKMA requires all authorised
institutions to have adequate systems of internal
control and requires the institutions’ external
auditors, upon request, to report on those systems
and other matters such as the accuracy of
information provided to the HKMA. In addition, the
HKMA may from time to time conduct tripartite
discussions with banks and their external auditors.
The HKMA, which may deny the acquisition of
voting power of over 10 per cent in a bank, and may
attach conditions to its approval thereof, can
effectively control changes in the ownership and
control of Hong Kong-incorporated financial
institutions. In addition, the HKMA has the power to
divest controlling interests in a bank from persons if
they are no longer deemed to be fit and proper, if
they may otherwise threaten the interests of
depositors or potential depositors, or if they have
contravened any conditions specified by the HKMA.
The HKMA may revoke authorisation in the event of
an institution’s non-compliance with the provisions
of the Banking Ordinance. These provisions require,
among other things, the furnishing of accurate
reports.
The Banking Ordinance requires that banks
submit to the HKMA certain returns and other
information and establishes certain minimum
standards and ratios relating to capital adequacy
(see below), liquidity, capitalisation, limitations on
shareholdings, exposure to any one customer,
unsecured advances to persons affiliated with the
bank and holdings of interests in land, with which
banks must comply.
Hong Kong fully implemented the capital
adequacy standards established by the 1988 Basel
Capital Accord. The Banking Ordinance currently
provides that banks incorporated in Hong Kong
maintain a capital adequacy ratio (calculated as the
ratio, expressed as a percentage, of the bank’s capital
base to its risk-weighted exposure) of at least 8 per
cent. For banks with subsidiaries, the HKMA is
empowered to require that the ratio be calculated on
a consolidated basis, or on both consolidated and
unconsolidated bases. If circumstances require, the
HKMA is empowered to increase the minimum
capital adequacy ratio (to up to 16 per cent), after
consultation with the bank.
A deposit protection scheme came into force
during 2006 pursuant to the Deposit Protection
Scheme Ordinance. The Scheme only covers
standard deposits held with licensed banks in Hong
Kong subject to a maximum of HK$100,000
(US$12,860).
The marketing of, dealing in and provision of
advice and asset management services in relation to
securities in Hong Kong are subject to the provisions
of the Securities and Futures Ordinance of Hong