HSBC 2007 Annual Report Download - page 195

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restrictions on the acquisition of local banks or
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 284.
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’). Additionally, data privacy is
regulated by the Data Protection Act 1998. Other
UK financial services 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 deposit taking, retail banking, life and
general insurance, pensions, investments, 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 and allocation’ on pages 282 to
284. 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.
Consumers of UK financial services institutions
are covered by the Financial Services Compensation
Scheme (‘FSCS’), which is the UK’s statutory fund
of last resort. It deals with claims against authorised
institutions that are unable, or likely to be unable, to
pay claims against them, for example if an institution
has stopped trading or is in insolvency. FSCS
protects deposits, investments, insurance and
mortgage advice and arranging, and is funded by
levies on institutions authorised by the FSA. The
maximum levels of compensation are available on
www.fscs.org.uk/consumer.
Hong Kong regulation and supervision
Banking in Hong Kong is subject to the provisions
of 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