Speech at panel on Financial Affairs

Briefing by the Secretary for Financial Services and the Treasury on the Chief Executive’s 2021 Policy Address

Development of financial infrastructure and CBDC in Hong Kong

Mr CHAN Chun-ying enquired about the Administration’s measures to promote the use of central bank digit currency (“CBDC”) in Hong Kong including developing CBDC (i.e. e-HKD) for retail payment, and promoting innovation in the financial services industry, such as providing financial support or tax concessions for enterprises in enhancing their infrastructure.

The Administration advised that the Hong Kong Monetary Authority (“HKMA”) was studying the prospect of issuing e-HKD and expected to come up with a preliminary view by mid-2022. In strengthening Hong Kong’s financial infrastructure, the Administration had been making collaborative efforts with various financial regulators on various initiatives, such as developing the eMPF Platform to enhance the operational efficiency of the Mandatory Provident Fund (“MPF”) schemes and achieve cost savings, thereby providing more room for reduction in the administration fee of MPF funds. Moreover, the Administration would continue to enhance the efficiency and capacity of the Central Moneymarkets Unit of debts instruments to support the southbound trading under Bond Connect and at the same time promoting the development of Hong Kong’s bond market.

Nurturing talents for the financial services industry

Mr CHAN Chun-ying suggested that the Administration and relevant professional institutions should develop strategies and enhance efforts in training and nurturing talents (including legal and accounting professionals) for the financial services sector. They also sought details on the Administration’s measures to retain and attract foreign talents for the banking sector, particularly due to the travel restrictions and the quarantine requirements in relation to COVID-19.

The Administration advised that a series of programmes had been rolled out to support the development of financial talents, including the FinTech Anti-epidemic Scheme for Talent Development administered by Hong Kong Cyberport Management Company Limited which had sought to create close to 1 000 full-time positions in the financial technology sector. Moreover “experienced compliance professionals in asset management” and “professionals in Environmental, Social and Governance” had been added to the Talent List Hong Kong, with a view to attracting foreign professionals with relevant experience.

Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022

Scope of the licensing regime for “virtual asset” service providers

Mr CHAN Chun-ying enquired about the scope of the proposed VASP licensing regime, including whether VAs issued by large information technology companies (like Facebook) and VAs backed by real assets (like real estate) would be covered. Concerns were raised about possible regulatory loopholes given that the regime only regulated VA exchanges.

The Administration responded that all VA-related activities falling within the definition of “regulated VA activity” would be subject to the regulation of the proposed regime. A licensing regime was tailored for VA exchanges as they were by far the most prevalent and developed embodiment seen in Hong Kong. Besides, VA activities conducted outside VA exchanges either had scanty local presence (e.g. VA payment systems) or could involve financial institutions which were already subject to the regulation of AMLO. As VAs were evolving rapidly, the Bill would adopt a functional approach in defining VAs so that new tokens emerging in future could be captured if they perform the same functions that the Bill sought to regulate. In a similar vein, the scope of the proposed regulatory regime would be on centralized VA exchanges. To cater for future development in VAs, the Secretary for Financial Services and the Treasury would be empowered under the Bill to designate further VA activities to be subject to the VASP licensing regime as necessary.

Definition of “politically exposed person”

In response to Mr CHAN Chun-ying’s enquiry, the Administration confirmed that the revised definition for “politically exposed person” under the Bill was consistent with that stipulated in other relevant legislation.

Briefing on the work of the Hong Kong Monetary Authority

Performance of the Exchange Fund

Mr CHAN Chun-ying welcomed HKMA’s recent move to replace the market value cap for managing the size of the Long-Term Growth Portfolio (“LTGP”) of the Exchange Fund (“EF”) and instead to determine the portfolio’s target asset allocation concurrently with that of other asset classes, subject to prudent risk management principles. They enquired: (a) whether there were limits to the respective proportions of investment in private equities (“PEs”) and real estate under LTGP; (b) whether HKMA would update its guideline to LTGP’s external investment managers in the light of the impending US interest rate hike; and (c) about the accounting arrangement of EF’s investment in PEs.

HKMA responded that the indicative proportions of PEs and real estate in LTGP were roughly 70% and 30% respectively, subject to market conditions. On HKMA’s guidance to the external managers, HKMA cited PE investments as an example, for which HKMA would seek to engage high quality external managers which focused on enhancing corporate management and governance of those entities they invested in. Meanwhile, HKMA would appoint independent accountants for valuations of PE investments.

Budget of the Securities and Futures Commission for the financial year 2022-2023

Manpower plan

Noting that the overall turnover rate of SFC staff rose from 5.1% in 2020 to 12% in 2021 with the rate among junior ranks staff as high as 25% in 2021, Mr CHAN Chun-ying enquired about (a) changes in SFC’s staff deployment, if any, for regulating the securities and futures markets; (b) whether the high staff turnover rate had impacted SFC’s regulatory functions; (c) whether SFC had measures other than the proposed pay increase and position upgrades in retaining staff; and (d) reasons for the Corporate Finance Division having the highest number of positions upgraded in 2022-2023.

SFC agreed that the high staff turnover had affected SFC’s daily work and added pressure on its staff. SFC had carefully adjusted its manpower structure, staff duties and pay policies to ensure effective and efficient performance of its regulatory functions. The proposed increase in headcount was to ensure that SFC was adequately staffed to meet a growing market and increased regulatory demands. The proposed position upgrades reflected the increasing complexity and scope of the respective roles and also aimed to create more opportunities for staff promotion and job rotation across departments. As regards the reasons for having more position upgrades in the Corporate Finance Division, SFC explained that the division would need to implement the new listing regime for special purpose acquisition companies, and to prepare for the perspective “homecoming listing” of a number of US-listed Chinese companies, as well as the potential further reform of the listing rules in 2022. On the proposed average pay increase of 4.5%, it was a measure to retain talent in SFC; the amount was a budgeted figure, based on input from pay consultants after analysing available market data at the time. The SFC Board would make a final decision on the pay increase after taking into account factors such as the latest inflation rate and developments in pay trends in the financial services sector. The proposed increase in SFC’s manpower should not pose any additional burden on the securities services industry nor on taxpayers, given that SFC had been careful in calibrating its headcount and overall budget to the real needs of the market. The SFC had for years, been entirely self-sufficient, being funded by levies, fees and charges from the market none of which would be subject to any increase.

Collaboration with other regulatory bodies

Mr CHAN Chun-ying enquired about the communication mechanism between SFC and HKMA for the regulation of VAs so as to avoid possible regulatory gaps.

SFC responded that it was fully aware of the importance of close cooperation with HKMA on the regulation of VAs given their cross-sectoral nature. The two bodies had recently issued a joint circular on intermediaries’ VA-related activities to provide guidance on the distribution of VA-related products and the provision of VA dealing or advisory services.