Speech at Panel on Financial Affairs

III Budget of the Insurance Authority for the financial year of 2023-2024

Information Technology expenses

Members enquired about the reasons for the 57% increase in “IT expenses” in the proposed budget for 2023-2024 as compared to that in the revised estimate for 2022-2023 and whether the development of Suptech was under the item, and the estimated expenditure as well as details in relation to the cyber mapping exercise under the “Engagement of professional services”. Noting that the revised estimate of “IT expenses” for 2022-2023 was less than the approved budget due to projects hitherto kept on hold pending completion of an IT audit review, members enquired about the details.

IA advised that in addition to “IT expenses”, the expenditure on IT systems and equipment under the capital expenditure in the 2023-2024 budget would amount to $35.7 million, including $16 million required for revamping IS developed in the 1990s and adopting Suptech, for which tenders were being invited. As regards some projects being kept on hold in 2022-2023, it was because IA was required to complete an information system risk audit to be carried out by an external consultant and to acquire the security software recommended by the consultant.

Estimates of income and expenditure and reserve

Members noted that while IA would be reminded to maintain its reserve at or above six months of operating expenditure, it had a deficit of $89.4 million in its proposed budget for 2023-2024. Members enquired about the expected time for IA to attain a balanced account, and whether it was necessary to consider advancing the resumption of charging licence fees on insurance intermediaries or requesting government injection in order to improve IA’s financial position. Members were also concerned about the effectiveness of resuming charging licence fees on insurance intermediaries in enhancing IA’s financial position.

IA advised that as the premium levies collected by IA was increased in a progressive manner while the operating expenditure was payable immediately, a time lag was inevitable between IA’s receipt of income and incurring the expenditure. As such, IA had been running a deficit in its accounts during its initial operation. In 2021-2022, IA recorded a surplus of $84 million, mainly due to savings in staff costs. IA estimated that while there would still be a surplus in 2022-2023, the amount of such a surplus would be less than that in 2021-2022, mainly due to a reduction in the income from premium levies as a result of lower premium income of the insurance industry and an increase in IA’s staff costs. In IA’s proposed budget for 2023-2024, the operating expenditure and total income were about $614 million and $525 million respectively, resulting in a deficit of about $89 million. Given that IA might not be able to maintain its establishment at full strength through recruitment, the staff costs might be less than estimated, and thus the actual operating deficit would be less than anticipated.

As regards the reserve, IA indicated that the projection of its reserve was $412.1 million on 31 March 2024, equivalent to over six months of estimated operating expenditure. IA would resume charging licence fees on insurance intermediaries in September 2024 as scheduled without the need for advancing the resumption. Looking forward, IA considered that resuming the charging of licence fees on insurance intermediaries would be beneficial to its financial position and conducive to achieving long-term structural surpluses. IA would also discuss with the industry the level of licence fees to be charged and hoped that such fees would not impose a heavy burden on the industry. With the increase in various incomes and the chain effect brought about by the resumption of customs clearance, it was believed that IA would gradually achieve a balanced budget in the coming years.

IV Budget of the Mandatory Provident Fund Schemes Authority for the financial year of 2023-2024 and latest progress of the eMPF Platform Project

Expressing grave concern that it was highly likely for the completion of system development work of the eMPF Platform to be deferred to mid-2023 and the delivery of a fully functional eMPF Platform by the Contractor to be delayed by eight months, Members enquired MPFA about: measures in place to ensure that there would be no further slippage in system delivery, including how the Contractor’s work was monitored round the clock.

As regards the role of the eMPF Company in overseeing the Contractor’s
work, MPFA said that the eMPF Platform sought to streamline, standardize and
automate the administration processes of the MPF system, thereby reducing the
overall administration costs. The eMPF Platform would not take over the role
currently played by MPF trustees. The present relationship between MPFA as the
regulator and the trustees as the regulated parties would not be affected by the
launch of the eMPF Platform. The eMPF Company would act as the system
operator that assisted MPFA in overseeing the work progress of the Contractor.

V Budget of the Accounting and Financial Reporting Council for the financial year of 2023-2024

Manpower plan and staff expenses

In view of the serious problem of staff turnover in various professional sectors in recent years, members were concerned: (a) whether AFRC could effectively attract and retain talent with an average salary increment of only 3.7% in the 2023-2024 budget; and (b) what specific measures were put in place by the Administration to alleviate the shortage of professionals in Hong Kong so that regulatory bodies such as AFRC would not have to compete with the industry for talent.

In response, AFRC advised that the recruitment of staff by AFRC should not have a direct impact on the manpower resources of the industry as the qualifications required of staff working in regulatory bodies might not be the same as those required of practitioners in the industry. As far as the overall labour market in Hong Kong was concerned, the Administration advised that apart from the various measures introduced to recruit and retain overseas talent, the current-term Government was also discussing with the accounting profession, AFRC and the Advisory Committee to AFRC established last year on how to attract more local graduates with professional accounting training to join the accounting profession in Hong Kong, so as to address the manpower shortage in the industry.

Sources of income and long-term financial stability

Referring to the Administration’s proposed plan of funding injection to AFRC in 2023, members enquired whether the Government would consider allowing AFRC to open up new income sources, with a view to ensuring AFRC’s long-term financial stability. Members were concerned whether AFRC would raise its levies to meet the projected cash shortfall, and asked how to strike a balance between the need to increase AFRC’s income and to maintain the competitiveness of those industries (including the financial services industry, the accounting industry, etc.) that were subject to the levies.

AFRC explained that the forecast income for 2022-2023 being below the approved budget was mainly due to the lower-than-budgeted market turnover and total remuneration (“TR”) of Public Interest Entities (“PIE”) auditors for PIE engagements. Besides, as AFRC would only start collecting fees relating to the regulatory functions of non-PIE auditors (“non-PIE-related functions”) from 1 October 2023, the funding shortfall of AFRC arising in 2024-2025 was expected to reoccur in ensuing financial years, and AFRC would need to review its financial position and income patterns with the Administration. The Administration added that regulatory bodies would generally meet their operating costs by collecting fees from the regulated sector and the sector’s service users in accordance with the users-pay principle. As AFRC was currently unable to achieve a structural balance of income and expenditure for its non-PIE-related functions, the Government planned to submit within this year to the Panel on Financial Affairs the proposed funding injection and the financing options to improve the long-term funding mechanism of AFRC. The Administration stressed that in considering any levy options, it would certainly take into account the impact of the options on the industry.