A business-friendly approach

OpRisk & Compliance spoke to Simon Topping, executive director – banking policy of the Hong Kong Monetary Authority, to get his view of the changing regulatory environment in Hong Kong, with particular reference to its approach to operational risk and anti-money laundering practices

Over the past few years, can you outline the most significant developments at the HKMA?

On the banking supervision side, the main preoccupations over the past few years have been implementation of Basel II, anti-money laundering/ terrorist financing (AML/CFT), the introduction of deposit protection, and enhancing regional co-operation.

Basel II has been very significant, because it has provided an umbrella under which we have been able to shift the focus of supervision away from compliance and more towards risk management. In particular, we have been keen to raise the attention given by banks to operational risk, to stress-testing, to interest rate risk, and to less traditional risks such as reputation risk and strategic risk. At the same time, we have tried to make Basel II something that banks see value in rather than as a regulatory issue.

This approach – of looking to build the capacity of the financial sector to contribute to the economy and to the success of Hong Kong – is something you can see in many of the initiatives undertaken by the HKMA in recent years. There is the continuing development of a robust and effective payment, clearing and settlement system in Hong Kong to support high-volume, multi-currency transactions; a number of initiatives to stimulate the development of deep, liquid and mature regional bond markets, and also to further expand the scope of renminbi business in Hong Kong and of the Qualified Domestic Institutional Investors (QDII) scheme to strengthen Hong Kong's financial integration with mainland China.

What is the HKMA's approach to operational risk?

One thing that made us most keen on Basel II was the increased focus it would give to operational risk, not least because of the creation of an explicit capital charge for operational risk. But it seemed to us that the right way to go, at least initially, was to stress the management of op risk rather than its measurement. So, instead of encouraging banks to put their efforts into advanced measurement approaches, we put the emphasis on banks ensuring they have sound practices to manage operational risk. Our guideline on this was issued back in November 2005, well ahead of the rest of Basel II, as we wanted banks to give operational risk a high priority.

How much of a concern is fraud and money-laundering in the region?

Efforts to control and reduce fraud and strengthen AML/CFT efforts are global in nature. Hong Kong obviously supports such initiatives, and AML/CFT has been, and remains, a key focus. In the same way as we are one of the first jurisdictions – not just regionally, but globally – to implement Basel II, we were one of the first jurisdictions to implement the Financial Action Task Force (FATF) recommendations on AML/CFT. But I'm not sure the issue is always given such a high priority elsewhere.

What has the HKMA been doing to combat this?

We participate actively in FATF activities, and we have close contact with other regulators and law enforcement agencies, both in Hong Kong and overseas. We also continue to try and push AML/CFT up the list of priorities in the regional and international groups in which we are involved.

A year or so ago we established, jointly with the industry, a working group on AML/CFT. This has proved very successful, in that it has brought home to people the fact that AML/CFT is not just a regulatory or compliance issue, but something that is of crucial importance to how banks conduct business. They are the gatekeepers of the financial system.

What is next on the regulatory agenda?

Nothing too much, I would hope. We really need a two- or three-year pause on the banking supervision front to allow financial institutions the time to digest the recent raft of regulatory, accounting and disclosure changes before introducing any further requirements, unless these are absolutely necessary. But work will still go on in the background in areas such as liquidity, economic capital, the definition of capital, and will press forward on developing payment, clearing and settlement systems, developing the regional bond market, and strengthening financial integration with the mainland.

We need to ensure that regulation continues to support the growth of business, and doesn't hinder it. That's the balancing act.

Could the current interaction between financial services firms and national regulators be improved?

At the HKMA we have always worked very closely with the industry. In some places there may be a 'them and us' attitude, but not here. Not only do we routinely conduct extensive consultation with the industry (and, when appropriate, with other professional bodies, with legislators, and with consumer interest groups), but we listen closely to the views of the industry in formulating policy.

How do you foresee the regulatory landscape in the region shaping up in the near- to long-term future?

As far as banking supervision is concerned, pretty much everyone is aiming for the same thing – implementation of Basel II (and other international standards, such as those of the FATF) within a reasonable timescale.

One factor that will help accelerate adoption of international standards is the growing realisation that 'we all stand together' in Asia. There is a growing appreciation of the value of increased co-operation and cumulative efforts among the central banks and regulators in the region, with the objective of enhancing the prosperity and stability of the region. The future for the region is one of increased integration and stronger markets and financial systems.