Supervisory Policy Manual - hkma.gov.hk

1 Supervisory Policy ManualCG-2 Systems of Control for the Appointmentof module should be read in conjunction with the Introduction and with theGlossary, which contains an explanation of abbreviations and other termsused in this Manual . If reading on-line, click on blue underlined headings toactivate hyperlinks to the relevant module. PurposeTo specify the systems of control that an AI should have for ensuringthe fitness and propriety of individuals appointed as managers1 ClassificationA statutory guideline issued by the MA under the Banking Ordinance, 16(10)Previous guidelines supersededThis is a new all of 2 of the Banking Fourteenth of and proper , reputation and character 1 The term manager used in this module is as defined in 2 of the Banking Policy ManualCG-2 Systems of Control for the Appointmentof , experience and soundness and of assessment of the review and of powers under the Banking appointments management of an AI, under the supervision of itsdirectors and chief executive, plays a pivotal role in ensuring thefinancial soundness and efficient operation of the AI.

2 The Boardof Directors and the chief executive have the primaryresponsibility for appointing persons who are fit and proper tomanage the AI s key business activities and minimum authorization criterion under para. 5A of theSeventh Schedule to the Banking Ordinance provides that theMA should be satisfied that an AI has adequate systems ofcontrol to ensure that each individual who is, or is to be, amanager of the AI is fit and proper to hold the particular positionhe holds or is to to adhere to the standards and requirements set out inthis module may call into question whether the AI continues tosatisfy the relevant authorization criterion under the BankingOrdinance. Such failure may also cast doubt on the fitness andpropriety of individual directors or the chief executive of the of managerSupervisory Policy ManualCG-2 Systems of Control for the Appointmentof 2 of the Banking Under 2 of the Banking Ordinance, a manager of alocally incorporated AI means any individual (other thana director or chief executive2) appointed by the AI, or bya person acting for or on behalf of or by arrangementwith the AI, to be principally responsible, either alone orwith others, for the conduct of any one or more of itsaffairs or business specified in the Fourteenth Scheduleto the For an overseas incorporated AI, a manager meansany individual (other than the chief executive)

3 Appointedby the AI, or by a person acting for or on behalf of or byarrangement with the AI, to be principally responsible,either alone or with others, for the conduct of any one ormore of its affairs or business in Hong Kong specified inthe Fourteenth Schedule to the The MA may declare in a notice under 2(14)(cb) that anindividual, or a class of individuals, is not a manager, ora class of managers, for the purposes of the Fourteenth The business or affairs specified in the FourteenthSchedule for the purposes of the definition of a managerare: the carrying on of retail banking, private banking,corporate banking, international banking,institutional banking, treasury or any otherbusiness which is material to the AI; the maintenance of the accounts or theaccounting systems of an AI; the maintenance of systems of control of an AI,including those systems intended to manage therisks of the AI; the maintenance of systems of control of an AI toprotect it against involvement in moneylaundering; 2As defined in 2 of the Banking Ordinance, the term chief executive includes an alternatechief Policy ManualCG-2 Systems of Control for the Appointmentof the development, operation and maintenance ofcomputer systems for an AI; the conduct of internal audits or inspections of theAI s affairs or business.

4 And the function of ensuring that an AI complies withlaws, regulations or guidelines that are applicableto it ( the compliance function). The terms describing the specific types of businessmentioned above are defined in the Fourteenth Schedule(see the table below). AIs may use other terms (such as commercial banking , wholesale banking or investment banking ) to define their business matters is the nature of the underlying activity orfunction rather than what it is called. AIs shouldtherefore ensure that all relevant business activities,however described or named, are identified for thepurposes of determining the managers who fall within of businessDetailsCorporate bankingThe provision of banking or otherfinancial services3 to companies.

5 Butexcluding such services providedunder retail bankingInstitutional bankingThe provision of banking or otherfinancial services to AIs and banksincorporated outside Hong Kongwhich are not AIs or other financialinstitutionsInternational bankingThe provision of banking or otherfinancial services through overseasoffices or subsidiaries of an AIPrivate bankingThe provision of banking or otherfinancial services to individuals who 3 The term banking or other financial services includes the taking of deposits, the provisionof payment and remittance services, the issue of credit, debit or multi-purpose cards,facilities for the purchase or sale of foreign currencies, securities or other financialinstruments, the provision of financial advice and the incurring of financial exposurementioned in 81(2) of the Banking Ordinance (see subsection of CR-G-8 LargeExposures and Risk Concentrations for details).

6 Supervisory Policy ManualCG-2 Systems of Control for the Appointmentof of businessDetailsare considered by an AI to be of highnet worth, but excluding suchservices provided under retailbankingRetail bankingThe provision of banking or otherfinancial services to individuals,firms, partnerships, unincorporatedbusinesses and companiesTreasuryThe management of the liquidity andfunding of an AI and the trading offoreign currencies, securities orother financial AIs should also identify any other business that ismaterial to them but is not specifically defined in theFourteenth Schedule. Materiality to an AI can be interms of the size of the business, the profits that itcontributes, the risks that it incurs or the resources that itcommands.

7 There is no standard measure of materialityas it varies among AIs. They may, however, have regardto the following indicators when comparing the relativesignificance of each type of business: the proportion of the AI s total operating income(net of interest expense) or net profit beforetaxation contributed by the business; the value of assets accounted for by the businessin relation to the AI s total assets or capital base;or the operating costs (including staff expenditure)attributable to the business in relation to the AI stotal operating of The following paragraphs provide AIs with some generalguidance on how the definition of manager applies tothem. It is not possible, however, to cover all relevantsituations. AIs should consult the HKMA or their legaladvisors if they have any doubt as to how the definitionshould apply in particular Policy ManualCG-2 Systems of Control for the Appointmentof In determining whether an individual falls within thedefinition of manager, AIs may consider whether thatindividual possesses the following characteristics: he is not a director or chief executive (including analternate chief executive) of the AI4.

8 And he is principally responsible, either alone or withothers, on a day-to-day basis for the managementof a discrete department, division or otherbusiness or functional unit which carries on abusiness or activity that falls within the categoriesspecified in the Fourteenth Schedule to theBanking That an individual is principally responsible for theconduct of a particular business or activity may bemanifested by the following attributes that he may exhibitin relation to that particular business or activity: accountability for the achievement of businessobjectives or targets set by the Board of Directorsor the chief executive; occupying a position within the AI which is ofsufficient authority as to enable the individual toexert a significant influence on the conduct of thebusiness or activity in question.

9 For example, ifthe individual is under the immediate authority of adirector or chief executive (including an alternatechief executive) or has a direct reporting line tosuch persons, that would be indicative of sufficientauthority; authority to make decisions ( assumebusiness risks within pre-set limits) for thatbusiness or activity; 4If an individual is principally responsible for the conduct of a particular business or activityof an AI but is also its director, chief executive or alternate chief executive, that individualdoes not fall within the definition of a manager. Whether any other individual within the AIshould be regarded as a manager for the business or activity in question will depend on thefacts of the case, whether such an individual is also principally responsible for thebusiness or activity in Policy ManualCG-2 Systems of Control for the Appointmentof authority to allocate resources or incurexpenditures in connection with the particulardepartment, division or functional unit carrying onthe business or activity.

10 Or authority to represent the particular department,division or function unit within the AI ( in seniormanagement meetings) or in meetings withoutside While the above characteristics or attributes are usefulindicators of whether an individual is a manager, AIsshould note that not every manager will necessarilypossess all these characteristics or attributes. Everycase should be judged according to the In general, the intention is to capture the layer ofmanagement immediately below the level of chiefexecutive, head of retail banking , head ofcorporate banking , head of internal audit etc. It isrecognised, however, that managerial appointmentswithin particular AIs may not fall neatly into thesecategories and that in some cases, it may be necessaryto go further down into the organisation.