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Focus on two Hong Kong landmark developments: a proposed bank resolution regime and the final chapter in the Tiger Asia insider dealing case

The New Year has brought new challenges on the horizon for financial groups, and a reminder of the existing determination and persistence of Hong Kong regulators in relation to potentially destabilising market activity. We focus on two significant developments below.

Resolution of Financial Institutions

The Hong Kong Government and its three main financial regulators, the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC), and the Insurance Authority (IA) have jointly launched the first stage of a public consultation on establishing a resolution regime for financial institutions in Hong Kong (the Financial Institution Resolution Regime). This proposal is designed to bring Hong Kong into line with other developed jurisdictions and their regimes as to how financial institutions which are either in crisis or may imminently suffer major adverse issues should be handled.

A broad range of financial institutions is expected to be caught, the initial net is cast so as to cover all regulated banks in Hong Kong, licensed securities and other regulated entities (particularly those within insurance and banking groups), "financial market infrastructure" entities, such as clearing houses, and most Hong Kong-authorised insurers. Hong Kong-incorporated holding companies, even where unregulated, and other affiliated companies which provide operationally critical services, will also potentially be caught.

Accordingly, from a risk perspective, there is the potential for a very broad array of regulated and unregulated entities to be swept up into the new regime. There is the prospect of "engineering" by regulators in respect of groups to ensure that relevant sub-groups and entities are housed under a "resolvable" umbrella, imposing seeming simplification of Hong Kong operations and structures.

Since these requirements will span multi-function groups, relevant regulators will play a crucial role in ensuring a level playing field for different industry sectors. The SFC, HKMA and IA are likely to share the burden across the various relevant sectors; we would not expect there to be a single resolution authority given the complications that would create and the historical multi-regulator background, including on-going cooperation under memoranda of understanding among them.

It is proposed that resolvability will be subject to the need for both a "non-viability" test and a test concerning the likely knock-on effects of the particular entity's (or group's) difficulties in the context of the Hong Kong financial system. For foreign groups with Hong Kong branches, the authorities would consider the "home" jurisdiction's stance on resolution matters, as well as relevant adverse effects on Hong Kong financial system as a whole.

The menu of possible powers for Hong Kong resolution authorities has been drawn widely (at least to start with), including compulsory transfers, temporary "parking places" for assets and businesses (or parts of them), statutory "bail-in" requirements and even, as a last resort, public ownership. It is suggested that "higher authority" may need to become involved as a check-and-balance at some point before the resolution regime is triggered by a regulator.

Over 70 % of AIs and over 45 % of authorised insurers in Hong Kong operate as branches of foreign groups, and so it is unsurprising that the proposed new regime makes special provision for institutions established beyond the Territory's borders.

  • The first is where the overseas institution and/or its Hong Kong branch is failing but has not been placed into resolution by the institution's home resolution authority (if there is one). In these circumstances, the resolution powers can be triggered in the same way as for Hong Kong-incorporated institutions. This trigger is necessary in order to make provision for situations where the financial institution's home resolution authority either cannot or does not act in a way that protects the public interests of Hong Kong.
  • The second is where the overseas financial institution has been placed into resolution by its home resolution authority. In such a case, the resolution powers would become available to the relevant resolution authorities in order to "support" the overseas resolution. The two conditions for this method are that the home resolution authority is initiating the resolution of a cross-border group whose Hong Kong operations are within the scope of the regime, and the resolution authority in Hong Kong assesses that the home resolution authority's approach will produce outcomes consistent with the Hong Kong resolution objectives and will not disadvantage Hong Kong creditors relative to foreign creditors.

Of course the global resolution system (however it may evolve) will ultimately depend on political expediency not overriding cross-jurisdictional cooperation in relation to international groups.

In practical terms, the first stage consultation ends on 6 April 2014; a second stage is promised later in the year with more detailed consultation issues, developed from the initial consultation; the various necessary legislation changes are intended to be navigated through 2015. Institutions need to weigh the potential Hong Kong requirements, how they fit into the rising world order, and in particular the extent to which they dove-tail, or can be made to dove-tail, with home jurisdiction requirements for foreign groups operating in Hong Kong.

The proposals will test the mettle of Hong Kong's practical commitment to the on-going evolution of international financial regulation, and will provide a further layer of challenge for the structure of financial groups, and their operational and compliance systems.


In our Legal & Regulatory Risk Note for July 2013, we reported on the latest development in the Tiger Asia case, noting that the Court of Final Appeal in Hong Kong had confirmed that the Court of First Instance has the power, on the application of the SFC, to make a final finding that market misconduct had occurred, and to grant final orders under s213 of the Securities and Futures Ordinance, regardless of whether a prior finding had been made by the Market Misconduct Tribunal (MMT) or the criminal courts that market misconduct had occurred.

Towards the end of the year, the Tiger Asia parties submitted a statement of agreed and admitted facts in the s213 proceedings admitting that they had contravened Hong Kong's laws prohibiting insider dealing and were ordered to pay HKD 45,266,610 to investors affected by their insider dealing. The order included the appointment of Mr John Robert Lees and Mr Kok Wing Chong, of JLA Asia as independent administrators to take charge of the distribution of the restoration amount to the counterparties to Tiger Asia's insider dealing. The same admissions were made in proceedings commenced by the SFC in the MMT. The SFC has indicated to the MMT that it will be seeking a cease and desist order as well as an order prohibiting the Tiger Asia parties from dealing in Hong Kong without leave of the court for up to five years.

The SFC's Executive Director of Enforcement, Mr Mark Steward, said: "Tiger Asia's admissions of insider dealing and manipulation vindicate the SFC's allegations made at the outset of these proceedings. Investors are unable to detect, or avoid transacting with, wrongdoers in the market and so they are highly vulnerable to this kind of misconduct. It is right and fair that these transactions should be rescinded so that the 1,800 innocent investors may be put back, as closely as possible, to the positions they were in before the transactions took place". This is fully consistent with the reported intent behind the use of proceedings under s213 to obtain recovery for the victims of misconduct. Against this background, such proceedings are likely to become ever more common.

there is the potential for a very broad array of regulated and unregulated entities to be swept up into the new regime