Hong Kong Finance Profile 2012

Hong Kong, China: Developments in Regulatory Reform

Key features of Hong Kong, China’s (HKC) regulatory reform

HKC began as a small and open trade port some 200 years ago. It is externally oriented and is fully open to foreign capital and technology for its growth and development. As the economy grew, industries became more sophisticated, the need for rules and regulations gradually evolved. To ensure regulatory policies and standards continue to serve their purposes and are consistent with changes in circumstances and needs, specific entities were set up to review the existing regulatory standards, and to remove burdensome and outdated rules and regulations.

As a result, the timing and sequencing of the establishment of regulatory authorities, and later the regulation reviewing bodies, tend to be largely coherent with market needs taking into account the size, the scope and the degree of sophistication of development of the specific industry.

Legislation, policy and principles

HKC maintains a high level of transparency of government laws, regulations and administrative procedures. All primary and subsidiary legislation (and amendments of them), statutory notices for appointment of public offices, departmental notices and public tenders; ordinances, regulations and bills; periodical lists for professionals, institutions, etc; executive orders and public notices are published regularly in the Government Gazette.

HKC is also committed to ensuring equality for all before the law, judicial independence and that the rule of law prevails in all spheres of society; respecting the rights and dignity, and safeguarding the freedoms of each individual; and maintaining a highly transparent and accountable government which supports civic participation.

It is a standing practice in HKC for the government and regulatory authorities to consult stakeholders in the making of policies, rules and regulations. The duty to consult relevant parties may also be a statutory requirement on the government or an authority. Specific ordinances or subsidiary legislation are introduced to provide a legal framework for new regulations and to empower the concerned regulatory bodies the authority of enforcement. Legislators and legal advisors are closely involved in the drafting of new regulations. The economic, financial, civil service, environmental and sustainability implications are duly assessed during the drafting process. And according to circumstances, different levels of consultations are conducted to gauge the public reaction to the proposed regulations (and there is no discrimination between domestic and foreign stakeholders). Prior to presentation to the legislature, the final draft (the Bill) and its explanatory memorandum will be published in the Gazette for public scrutiny. The passage of a bill normally involves extensive debates among the legislators comprising representatives from different functional and geographical constituencies.

Once policies and regulations are made, the responsible government agencies or relevant organisations will ensure that they are properly implemented or enforced to achieve their purposes. Details of policies, rules and regulations, as well as the laws that provide backing to them, are made publicly available through various channels, including the government website. Policies and regulations are reviewed regularly or when required, taking into account the prevailing circumstances and views expressed by stakeholders.

Objectives of regulatory reform

HKC believes in market forces and adopts a minimum intervention approach to economic arrangement. Regulatory regimes are established to provide prudential supervision, to ensure safety, to protect consumer interests, and to encourage investment.

HKC also strives to ensure that it does not create unnecessary red tape in achieving legitimate policy objectives and that regulators are conscious of the full cost implications of their practices. It continues to undertake regulatory reviews and business facilitation initiatives to cut red tape, deregulate and reduce the cost of compliance; to cultivate a business facilitation and customer-centric culture in the civil service; and to implement deregulatory measures where appropriate.

Mechanisms and institutions to oversee regulatory reform
Institutions

Hong Kong became a Special Administrative Region of the People’s Republic of China (PRC) on July 1, 1997. The Basic Law of the Hong Kong Special Administrative Region (HKSAR) came into effect on the same day. The Basic Law prescribes the systems to be practised in the HKSAR. Under the Basic Law, the HKSAR exercises executive, legislative and independent judicial power, including that of final adjudication.

The Executive Council is an organ for assisting the Chief Executive (CE) in policymaking. Under Article 56 of the Basic Law, except for the appointment, removal and disciplining of officials and the adoption of measures in emergencies, the CE shall consult the Executive Council before making important policy decisions, introducing bills to the Legislative Council, making subordinate legislation, or dissolving the Legislative Council.

The Legislative Council of the HKSAR, on the other hand, shall exercise the powers and functions, including to enact, amend or repeal laws in accordance with the provisions of the Basic Law and legal procedures, amongst others.

The network of advisory and statutory bodies is a distinctive feature of the system of the government. Its purpose is to tap professional expertise present in the community and to encourage public participation in government decision-making. Advisory bodies give advice to the government through senior government officials such as Principal Officials, Permanent Secretaries of Bureaux or department heads. A few advisory bodies pass their advice directly to the CE.

The advisory and statutory bodies’ areas of activities are wide-ranging. Some, such as the Telecommunications Standards Advisory Committee, deal with the interests of a particular industry while the Transport Advisory Committee advises on a particular area of government policy. The District Councils advise the government on all matters affecting the well-being of residents in the districts. Statutory bodies have legal powers and responsibilities to perform specific functions in accordance with the relevant legislations. Over 4,000 members of the public are serving on about 400 advisory bodies.

The Economic Analysis and Business Facilitation Unit (EABFU) under the Financial Secretary’s Office is a dedicated Unit established in June 2004 to support the work of the Business Facilitation Advisory Committee (BFAC) (and the dissolved Economic and Employment Council6 before 2006), and coordinate the HKC government’s efforts to take forward various business facilitation initiatives such as

the “Be the Smart Regulator” Programme (see Section 2.2. below for details of the Programme). It continues to focus on making HKC a genuinely friendly place for both local and overseas businesses.

Extensive participation of representatives from the business, academic and professional sectors, as well as legislators and senior government officials from relevant government bureaux, in the BFAC manifests the significance HKC places on regulatory reform and the wide public support it enjoys. BFAC advises and reports to the Financial Secretary on the development and implementation of programmes and measures to facilitate business, and serves as a channel for the top management of the government to monitor regulatory reform progress. It systematically reviews government regulations and procedures impacting on business, with a view to eliminating outdated or burdensome regulations to facilitate business operations and reducing compliance cost to the business community. It sets the priority for conducting regulatory reviews of selected business sectors and sets up dedicated sector-specific task forces to carry out the reviews. The task forces usually invite relevant trade representatives to take part in the reviews.

EABFU, under the steer of the BFAC, conducts regulatory reviews on those sectors not covered by the task forces and co-ordinates with the bureaux/departments concerned in taking forward business facilitation initiatives endorsed by the BFAC. EABFU is also working closely with government bureaux and departments concerned in conducting Regulatory Impact Assessment (RIA) or Business Impact Assessment (BIA) studies on proposed regulations impacting on business. BFAC, together with the EABFU and the sector-specific task forces, to a certain extent, functions as a “quality control” mechanism for the “external” review of government regulations and procedures which have impact on the business sectors.

Awareness and support

In February 2007, the HKC government launched the “Be the Smart Regulator” Programme as a new wave of regulatory reform to further enhance the business environment and long-term competitiveness. The Programme aims to improve the efficiency, transparency and businessfriendliness of business licensing processes with a view to reducing compliance costs to the business community while safeguarding public interest. The Programme was endorsed by the CE and regular progress reports are submitted to the Office.

Around 30 government bureaux/departments providing licensing services to various business sectors are participating in the Programme. Good progress has been made on various fronts to improve the overall licensing environment for doing business in HKC. In particular, targeted measures have been implemented to improve the turnaround time of issuing licences for the food and hospitality industries.

Some key measures implemented under the Programme include setting up Business Liaison Groups for major business sectors to give their views on regulatory or licensing issues directly to licensing departments; establishing a business consultation e-platform under the GovHK portal (www.bce.gov.hk) to facilitate the business sectors to access consultation information relating to proposed regulations, administrative measures and procedures that would impact business and to offer their views and comments; developing a BIA framework to help bureaux/departments to assess the business impact of their regulatory proposals in a structural and systematic manner; setting up application-tracking facilities to enable applicants to track the processing status of their licence applications; development of e-licensing systems; re-engineering the licensing processes through process reviews and better exploitation of IT; and promoting a business facilitation and customercentric culture in the civil service.

Transparency and predictability
Within the Administration, a General Circular sets out the policy and principles of public consultation and the importance of keeping the public informed of the results of consultation as general guidelines for all bureaux and departments. In recent years, the CE has stressed the importance of going further than consultation by seeking to engage the public at the earliest opportunity on the formulation of proposals. Bureaux and departments have flexibility in designing and implementing public consultations/engagement to best suit their situations and needs. The level of consultation required and the consultation format adopted depend upon the nature of each regulatory proposal and the stage of the policy development process.

Generally, consultation papers are made available on the websites of relevant bureaux, departments or regulatory authorities, and are usually accompanied by press releases to inform the public. Such information is accessible to all and is open to comments from both domestic and foreign stakeholders. Written comments can be submitted by facsimile, mail and email within a specified time period. A business consultation e-platform under the GovHK portal (www.bce.gov.hk) has been established to provide a single access point to all consultation documents on regulatory proposals which potentially have significant effects on business. To ensure a transparent process, summary reports on public comments and/or written submissions received during the consultation period are published on the websites of the responsible bureaux and departments. Further rounds of public consultation may be conducted as required.

Bureaux and departments in HKC are held accountable for the way in which they conduct public consultations and how they address public opinions. In cases where the opinions of certain sectors cannot be fully adopted, a clear explanation is required. Public opinion and public reaction to proposals are carefully considered during the entire policy formulation process.

In his 2007 Policy Address, the CE announced “Reaching out to the Community” and “People-based Governance” as key commitments of the government. A subtle evolution from public consultation to public engagement has taken place in recent years. Government officials have proactively solicited public views prior to the identification, formulation and introduction of new policies as well as designing and delivering important public services.

Improving the quality of regulation
Regulatory tools, systems and processes for improving the quality of new regulations
(Flow)

While RIA is not a compulsory requirement for new regulatory proposals, departments/bureaux concerned will normally consider conducting RIA for major policy proposals with a significant regulatory impact.

A typical RIA may include assessment of  the need for regulation; options available;  identification of stakeholders; impact analysis of regulations in terms of both quantifiable and nonquantifiable benefits and costs associated, which would also include its implications for trade and market entry, if applicable; distributive analysis of the impacts and costs by stakeholder;  sensitivity analysis of changes in key assumptions and parameters; he consultation process and its findings; implementation and review mechanisms.

HKC recognizes that there is no one-size-fit-all method for conducting RIAs. While we have developed a general framework for how a RIA could be performed, bureaux and departments have the flexibility to incorporate methods and criteria that suit their respective situations.

Under the “Be the Smart Regulator” Programme, HKC has developed a BIA framework for bureaux and departments to deploy in assessing the business impact of their regulatory proposals with a view to reducing compliance costs to business and avoiding any unintended consequences. The four stages involved in the BIA framework include review of government intervention and options; assessment of business environment; business consultation and business impact assessment; and identification of key issues/challenges and proposed changes to the regulatory proposal (including recommendations on mitigation measures, enforcement strategy and evaluation/review mechanism).

Regulatory tools, systems and processes for improving the quality of existing
regulations (Stock)

To avoid the abuse of regulations or misjudgement in enforcement, various appeal and complaint mechanisms are available to the regulated parties. The first channel is the department or bureau concerned. In his Policy Address in October 2008, the CE asked all heads of department to review their complaints handling regimes. This is now in progress. Another common avenue for complaints is through the built-in complaint procedures maintained by the regulatory body involved. A further complaint avenue available is the Office of The Ombudsman, an independent authority established under the Ombudsman Ordinance (Cap 397) since February 1989. The Office of The Ombudsman may initiate direct investigation and extend its jurisdiction to include nearly all government departments and 14 major statutory bodies.

Future challenges and lessons learned in promoting regulatory reform
 

Lessons learned in promoting regulatory reform and major progress in the past five
years

Under the steer of the BFAC and its Task Forces, EABFU continues to take forward the regulatory reviews and other business facilitation initiatives over time. Amongst other successful experiences, for example, HKC requires each cinema operator to obtain a Places of Public Entertainment (Cinema) licence before films can be legally exhibited for public entertainment to protect public safety and maintain the hygiene standard of a metropolitan city.

In early 2005, a review of the regulatory regime of the cinema industry was conducted with a view to developing a more transparent and efficient licensing system. The trade, professional bodies and associations of specialist contractors were consulted, and all indicated support to a number of reform measures.

The regulatory reform has commenced since 2006, adopting a four-pronged approach, i.e., efficiency, modernisation, transparency and communication. A provisional licensing system has been put in place through legislative amendment since late 2006, by adopting “private sector involvement” in certification issued by registered professionals and specialist contractors confirming the full compliance of building safety, fire safety and hygiene standards. In addition, a central database on “common defects” and “lessons learnt” regarding past applications has been uploaded onto the official website for public access since 2007. These measures facilitate early compliance, hence shortening the time to obtain a licence. On enhancing communication, case-specific licensing requirements are sent to applicants prior to the meeting of the Application Vetting Panel where issues of licensing requirements could be discussed with the licensing authorities.

Since the implementation of a set of improvement measures, the time required for a cinema to legally commence business has been reduced by half, i.e. from 10 months to around four to five months. Accordingly, rents and other related start-up expenses have also been saved. This enhanced cinema regulatory system has benefited the film-making industry since film exhibition is the “retail-outlet” of film-production.

From a broader perspective, HKC also strives to cultivate a business facilitation culture in the civil service through various means such as training, experience-sharing sessions and publications. The government has developed a dedicated “Be the Smart Regulator” website in the intranet of the civil service to promote smart regulation, and published a related booklet to provide civil servants tasked with regulating HKC’s businesses with an overview of the challenges facing the regulators and with examples of good practices.

Future challenges

HKC appreciates that regulatory reform is a dynamic and ongoing process. Over the past few decades, HKC has built a sound foundation and is acknowledged internationally for its high quality institutions. Despite ongoing improvements to service quality and efficiency, like governments around the world, the government is facing challenges in seeking to balance the interests of a multiplicity of stakeholders whilst coping with constant changes in the social, technological and economic environments. For example, various types of services are organised on the basis of programme areas. The delivery of these services is performed by different bureaux and departments with their own missions, operational approaches, processes and procedures. The government must embrace joined-up services with collaboration among bureaux and departments in order to organise public services around customer needs, bring convenience to people and bolster improvements towards better services.

Some commentators have suggested that the current financial crisis may prompt a fundamental change in attitude to regulation and there may be calls for stricter regulation, and that such calls may spill over from the financial sector into non-financial areas. The government is mindful of the need to balance financial market facilitation against market regulation.

Undoubtedly, the government has to meet broad social objectives which can be challenging to measure. In response, HKC is making changes, many of which have to do with attempts to simplify and reduce the complexity of day-to-day operations, comparing and benchmarking with equivalent private and public sector operations, all the better to manage performance and measure results.

HKC will sustain its efforts to enhance competitiveness on the globalised platform through regulatory reform. HKC will continue to strive hard to improve regulatory efficiency in areas such as licensing, enforcement of regulations and support to businesses in complying with regulations. In addition, HKC will further cultivate within the civil service a business facilitation and customer-centric culture.

Commercial Banking Report Q1 2011