Regulation and Compliance: HKMA warns banks of stricter supervision

Extracts from the letter sent 4 January 2010.

At present, the HKMA considers compliance with the Code as part of its regular supervisory process for AIs. It also requires AIs to undertake periodic self-assessments of their own compliance. The HKMA then follows up with relevant AIs and takes appropriate action when breaches of the Code come to light through these monitoring processes or from other channels, such as complaints from customers.

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The current biennial self-assessment exercise will revert to a yearly basis. As a transitional arrangement, the forthcoming exercise will cover a reporting period from 1 June 2008 to 31 December 2009. This will enable the HKMA to assess AIs’ full compliance with the current version of the Code which took effect on 2 January 2009.

In addition, the reporting template for the self-assessment has been revised so that AIs set out their rationale for any deviation from the norm in certain areas. For instance, section 12.3 requires AIs not to charge customers “extortionate interest rates”. An AI might be charging over 48% (the level presumed under the Money Lenders Ordinance to be extortionate) in some cases but decide that it is in compliance with that section because it sees itself as having strong justification for doing so. Instead of reporting a simple “yes” as in the existing template, the revised template would require the AI to provide further information on its justification for cases where it charges in excess of 48%.

As in the past, all AIs are required to commission their internal audit department, compliance department or other equivalent unit to conduct the self-assessment. The chief executive of the AI should co-sign the self-assessment report. Where an instance of non-compliance is identified, the AI concerned should provide details of the case including its plan to rectify the situation. A full account should be given if the instance of non-compliance is a recurrence of similar instances identified in previous exercises.

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Based on results from previous self-assessment exercises, most of the non-compliance cases concern subjects covered in Chapter 1 (Relationship between Banks and Customers) and Chapter 2 (Accounts and Loans) of the Code. These also tend to be areas that attract customer complaints and therefore call for priority attention. Henceforth, AIs should notify the HKMA as soon as practicable of any breach of any provision within Chapters 1 and 2 of the Code, adopting the standard format below. Such exception reporting will facilitate the HKMA’s timely monitoring of rectification action, and should also help focus AIs’ attention on measures needed to strengthen their compliance with the Code.

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Both self-assessment and exception reporting inevitably reflect AIs’ own perspectives of their compliance with the Code. Drawing on the monitoring frameworks in other jurisdictions, including the UK and Australia, the HKMA is proposing to introduce a trial mystery shopping scheme as a proactive approach to seek to assess compliance from the consumer’s perspective. By testing customer experience against expectations set by the Code, this research technique may reveal useful information regarding levels of compliance with the Code and identify potential areas for improvement.

Starting from 2010, the HKMA will engage the services of one or more organisations engaged in market research activities to undertake mystery shopping exercises.

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