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    HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration

    July 29, 2021

    The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions. Also revised was the policy manual CS-1 that sets out the group-wide approach currently adopted by HKMA for locally incorporated authorized institutions where they form part of a financial or a commercial group, either as the head of the group, or as one of the member companies of the group. Authorized institutions are expected to review whether their remuneration systems are consistent with the principles set out in the revised module and, if needed, to adopt all necessary changes as soon as practicable, no later than January 01, 2022.

    Policy Module on Group-Wide Supervision. In Hong Kong, the structure of a group of which an authorized institution forms a part generally falls into one or more of the three categories. Type one is where an authorized institution is heading a financial group with subsidiaries engaging predominantly in providing financial services, such as banking, securities and insurance. Type two is where the authorized institutions and its subsidiaries form part of an international banking group or other supervised financial group. Type three is where an authorized institutions and its subsidiaries are part of a group that is headed by an unregulated holding company which controls entities engaging in financial activities or a wider range of financial and non-financial activities. The Policy module on group-wide supervision was revised primarily to:

    • Reflect the current supervisory approach and practices adopted by HKMA in relation to a locally incorporated authorized institution where it forms part of a banking, financial, or commercial group
    • Incorporate relevant principles in international standards concerning the supervision of financial conglomerates
    • Cater for consequential changes arising from amendments to the Banking Ordinance, relevant rules made under the Ordinance and supervisory guidelines.

    Policy Module on Remuneration. This module sets out the supervisory expectations with regard to remuneration practices of authorize institutions. This module focuses on the governance and control arrangements for, and operation of, authorized institutions’ remuneration systems in the context of the incentives for risk-taking they may create. Authorized institutions are expected to establish and operate their remuneration policies, structures, and incentive awards with due regard to the principles set out in this module. The changes incorporated in the revised policy module are mainly to:

    • Update the existing guidelines following the most recent guidance issued by the Financial Stability Board on sound remuneration practices, and in particular on the use of remuneration tools to address potential misconduct risks
    • Strengthen the Board oversight on the formulation and implementation of remuneration systems and related control processes
    • Provide guidance in relation to the adoption of group remuneration policies and approval of remuneration packages of senior management and Key Personnel for foreign bank branches
    • Update the existing guidelines to align with the remuneration disclosure requirements in the Banking (Disclosure) Rules

    Keywords: Asia Pacific, Hong Kong, Banking, Banking Ordinance, Group-Wide Supervision, Supervisory Policy Manual, CG-5, CS-1, Remuneration, Disclosures, Governance, ESG, HKMA

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