Regulatory risk management
Introduction
The current regulatory structure in Hong Kong
3. Hong Kong’s current approach to regulation can be characterized as institutional with functional aspects. This means that the firm’s legal status (bank, broker or insurance company) determines which regulator is responsible for supervising its activities from both a prudential and conduct of business perspective. However, this has been modified in Hong Kong to allow for the fact that banks are conducting a broader range of financial services business. In particular, responsibility for supervising the banks’ securities business is shared between the HKMA and the Securities and Futures Commission (SFC).
4. It should be noted that Hong Kong is by no means alone in continuing to maintain a system of multiple regulators.
The Twin Peaks model
14. This potential for conflict of interest underlies the preference of some countries for the so-called Twin Peaks approach which allocates responsibility for prudential regulation and conduct of business regulation to two separate agencies. This is an example of regulation by objectives: prudential regulation being designed to promote the safety and soundness of individual financial institutions (and deriving from that, the stability of the financial system as a whole), while conduct of business regulation is directed at consumer protection.
15. So far only two countries have adopted fully-fledged variants of the Twin Peaks approach, albeit with some differences between them. These are Australia and the Netherlands.
16. Interest in the Twin Peaks model has recently been heightened by the 2008 US
Treasury “Blueprint for a Modernised Financial Regulatory Structure” which presents a long-term optimal regulatory structure based on a separation between prudential and conduct of business regulation.
17. While it may represent a growing trend the Twin Peaks model is not without its own problems. In particular, the respective responsibilities of the two regulators
The current regulatory structure in Hong Kong
3. Hong Kong’s current approach to regulation can be characterized as institutional with functional aspects. This means that the firm’s legal status (bank, broker or insurance company) determines which regulator is responsible for supervising its activities from both a prudential and conduct of business perspective. However, this has been modified in Hong Kong to allow for the fact that banks are conducting a broader range of financial services business. In particular, responsibility for supervising the banks’ securities business is shared between the HKMA and the Securities and Futures Commission (SFC).
4. It should be noted that Hong Kong is by no means alone in continuing to maintain a system of multiple regulators.
The Twin Peaks model
14. This potential for conflict of interest underlies the preference of some countries for the so-called Twin Peaks approach which allocates responsibility for prudential regulation and conduct of business regulation to two separate agencies. This is an example of regulation by objectives: prudential regulation being designed to promote the safety and soundness of individual financial institutions (and deriving from that, the stability of the financial system as a whole), while conduct of business regulation is directed at consumer protection.
15. So far only two countries have adopted fully-fledged variants of the Twin Peaks approach, albeit with some differences between them. These are Australia and the Netherlands.
16. Interest in the Twin Peaks model has recently been heightened by the 2008 US
Treasury “Blueprint for a Modernised Financial Regulatory Structure” which presents a long-term optimal regulatory structure based on a separation between prudential and conduct of business regulation.
17. While it may represent a growing trend the Twin Peaks model is not without its own problems. In particular, the respective responsibilities of the two regulators