WORLD TRADE
ORGANIZATIONS/FIN/W/25/Add.1
19 June 2003
(03-3275)
Committee on Trade in Financial Services Original:  English
COMMUNICATION FROM HONG KONG, CHINA
Market Trends and Regulatory Issues Relating to Electronic Banking and On-line Trading in the
Securities and Futures Market of Hong Kong, China
Addendum
The attached communication has been received from the delegation of Hong Kong, China
with the request that it be circulated to the Members of the Committee on Trade in Financial Services.
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ANSWERS TO SUPPLEMENTARY QUESTIONS
1. Members of the Committee on Trade in Financial Services raised a number of questions at the
meeting of 26 February 2003 on the submission by Hong Kong, China (HKC) sharing its experience
on regulatory issues relating to electronic bankin g and on-line trading in the securities and futures
markets in HKC (S/FIN/W/25).  This supplementary note provides some of the answers for the
purpose of information sharing without prejudice to the measures that may be taken by the relevantregulators of HKC.
Q1. Are there already some foreign institutions providing services across the border into HKC?
Are such services allowed under HKC's regulatory regime?  Are these institutions subject to HKC's
regulatory regime?
2. As far as the banking sector is concerned, there are already foreign banks carrying on the
business of taking deposits or banking business in HKC through their physical branches in HKC.  All
these branches must be authorized under the Banking Ordinance (Chapter 155 of the Laws of Hong
Kong)
1 and subject to the supervision of the Hong Kong Monetary Authority (HKMA). Any
institutions (local or foreign) that intend to carry on banking business or the business of takingdeposits in Hong Kong must be authorized under the Banking Ordinance and a physical presence has
to be established
2, regardless of whether electronic channels are used in Hong Kong.  The HKMA has
been complying with the guidance3 set out by the Basel Committee on Banking Supervision in
                                                     
1 The Laws of Hong Kong can be found at http://www.justice.gov.hk/index.htm .
2 There is, however, no restriction for customers of an overseas bank which does not have any branches in HKC to access
their internet banking accounts maintained with the bank when the customers are inside HKC, say, during their visits to
HKC.
3 See “Principles for the Supervision of Bank’s Foreign Establishments”, generally known as the “Concordat”, issued by the
Basel Committee on Banking Supervision in May 1983, and its later supplements. See also “Management and SupervisionS/FIN/W/25/Add.1
Page 2
supervising cross-border provision of banking services, including any cross-border e-banking
services, to HKC.
3. We are aware of a number of cases where foreign institutions solicit offshore deposits from
members of the public in HKC.  We also notice that at least one foreign e-payment service provider is
offering its email-based payment services to members of the public in HKC.  The service providerconcerned does not have any physical presence in HKC and the service is provided to HKC customers
over the internet.  If the financial services are the carrying on of banking business or the business of
taking deposits in HKC, the institutions must be authorized under the Banking Ordinance and subject
to the supervision of the HKMA.  If the financial se rvices consist of the taking of offshore deposits
from Hong Kong, the advertisements for deposit s must comply with the statutory disclosure
requirements set out in the Fifth Schedule to the Banking Ordinance.
4. On the securities and futures sector, there are a number of multinational financial institutions
carrying on significant amount of securities and futures business volume in HKC.  These institutions
mainly carry on their businesses through setting up subsidiary companies in HKC.  Under the
Securities and Futures Ordinance, any entity may carry on a business of regulated activities (e.g.
dealing in securities or futures contracts) if it is  licensed or registered by the Securities and Futures
Commission (SFC).  All licensed or registered entities, irrespective of whether it is a local or overseascompany, must comply with the same law and regulations relating to their carrying on of regulated
activities in HKC.
5. Regarding the insurance sector, apart from statut ory insurance such as motor third party risk
and employees compensation insurance which must be purchased from authorized insurers, there are
expatriates purchasing insurance from insurers of their home countries and some HKC residentspurchasing insurance from overseas mainly through the internet.  Under section 2(3) & (4) of the
Insurance Companies Ordinance (Chapter 41 of Laws of Hong Kong), an insurer shall be deemed to
carry on insurance business in or from HKC and thus be required to obtain an authorization from the
Insurance Authority (IA) if it opens or maintains an office or agency (except a claims settlement
agency for certain goods in transit insurance) in HKC for the purpose of carrying on of insurancebusiness, or holds itself out as carrying on insurance business in or from HKC.
6. The Insurance Authority has also issued a Guidance Note on the Use of Internet for Insurance
Activities (GN8)
4, indicating that service providers with promotional activities or solicitation
targeting at Hong Kong residents may need to obta in authorization or otherwise be regulated pursuant
to the Insurance Companies Ordinance.  If the service provider is caught by the foregoing, then it will
need an authorization or be regulated in the usual manner.
Q2: Are there any banks in HKC that are really virtual?  If so, whether they provide services
abroad?  Whether establishing a virtual bank in HKC means that it must be incorporated in HKC?
7. There is one locally incorporated internet-based bank (MEVAS Bank,
http://www.mevas.com ).  While it is an internet-based bank, it provides customers with multiple
service channels such as the Internet, a 24-hour customer service officer-assisted hotline, theinteractive voice response phonebanking system, ATMs and its five physical service centers.
Moreover, its customers can enjoy a range of banking services at all branches of another local retail
bank of the same banking group.  The bank's current focus is on basic banking and credit card
services for retail customers.  Virtual banks can be established by locally incorporated institutions or
foreign banks (in branch form) as long as they meet the requirements set out in the Guide to
                                                                                                                                                                    
of Cross-Border Electronic Banking Ac tivities” issued by the Basel Committee on Banking Supervision in October 2002.
These documents can be found in http://www.bis.org .
4 http://www.info.gov.hk/oci/download/gn8-eng.pdf .S/FIN/W/25/Add.1
Page 3
Authorization of the HKMA5, particularly the minimum criteria for authorization in the Seventh
Schedule to the Banking Ordinance.
Q3. How do the regulators cope with the challenge posed by cross-border provision of financial
services by institutions such as virtual banks, especially to ensure proper regulation and
accountability?  Are foreign
8. As far as the banking sector is concerned, the Basel Committee has already established the
guidance and principles of supervision of cross-border banking services, including any cross-border e-
banking services (see footnote 3).  In general, these documents set out how the home country bank
supervisor and the local supervisors should cooperate in supervising cross-border banking services.
9. Regarding the securities and futures sector, the SFC expects that cross-border institutions
conducting regulated activities overseas to be licensed with the relevant regulatory authorities in theirhome jurisdictions.  The SFC has signed a number of memorandums of understanding with overseas
regulatory authorities.  It is through this mechanism that the SFC seeks to obtain relevant information
of such entities to ensure that they are fit and proper before they are permitted to carry out regulated
activities in HKC.  In some instances, the SFC may require the institutions to set up a local branch
office or subsidiary to facilitate supervision over the regulated activities.
10. Regarding the insurance sector, if the service provider is caught by the circumstances
mentioned in paragraphs 5-6 above, it will be regu lated in the usual manner, e.g. an insurer would be
required to observe the fit and proper persons test; capital and solvency; adequate reinsurance
protection requirements; etc.  Under GN8, the relevant service provider is required to state explicitly
in its website its authorization status in different jurisdictions, take precautionary measures tosafeguard transaction security/data integrity/protection of privacy of clients’ personal information, be
capable of dealing with various issues throughout  the online sales including provision of adequate
information and compliance with the Electronic Transactions Ordinance (Chapter 553 of the Laws of
Hong Kong), etc.  In terms of enforcement, the IA will seek the assistance of the insurance supervisor
in other places whenever necessary.  In its public education activities, the IA also from to timereminds the insuring public in HKC of the importance to purchase insurance products from authorized
insurers.
Q4: Is solicitation of deposits from the public in HKC by overseas institutions not subject to
authorization if the deposits are placed outside HKC?  Whether the same applies to other financial
services such as investment funds?
11. Companies intending to solicit offshore deposits from members of the public in HKC are not
required to be authorized.  However, all advertising materials for deposits are required under section
92 of the Banking Ordinance of HKC to comply with the disclosure requirements in the Fifth
Schedule to the Ordinance as they are targeted at  members of the public in HKC.  Such requirements
include, among other information, a prominent warning to the effect that the deposit-taker is not an
authorized institution and is therefore not subjec t to the supervision of the HKMA.  The aim is to
ensure that material facts are available to enable prospective depositors to make their own judgement
on whether to place a deposit with the institutions concerned.
12. A person cannot solicit investment funds from Hong Kong public unless the offer documents
are authorised by the SFC.
13. For insurance, whether an authorization is required does not depend on location of the subject
matter or risks but rather on the factors mentioned in paragraphs 5-6 above.
                                                     
5 http://www.info.gov.hk/hkma/eng/public/gta2002/Chapter%209.pdf .S/FIN/W/25/Add.1
Page 4
Q5. Would advertising material over the internet be considered as active solicitation and
marketing of financial services?
14. Like regulators in other major financial centers,  it is also the HKMA's policy to regulate only
Internet advertising material for offshore deposits which is targeted at members of the public in HKC.All advertising materials for deposits issued over  the Internet must comply with the statutory
disclosure requirements as long as they are targeted at members of the public in HKC.  To this end,
the HKMA has issued a statutory guideline
6 to set out the factors it will consider in determining
whether advertising material for deposits issued over the Internet or other technological means is
targeted at members of the public in HKC and therefore subject to the statutory disclosure
requirements.
15. Advertising material over the Internet that in vite members of the HKC investing public to say
deal in securities would be considered as active marketing in HKC and such persons are required to be
licensed before he can carry out such activities.  In this regard, the SFC will consider whether or not
the advertisement materials in the Internet are set out to target HKC's investing public in an active
manner.  The factors which the SFC would consider include whether the language used is Chinese;
whether the investment fund is denominated in HKC currency and whether the information istargeted, via "push" technology, to people whom the financial services provider knows, or should
reasonably know, reside in Hong Kong.  For this purpose, "push" technology refers to any technology
which spams, broadcasts, or directs information to a particular person or group of persons via, for
example, e-mail.
16. As indicated in paragraphs 5-6 above regarding GN8, the Office of the Commissioner of
Insurance (OCI) considers advertising material and solicitation over the Internet targeting at Hong
Kong residents would necessitate authorization or regulation.
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6 http://www.info.gov.hk/hkma/eng/bank/spma/attach/TM-E-2.pdf .