Hong Kong's introduction of guidelines to strengthen the role of independent non-executive directors in the banking sector could benefit professional accountants
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This article was first published in the July/August 2017 China edition of Accounting and Business magazine.
Almost 10 years on from the global financial crisis of 2008, Hong Kong’s currency board and de facto central bank is preparing to introduce new guidelines that will come into effect at the end of this year. These will strengthen the role of independent non-executive directors (INEDs) and give renewed focus to corporate governance at the city’s banks.
This is good news for accountants. The move means an increased demand for mid- to senior-level accountants well versed in the relevant guidelines. What’s more, demand from Chinese banks is expected to be especially high.
But first, some background to the guidelines that will come into effect by 14 December. In a circular to the chief executives of banks and the directors of boards of local authorised institutions (AI), Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA), pointed to weaknesses in corporate governance that the financial crisis had exposed. He said that in many cases boards and individual directors were unable to understand the risks that their institutions were exposed to and thus unable to manage or mitigate that risk.
‘This has led to a greater emphasis on the role of the board, and in particular the role of INEDs, what is expected of them and the knowledge, expertise and – not least – personal qualities they must possess in order to do their jobs effectively,’ Chan wrote.
With this in mind, in July 2015 the HKMA pulled together a small group of members with experience in corporate governance – and in particular the banking sector – to study the role of INEDs. The group submitted its report in December 2015 and an industry consultation was carried out on the recommendations in early 2016.
Chan’s circular – ‘Empowerment of Independent Non-Executive Directors (INEDs) in the Banking Industry in Hong Kong’ – sets out what is expected of INEDs and also what needs to be done to ensure there will be enough suitably qualified people able to serve as INEDs on local boards in future.
Shore up the cracks
‘The guidelines cover everything from where the independent non-executive directors should be recruited to how to structure the board to ensure they have some power and remain independent,’ says Paul Haswell, a partner in the Hong Kong office of the international law firm Pinsent Masons.
He believes that although Hong Kong wasn’t as badly hit by the 2008 financial crisis as the US or Europe, it was nevertheless necessary to shore up any cracks in the system. ‘I think this is a sensible thing; the banking sector does need a bit of a watchful eye, a third party to keep a check on what is going on,’ Haswell says, adding that this is even more critical as banks look for new ways of doing business online and in fintech.
Although surprised that the HKMA has taken such a formal step, Haswell concedes that it is necessary in the current environment. ‘The HKMA has been increasingly proactive in the last few years,’ he says. ‘Ultimately it is seeing competition from other jurisdictions, Singapore and increasingly China; it needs to ensure the competitiveness of Hong Kong. ‘It’s very good news for accountants – and it could be quite lucrative, too.’
As of 14 December, all AIs will be expected to have at least one INED on their board with a background in accounting, banking or other relevant financial industry. The guidelines suggest a basic fee of at least HK$400,000 a year, plus additional payments for membership or chairing of board committees.
Dean Stallard, regional director of Hays in Hong Kong, says that one of the hottest areas of hiring is for accounting and finance professionals with HKMA regulatory reporting experience. He sees the greatest demand coming from Chinese banks. ‘One factor is due to the large investment being poured into Chinese banks this year compared to their foreign counterparts,’ he says. ‘Much of the focus for foreign banks is the continuing outsourcing, migration and cost-saving processes that many firms are undergoing.’
Interested in becoming an INED? In addition to accountants, those from banking, law and finance will also be considered. It goes without saying that you should be a person of integrity, and extensive professional or business experience is a must. Although a banking background is not necessary, you should have the ability to manage operational, financial and reputational risks.
And should you be accepted as an INED, what will you do? You will be expected to sit on or chair board committees. As well as protecting the interests of shareholders, you will be expected to protect the interests of other stakeholders – depositors and customers – as well as the wider public interest. This is a position that is expected to take up a significant amount of time; you must prepare well for meetings and attend all board and committee meetings in person.
Independence is essential. The guidelines lay out specific areas where this might be compromised, such as material business relationships with the bank or an immediate family member who has been a member of the senior management in the last three years. And previous service on a government or regulatory agency might require a ‘cooling-off’ period. The HKMA also recommends that AIs take out insurance cover in case of legal action against their directors.
Stallard advises accountants to stay ahead of the curve by keeping up-to-date on HKMA movements through self-study and researching the guidelines. ‘As the guidelines become more stringent, this increases the need to hire or upskill accountants who are familiar with the new guidelines,’ he says. ‘This will undoubtedly increase the competitiveness between accountants.’
And the bank itself will be responsible for giving INEDs appropriate induction and ongoing training, including regular briefings on operations and risk management regarding different areas of the bank as well as the wider industry and regulatory developments.
Kate Whitehead, journalist
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"Hong Kong is preparing to introduce new guidelines to strengthen the role of independent non-executive directors"