From banking and securities to insurance and wealth management, finance is one of the city’s core strengths. Hong Kong’s Secretary for Financial Services and the Treasury James Lau explains to A Plus the government’s key policies in a sector that accounts for nearly a fifth of the economy and employs more than a quarter of a million people.
Although Hong Kong has long had an outsized financial services sector – accounting for almost 19 percent of gross domestic product in 2017 with just 6.8 percent of the workforce – James Lau believes the city will have its work cut out keeping up with technological changes.
“For Hong Kong, financial services is really the bread and butter, supporting the running of the economy,” says Lau, who was appointed Secretary for Financial Services and the Treasury on 1 July 2017. “We have always had banks and insurance and securities, and these are all very established, but then we also have the challenge of Hong Kong leading in the transition into the new economy – financial technology (fintech) in particular.”
Given Hong Kong’s laissez faire capitalism, Lau sees the government as having a coordinating role, balancing the needs of the market with the public good. Those leading the transition, he adds, are the market stakeholders – including accountants. “Accountants have a crucial role, and the Hong Kong Institute of CPAs is a very important constituency,” he says.
The Institute, he says, provides input on a range of government policies, from the budget to the annual policy address. “I think there was a very good measure of understanding and cooperation between us. So they are a natural kind of a counterpart – an interlocutor – for us.”
Lau says that role will become even more important as Hong Kong increases its interaction in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), comprising nine municipalities in Guangdong with China’s two special administrative regions over 56,000 square kilometres and about 70 million people.
“If you look at the GBA, Chinese companies want to be aligned with international standards so the Institute and their members are very crucial,” he says. Lau adds that he is delighted to see a memorandum of understanding reached over the status of working papers by the Financial Reporting Council with the Ministry of Finance.
In addition, he expects a greater impact in the GBA from environmental, social and governance (ESG) reporting, as China continues to emphasize sustainability and ethical impact of commercial entities.
“Sustainable development is now part of the 13th Five-Year Plan and is implemented vigorously in the annual work plan of the government,” he says. “They can do a lot in ESG because China is becoming very, for its own interest and for the interests of humanity, insistent that sustainable development will be actually given effect and not just be a slogan.”
He also believes the Institute, which holds its Best Corporate Governance Awards every year, and its members play a crucial role in promoting better corporate governance in Hong Kong. “Good governance is pivotal in helping a business to strive. From establishing a proper financial reporting mechanism to setting up a sound internal control system in a company, accounting professionals provide a valuable service,” he says. “We also rely on auditors to promote good corporate governance of companies by providing an independent view on the truthfulness and fairness of financial statements. This is important for shareholders and other stakeholders to get an informed view on a company’s operation, contributing to the robustness and competitiveness of our financial services industry.”
Question of balance
Sustainability is increasingly at the fore at the Financial Services and the Treasury Bureau. “Over the past two years we have been working with the Hong Kong Quality Assurance Agency in promoting the green finance certification programme. Just last year in Hong Kong we saw US$11 billion worth of green bond issuance, nearly four times that in 2017.”
The government joined the green bond bandwagon this year, with a US$1 billion issue just in May. “We have a green bond programme with a ceiling of HK$100 billion. The Hong Kong Monetary Authority (HKMA) did roadshows both in America and in Europe so it can be issued worldwide.”
Lau sees such developments as a broadening of the financial product range available in Hong Kong, pointing to the establishment of weighted voting rights in April last year – a departure from Hong Kong’s long-standing ‘one share, one vote’ – and modernizing the listed companies through developing fintech, start-ups in artificial intelligence and robotics, and other new economy entities. “On the securities side we have had 40 new economy companies, including two companies with weighted voting rights structure and nine biotech companies, together accounting for 53 percent of our initial public offerings in the last 12 months,” says Lau.
He says the regulatory obligations of the government must be balanced with growing the sector. “It is not that much of a conflict although it’s often perceived as so,” he says. The Securities and Futures Commission (SFC) is often given an unfair label as a very aggressive regulator.”
Lau believes in upholding the SFC’s six statutory objectives: to promote a fair and transparent securities and futures industry; help the public understand the industry; provide investor protection; minimize misconduct; reduce systemic risks; and maintain financial stability.
Since October 2018, the SFC has been chaired by Tim Lui, who was Institute president in 1997. A PwC veteran, Lui retired as the firm’s senior advisor to take on his new role. “He brings a lot to the role,” says Lau. “One is his professional experience as an accountant and the second is his public-sector experience, whether in education or whether it’s in taxation or levy management or strategic development.”
Lau says he has a good working relationship with Lui and his predecessor Carlson Tong, another Institute member and former Council vice-president. “I found they were both very attuned to the need for the market to develop,” he says. “They were not just there to put their foot down to show who are the regulators. There’s a lot of consultation and there’s a lot of dialogues.”
Lau says he is proud of recent achievements, such as the virtual banking licences issued in three batches this year. He also cites the ongoing risk assessments carried out by various agencies as a positive sign, such as a review of shell companies “with a view to actually having guidelines to tackle these sort of questions.”
The SFC, he adds, has issued several guidelines and warnings on cryptocurrencies and related issues such as “initial coin offerings.” “With cryptocurrency and crypto platforms, the SFC is working very closely with the International Organization of Securities Commissions and the G7’s Financial Action Task Force because we need to know where these transactions go.”
Domestically, Lau adds, one major success is the setting up of the Insurance Authority (IA). “We started with the insurance companies coming under the authority and now the some 90,000 practitioners – agents, back end staff, etc. – also will be coming under the supervisory oversight of the IA. They also have issued a first virtual insurance licence and that is actually the beginning of what we see as more insurtech in Hong Kong and we are working on a regime to introduce special purpose vehicles for insurance-linked securities.”
Regulatory authorities, he says, are also conducting more experiments on proof of concept for blockchain applications, including one being tested out on the new eTradeConnect trade financing platform. “They’re exploring a short trial with the Monetary Authority of Singapore,” says Lau.
He takes pride in Hong Kong having the leading wealth management sector, with US$3.1 trillion in terms of asset under management. “We have done a lot in terms of the taxation regime for asset management. We’re looking at a limited partnership regime that is more favourable and more up to date.”
Lau understands that the government cannot please all market players. “Because not everything that a regulatee wants would necessarily be given. We have to take a view from the overall policy perspective, the overall playing field, the overall implication, and not just what it means for the industry.”
As cross-boundary connections develop, for example, Hong Kong might like to have a very wide scope of products available for investors in the Mainland. “But then there is a need to ensure that the products are properly supervised, with an appropriate transparency and enforcement mechanism.”
Four decades ago, when Lau first joined the Hong Kong government as a young administrative officer, he was thinking about how to use data to improve efficiencies. Today, he is far from intimidated by today’s technology. “I’m a computer science guy by training,” he says. “I have a natural kind of, almost innate kind of liking for this sort of work.”
The latest milestone, he says, is distributed ledger technology (DLT), often referred to as blockchain. “DLT is a game changer that actually enables a lot to happen because of consistency and integrity. With DLT, we see many things happening which were not possible before and can make possible secure, remote crossborder transactions, which are important for Hong Kong.”
And by cross-border, Lau does not mean just Mainland China. While he believes greater integration with the rest of the country is essential, he also says Hong Kong must continue to develop as a global city. “We have a lot to do about integration with China and we are also very mindful of Hong Kong as an international financial centre.”
He joined the Hong Kong government as an administrative officer in 1979 and was promoted through the ranks until he joined the HKMA in 1993. In 2004, Lau was seconded to the Hong Kong Mortgage Corporation as chief executive officer until he retired in December 2012. His previous role was as under secretary for Financial Services and the Treasury.
On the cusp of retirement – he is now 69 – Lau sees a future in which China continues to open up to the markets, and its capital account too, but “it needs to do so gradually,” he says. Hong Kong will be key to that opening up through the various connections of securities, fund and bond markets. “There might be more connections on the insurance side, on wealth management products, and we have been discussing, for example, exchange-traded funds, with the China Securities Regulatory Commission.”
Lau predicts that the GBA will become much more tangible with time. “What is clear in the long-term development plan is actually they want to see more flow of people – workers, teachers, researchers. And clarifying the status of what is a tax resident,” he says. “Some details are being worked out but you can see a lot of measures are really to facilitate a flow of people across the boundary.”
As the GBA develops, Lau expects to have other priorities. “I think I’ve done pretty good here and I think there are lots of things one can do afterwards,” he says. “I like photography and now I like walking, mostly along Bowen Road because I want to really get exercise, and I’m not a gym person.”
This article was originally published in the June 2019 issue of A Plus. You can read the digital version here.