The Legislative Council (LegCo) is currently considering the Financial Institutions (Resolution) Bill (Bill), which provides for the establishment of a cross-sector regime for the orderly resolution of financial institutions (FIs) in Hong Kong.

The proposal to set up a resolution regime is a response to the direction of the Financial Stability Board (FSB), tasked by the G20 leaders, to establish a regime to provide local authorities with administrative powers to rapidly bring about orderly resolution of failing FIs. In November 2011, the FSB released the “Key Attributes of Effective Resolution Regimes for Financial Institutions” (Key Attributes), which set out the essential features required of an effective regime. This was re-issued with additional guidance in October 2014.

Two rounds of consultation on the proposed resolution regime for Hong Kong were launched in January 2014 and January 2015 respectively by the Hong Kong Government, jointly with the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA) and the Insurance Authority (IA) (collectivelyauthorities). Our earlier e-bulletin highlighting the conclusions reached from the initial consultation and further matters raised in the second round of consultation can be accessed here. Following the conclusion of the second round of consultation, the Bill has now been introduced into LegCo and is being considered by the Bills Committee.


The Bill sets out the following major aspects of the proposed resolution regime:

We will summarise the legislative proposal on these various aspects below.


The regime is proposed to cover:

  1. All authorised institutions (AIs) under the Banking Ordinance, including all licensed banks, restricted licence banks and deposit-taking companies;
  2. Certain financial market infrastructures (FMIs), including all clearing and settlement systems which are designated to be overseen by the HKMA under the Clearing and Settlement Systems Ordinance (to be renamed the Payment Systems and Stored Value Facilities Ordinance) other than those which are wholly owned and operated by the Government;
  3. FMIs that are recognised as clearing houses under the Securities and Futures Ordinance (SFO);
  4. Exchange companies recognised under the SFO that are designated by the Financial Secretary (FS) on the recommendation of the SFC to be systemically important to the functioning of the financial markets in Hong Kong;
  5. Licensed corporations under the SFO which are non-bank non-insurer global systemically important FIs;
  6. Licensed corporations which are subsidiaries or branches of groups which are identified as being (or containing) global systemically important financial institutions (G-SIFIs);
  7. Authorised insurers under the Insurance Companies Ordinancethat are, or are subsidiaries or branches of, global systemically important insurers;
  8. Branches of foreign FIs that are within the proposed scope or the holding companies of in-scope FIs;
  9. Affiliated operational entities (AOEs), which means companies that are in the same group of companies as an in-scope FI and which provide services, directly or indirectly, to that FI.

In addition, with a view to accommodating any future changes in the potential risks posed by different types of FIs, the Financial Secretary will have the power to designate both regulated and unregulated FIs as being within the scope of the regime, to avoid the possibility in the future of being caught without any of the tools necessary to address a systemic institution, regulated or unregulated, particularly at a time when its condition is deteriorating rapidly.


The HKMA, the SFC and the IA are designated as the resolution authorities (RAs) for the banking, securities and futures, and insurance sectors respectively. In the case of an FI which is part of a cross-sector financial group, the FS may designate a lead resolution authority to be responsible for coordination and ultimate decision-making in resolutions involving cross-sector financial groups.


A RA can initiate resolution of an in-scope FI if the FI meets all of the following conditions:

  1. the FI ceased, or is likely to cease, to be viable1;
  2. there is no reasonable prospect that private sector action would result in the FI becoming viable again within a reasonable period; and
  3. the non-viability of the FI will pose risks to the stability and effective working of the financial system of Hong Kong2.


In exercising the power of resolution, the RA must have regard to the following underlying resolution objectives:

  1. to promote and seek to maintain the general stability and effective working of the financial system of Hong Kong;
  2. to seek an appropriate degree of protection for depositors, investors and policyholders;
  3. subject to pursuing the above two objectives, to seek to contain the costs of resolution and, in so doing, to protect public funds.


The resolution regime makes available five stabilisation options which can be applied individually, in combination or sequentially by a RA to an in-scope FI to stabilise a failing FI’s business. The five stabilisation options are:

  1. transfer of some or all of the failing FI’s business (by way of transfer of shares or assets, rights and liabilities) to a purchaser;
  2. transfer of some or all of the failing FI’s business to a bridge institution, which will be a vehicle wholly or partly owned by the Government and established specifically for this purpose;
  3. transfer of assets, rights or liabilities of the failing FI to an asset management vehicle (AMV), which will be a vehicle wholly or partly owned by the Government for the purpose of acquiring and winding down a part of a failing FI’s portfolios in an orderly manner over time;
  4. statutory bail-in (ie, write-off or conversion into shares) of liabilities of the failing FI to absorb losses and recapitalize the failing FI; and
  5. (as a last resort) transfer of the failing FI to temporary public ownership, which will be a vehicle set up by the Government to acquire the shares of the failing FI.


The authorities recognise that substantial advance planning is required for an effective and orderly resolution of a failing FI. The Bill therefore includes a range of preparatory powers which the resolution authority can exercise before and after commencement of resolution, such as:

  1. gathering or obtaining information needed for the purposes under the Bill on demand or by inspection or investigation (including applying for a magistrate’s warrant);
  2. undertaking resolution planning and resolvability assessment, and requiring the FI or its holding company to remove any identified impediment to resolvability;
  3. imposing requirements relating to the loss absorbing capacity of in-scope FIs, including facilitating the implementation of future international standards;
  4. giving directions to an in-scope FI or a group company of the FI, their directors, chief executive officer (CEO) or deputy chief executive officer (DCEO), in the run-up to resolution;
  5. removing one or more directors, CEO or DCEO of the failing FI or its holding company in the run-up to resolution.

Under the Banking (Capital) Rules (BCR), the HKMA can write off or covert into ordinary shares an AI’s capital instruments (ie, Additional Tier 1 and Tier 2 capital instruments) if the AI is about to become non-viable. The Bill provides for the HKMA to write off or convert those capital instruments before applying any stabilisation option if the write-off or conversion of those instruments has not already occurred under the BCR.


For the purpose of implementing the stabilisation option(s) effectively, the RAs are given a range of general resolution powers. These include powers to:

  1. impose a temporary stay of no longer than two days of early termination rights of counterparties to contracts with an FI in resolution and a temporary restriction or suspension of the rights of policyholders to withdraw from their insurance contracts;
  2. prohibit the filing of a winding-up petition against an in-scope FI unless the relevant resolution authority has been given 7 days to determine whether or not to initiate resolution (this is to avoid a winding-up frustrating the underlying objective of maintaining financial stability);
  3. impose a temporary suspension of no longer than two days of obligations to make payments to certain creditors and impose a stay on creditor actions such as attaching assets;
  4. issue directions to a FI to carry out resolvability measures before any resolution for the purpose of improving its resolvability;
  5. operate and manage the FI in resolution;
  6. issue directions to a residual FI or AOE requiring them to provide services essential to support any business of the non-viable FI, including that transferred to an acquirer;
  7. claw back remuneration from certain senior management of an FI through the courts (the claw-back applies to both fixed and variable remuneration and will be limited to the period of three years preceding the initiation of resolution but extendable by the court for up to three further years back in cases of dishonesty);
  8. defer certain authorisation criteria required for the conduct of regulated businesses for not more than 12 months where the business is transferred to a bridge institution or an AMV as part of a resolution;
  9. defer certain disclosure requirements under the SFO for a listed entity that is, or is a group company of, an in-scope FI.


The Key Attributes state that creditors should have a right to compensation where they do not receive at a minimum what they would have received in a liquidation of the firm under the applicable insolvency regime. The Bill accordingly provides for a “no creditor worse off than in liquidation” (NCWOL) compensation mechanism.

The FS will appoint a person who would in turn appoint a NCWOL valuer to determine whether NCWOL compensation is payable based on certain assumptions and principles set out in Part 6 and Schedule 7 of the Bill and in regulations to be made by the Secretary for Financial Services and the Treasury. Schedule 2 of the Bill sets out the criteria for the appointment of the NCWOL valuer.


A Resolution Compensation Tribunal (RCT) will be established to hear appeals against a NCWOL valuation with power to ultimately determine the valuation and to provide pre-resolution shareholders and pre-resolution creditors with an avenue to challenge decisions regarding eligibility for compensation or the amount of compensation. The RCT will also have jurisdiction to revoke the appointment of a NCWOL valuer.

A Resolvability Review Tribunal (RRT) will also be established to provide an avenue of appeal for a FI or its holding company aggrieved by the pre-resolution resolvability measures directed by a RA.

The RCT and RRT are to consist of a chairperson and two other members.


One of the objectives of the proposed resolution regime is to ensure that the costs of resolution can be imposed on the shareholders and creditors of a failing FI rather than on taxpayers.

Public funding support can be made available on a temporary basis. Any public funding so deployed must be recouped and any losses incurred will be recovered from the wider financial industry through a levy to be determined afterwards. The levy will be imposed on those FIs which are both within the scope of the resolution regime and within the same sector as the failed FI. For cross-sector FIs, the levy will be assessed on a case-by-case basis to apportion contributions across the relevant sectors by reference to the composition of the failed cross-sector group. For FMIs and exchanges, the authorities are inclined to a “user pays” levy model. The FS is given the power to make regulations to specify how a levy would be imposed.


The authorities are of the view that a coordinated and cooperative approach to the resolution of a cross-border FI has the potential to better protect financial stability across both the home and host jurisdictions. Accordingly, the Bill provides for a statutory recognition framework which enables a RA to, after consultation with the FS, recognise all or part of a foreign resolution action on the conditions that the recognition shall not:

  1. have an adverse effect on financial stability in Hong Kong;
  2. deliver outcomes that are inconsistent with the resolution objectives; or
  3. disadvantage Hong Kong creditors or shareholders (or both) relative to their counterparts overseas.

There must also be an arrangement under which Hong Kong shareholders or creditors would be eligible to claim compensation broadly consistent with what they would be eligible to claim in a local resolution.

A RA may also use the stabilisation options in the local regime in respect of in-scope FIs to support foreign resolution actions provided that the triggering conditions for resolution are met.


Part 11 of the Bill contains provisions governing the confidentiality requirements, including secrecy requirements on various persons operating in an official capacity, in-scope FIs or certain persons related to the FIs. There are, however, specific gateways to allow disclosure of information to, for example, other RAs and NCWOL valuers.


The Bill was introduced into the LegCo for first reading on 2 December 2015 and will become part of the law in Hong Kong in due course. It is expected that rules, codes of practice and guidance will be developed as matters progress and the authorities have expressed their intention to continue their dialogue with stakeholders throughout the process. It is believed that the proposed regime, which meets with international standards, would help strengthen the resilience of the financial system, thereby limiting the damage a failure of a systemic FI might bring to the wider economy and maintaining the competitiveness of the financial market in Hong Kong.